In Re:Teleglobe Comm ( 2007 )

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
7-17-2007
In Re:Teleglobe Comm
Precedential or Non-Precedential: Precedential
Docket No. 06-2915
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-2915
IN RE: TELEGLOBE COMMUNICATIONS
CORPORATION, et al,
Debtor
TELEGLOBE USA INC.; OPTEL
COMMUNICATIONS INC.;
TELEGLOBE HOLDINGS (U.S.) CORPORATION;
TELEGLOBE MARINE (U.S.) INC.;
TELEGLOBE HOLDING CORP.;
TELEGLOBE TELECOM CORPORATION;
TELEGLOBE INVESTMENT CORP.;
TELEGLOBE SUBMARINE, Teleglobe Submarine Inc.;
OFFICIAL COMMITTEE OF UNSECURED CREDITORS
OF TELEGLOBE
COMMUNICATIONS CORPORATION;
TELEGLOBE COMMUNICATIONS
CORPORATION; TELEGLOBE LUXEMBOURG, LLC;
TELEGLOBE PUERTO RICO INC.
v.
BCE INC.; MICHAEL T. BOYCHUK;
MARC A. BOUCHARD;
SERGE FORTIN; TERENCE J. JARMAN;
STEWART VERGE;
JEAN C. MONTY; RICHARD J. CURRIE;
THOMAS KIERANS;
STEPHEN P. SKINNER; H. ARNOLD STEINBERG,
Appellants
VARTEC TELECOM, INC.,
Defendants/Intervenor in District Court
Appeal from the United States District Court
for the District of Delaware
(D.C. Civil Action No. 04-cv-01266)
Chief District Judge: Honorable Sue L. Robinson
Argued January 8, 2007
Before: McKEE, AMBRO and FISHER, Circuit Judges
(Opinion filed July 17, 2007)
Pauline K. Morgan, Esquire
John T. Dorsey, Esquire
Margaret B. Whiteman, Esquire
Young, Conaway, Stargatt & Taylor
1000 West Street, P.O. Box 391
17th Floor, Brandywine Building
Wilmington, DE 19899-0391
2
Stuart J. Baskin, Esquire
Jaculin Aaron, Esquire
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Stephen J. Marzen, Esquire (Argued)
Shearman & Sterling
801 Pennsylvania Avenue, N.W., Suite 900
Washington, D.C. 20004
Counsel for Appellants
Gregory V. Varallo, Esquire
C. Malcom Cochran, IV, Esquire (Argued)
Chad M. Shandler, Esquire
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
Philip A. Lacovara, Esquire
Andrew Tauber, Esquire
Mayer, Brown, Rowe & Maw
1909 K Street, N.W.
Washington, D.C. 20006
Counsel for Appellees
Mark I. Levy, Esquire
Kilpatrick Stockton
3
607 14th Street, N.W., Suite 900
Washington, D.C. 20005
Susan Hackett, Esquire
Senior Vice President and General Counsel
Association of Corporate Counsel
1025 Connecticut Avenue, N.W., Suite 200
Washington, D.C. 20036
David C. Frederick, Esquire
Robert A. Klinck, Esquire
Kellogg, Huber, Hansen, Todd, Evans & Figel
1615 M Street, N.W., Suite 400
Washington, D.C. 20036
Counsel for Amici-Appellants
OPINION OF THE COURT
TABLE OF CONTENTS
I. Facts and Procedural History . . . . . . . . . . . . . . . . . . . 8
A. The Parties and Underlying Causes
of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
B. The Privilege Dispute . . . . . . . . . . . . . . . . . . 11
II. Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
III. Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4
IV. Summary of the Law . . . . . . . . . . . . . . . . . . . . . . . . . 24
A. The Attorney-Client Privilege . . . . . . . . . . . . 25
B. The Disclosure Rule . . . . . . . . . . . . . . . . . . . 28
C. Privileged Information Sharing . . . . . . . . . . . 30
1. The Co-Client (or Joint-Client)
Privilege . . . . . . . . . . . . . . . . . . . . . . . 30
2. The Community-of-Interest
(or Common-Interest) Privilege . . . . . 35
D. The Exception for Adverse Litigation . . . . . . 42
E. When Joint Representation Goes
Awry: The Eureka Principle . . . . . . . . . . . . . 46
F. Putting It All Together: Parents,
Subsidiaries, and the Modern
Corporate Counsel’s Office . . . . . . . . . . . . . . 49
1. Intra-group Information Sharing:
Parents and Subsidiaries as Joint
Clients . . . . . . . . . . . . . . . . . . . 50
2. Keeping Control of the Privilege . . . . 57
3. When Conflicts Arise . . . . . . . . . . . . . 59
V. Issues on Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
A. Whether the Debtors Are Entitled to
Documents Generated in the Course
of a BCE/Teleglobe Joint
Representation . . . . . . . . . . . . . . . . . . . 61
1. Whether BCE’s Concession
in the Bankruptcy Court Prevents
it from Arguing that the Debtors
are not Entitled to the
Disputed Documents . . . . . . . . . . . . . 62
5
a. Background . . . . . . . . . . . . . . . 62
b. Merits . . . . . . . . . . . . . . . . . . . . 67
I. Issue Waiver . . . . . . . . . 67
ii. Judicial Admission . . . . 69
iii. Judicial Estoppel . . . . . . 70
iv. Implied Prospective
Waiver of the
Privilege . . . . . . . . . . . . 71
2. Whether the Community-
of-Interest Privilege Entitles the
Debtors to the Documents as a
Matter of Law . . . . . . . . . . . . . . . . . . 72
3. Whether Teleglobe’s Waiver
of the Privilege for the Debtors’
Benefit in the Canadian
Insolvency Proceedings Entitles
them to the Documents . . . . . . . . . . . . 74
4. Conclusion and Remand . . . . . . . . . . . 77
B. The Effect of Funneling Documents
Through BCE’s In-House Counsel . . . . . . . . 78
VI. Potential Alternate Sustaining Grounds . . . . . . . . . . 85
A. The Fiduciary Exception to the
Attorney-Client Privilege . . . . . . . . . . . . . . . . 85
B. Affirming as a Discovery Sanction . . . . . . . . 92
VII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
AMBRO, Circuit Judge
This is a twist on a classic corporate divorce story. It
6
begins much as Judge Richard Cudahy’s “classic corporate love
story”: “Company A meets Company B. They are attracted to
each other and after a brief courtship, they merge.” GSC
Partners CDO Fund v. Washington, 368 F.3d 228, 232 (3d Cir.
2004). Sadly, it does not last. Not long after Company A
acquires Company B, they start taking risks together, some of
which go terribly wrong. After only a year or so, Company B
is steeped in debt, and, not surprisingly, Company A begins to
“los[e] that lovin’ feelin’.”1 It leaves Company B, explaining
that it simply must do so in order to save itself. Jilted and out of
money, Company B promptly turns to that shelter for abandoned
corporations, the bankruptcy system.
In bankruptcy, Company B’s children (subsidiaries), also
in the shelter of bankruptcy, become indignant, and they sue
Company A for all manner of ills relating to the break-up. Here,
we deal not with the merits of the action, but with a pre-trial
dispute over corporate documents. Everyone agrees that the
attorney-client privilege protects these documents against third
parties. The wrinkle is that they were produced by and in
communication with attorneys who represented the entire
corporate family back when they all got along.
The question, then, is whether Company A may assert the
1
Righteous Brothers, You’ve Lost That Lovin Feelin, on YOU’VE
LOST THAT LOVIN FEELIN (Phillies 1965).
7
privilege against its former family members. Because we
conclude that the District Court’s factual findings do not support
setting aside the parent company’s privilege in this case, we
vacate its order compelling production and remand for further
proceedings.
I. Facts and Procedural History
A. The Parties and Underlying Causes of Action
This action began with a complaint brought in a Chapter
11 bankruptcy case. The debtors (“Debtors”) are the wholly
owned United States subsidiaries of a Canadian
telecommunications company formerly known as Teleglobe,
Inc. (“Teleglobe”). Teleglobe and the Debtors are undergoing
reorganization in Ontario in accordance with the Canadian
Companies’ Creditors Arrangement Act (the “Arrangement
Act”), a form of bankruptcy protection similar to Chapter 11. In
addition, the Debtors (but not Teleglobe), all but one2 of which
are Delaware corporations, are simultaneously undergoing
Chapter 11 reorganization in the District of Delaware. Until
recently, Teleglobe was a wholly owned subsidiary of Bell
Canada Enterprises, Inc. (“BCE”), Canada’s largest
2
One is a Puerto Rico corporation.
8
telecommunications company.3
In 2000, BCE, which had previously owned a 23%
minority stake in Teleglobe, purchased all its remaining shares
(directly and indirectly through subsidiaries), thus taking control
of the company. According to the Debtors, in late 2000 BCE
directed Teleglobe to accelerate the development of a fiberoptic
network called GlobeSystem. BCE pledged its financial support
to the project and caused Teleglobe and its subsidiaries (the
Debtors) to borrow some $2.4 billion from banks and
bondholders. The bond debt was guaranteed by one of the
Debtors. Teleglobe exhausted its funding in 2001, and in
November of that year BCE approved an additional $850
million equity infusion for Teleglobe and its subsidiaries. These
monies were to be disbursed at the sole discretion of Jean
Monty, then Chairman and CEO of BCE as well as Chairman
and CEO of Teleglobe. BCE announced its intention to
continue funding Teleglobe in December 2001.
About this time BCE began working on what personnel
referred to as Project X—a comprehensive reassessment of
BCE’s plans for Teleglobe. Lurking in the background was
3
As a result of the Canadian reorganization process,
Teleglobe, now known as VSNL International Canada, operates
as a subsidiary of VSNL, a telecommunications company
organized in India, which itself is owned by the Tata Group, an
Indian conglomerate.
9
BCE’s declining confidence in GlobeSystem’s ultimate
potential.4 In the course of Project X, BCE considered a variety
of options, including maintaining its funding in the hope that
GlobeSystem would be profitable, restructuring Teleglobe in
such a way that it could continue as a viable subsidiary, and
simply cutting off funding (which would send Teleglobe and its
subsidiaries into a liquidating bankruptcy). In early April 2001,
BCE publicly announced that it was reassessing its funding of
Teleglobe; just a few weeks later, it ceased its funding,
effectively abandoning Teleglobe. GlobeSystem was not
operational, and so Teleglobe had no means of paying back its
multi-billion dollar debt. Consequently, within weeks Teleglobe
and the Debtors filed for Arrangement Act relief in Canada, and
the Debtors also filed for Chapter 11 relief in Delaware.
4
As stock market junkies may recall, Teleglobe was but one
of many victims of the “telecom meltdown” of 2000–2001. In
the late 1990s deregulation in the United States and Europe
touched off a rush to build new telecom infrastructure. Like so
many other companies in that period, Teleglobe spent much debt
capital to build fiberoptic lines around the world. Because of
the ensuing glut of infrastructure, prices tumbled, and Teleglobe,
along with a host of other over-leveraged telecom firms, went
bankrupt. See, e.g., Peter Elstrom & Heather Timmons,
Telecom Meltdown, BUSINESSWEEK, Apr. 23, 2001, at 100;
Gordon Pitts, When Friends Do Business with Each Other,
GLOBE & MAIL (CANADA), Apr. 27, 2002, at B1.
10
For BCE’s role in funding and then abandoning the
GlobeSystem project, the Debtors sued it in this adversary
proceeding.5 They assert several causes of action, including
breach of contract, breach of fiduciary duties, estoppel, and
misrepresentation (whether fraudulent or negligent). All claims
relate to the manner in which BCE ceased funding Teleglobe,
the Debtors’ corporate parent. Debtors’ theme is that BCE
reneged on binding commitments to fund Teleglobe and
fraudulently or negligently induced Teleglobe and the Debtors
to continue incurring debt in reliance on those commitments,
thus harming, inter alia, Teleglobe, the Debtors, and the
Debtors’ creditors. Moreover, they allege that BCE, as the
controlling shareholder of Teleglobe and the Debtors while
those entities were insolvent, breached its fiduciary duties to the
Debtors.
B. The Privilege Dispute
In the District of Delaware Bankruptcy Court, the
Debtors and the Creditors Committee began exploring through
5
At one time the committee of unsecured creditors (the
“Creditors’ Committee”), appointed under 11 U.S.C.
§ 1102(a)(1), was also a plaintiff; it, however, has been
dissolved with the confirmation of the Debtors’ plan of
reorganization.
11
Rule 20046 discovery the possibility of suing BCE for the
manner in which it abandoned Teleglobe and the Debtors. In
response to discovery requests, BCE marked 98 documents as
protected by a “common interest privilege.”7 When the creditors
moved to compel production, BCE responded that the
documents were privileged because “BCE attorneys consulted
with attorneys, officers, or employees of Teleglobe, Inc. or its
subsidiaries to discuss or provide legal advice in matters where
BCE and Teleglobe, Inc. (or its subsidiaries) shared a common
legal interest.” App. at A01110. BCE further stated that the
“privilege will continue to exist until the Debtors file a litigation
against BCE.” Id.At a hearing in the Bankruptcy Court, BCE—in keeping
with the theme of its argument—agreed to produce (even
without the filing of a suit) the “common interest” documents to
the Debtors, seemingly agreeing that they fell within the scope
of their shared interest, and the Bankruptcy Court entered an
order to that effect. BCE did not specifically admit that it was
required to produce the documents; it merely agreed to do so.
It continued to maintain, however, that the rest of the documents
6
Federal Rule of Bankruptcy Procedure 2004 allows parties
with an interest in the bankruptcy estate to conduct discovery
into matters affecting the estate.
7
We assume that BCE meant to invoke the joint-client
privilege, rather than the common-interest privilege. We
explain the difference in Part IV.C, infra.
12
designated as privileged represented advice provided solely to
it and were not part of any joint representation with Teleglobe
or the Debtors. It is unclear from the record exactly what the 98
“common interest” documents contained that BCE agreed to
produce, but the privilege logs reflect that they primarily
consisted of documents created by BCE’s in-house counsel on
the subject of Teleglobe’s financing and restructuring. At the
same time, the privilege log (exclusive of the 98 “common
interest” documents) lists many other documents reflecting legal
advice on Project X matters that BCE claimed—then and
now—were intended as advice solely to it and not as part of any
joint representation. See generally App. at A00967–A01091.
Once the Debtors and Creditors’ Committee filed their
suit against BCE, the District Court withdrew its automatic
reference to the Bankruptcy Court and began handling the suit
itself. The District Court held an initial discovery conference at
which BCE reasserted that it had produced all of the documents
that it thought were generated as a result of a
BCE/Teleglobe/Debtors joint representation and that the
documents it was withholding reflected advice provided to and
intended solely for BCE. App. at A00264–65. The Debtors did
not press the joint representation/common interest point at that
time, nor did they argue for a broader scope of the joint
representation/common interest than BCE had admitted; rather,
they focused on an extension of the “conflicted fiduciary” line
13
of cases, see Part VI.A, infra.8 App. at A00262–63.
The District Court ended up referring the discovery
dispute to a Special Master—C.J. Seitz, Jr., Esquire. In its
initial written response to the Debtors’ motion to compel
production before the Special Master, BCE stated that it had, in
response to the Bankruptcy Court’s Rule 2004 order, “produced
to the Debtors all the documents that were protected by a
common interest.” App. at A0197. BCE further stated that it
had reviewed all of the documents on the privilege log and that
the only documents that remained designated as privileged were
those “reflect[ing] the provision of legal work solely to BCE.”
Id.8
In brief, these cases provide that when a corporation’s
shareholders attempt to bring a derivative suit on behalf of the
corporation against its directors for breaching their fiduciary
duties, the shareholders can invade the corporation’s privilege
upon showing “good cause.” Garner v. Wolfinbarger, 430 F.2d
1093, 1103–04 (5th Cir. 1970). A more expansive view of the
rule is phrased thus: “where a corporation seeks advice from
legal counsel, and the information relates to the subject of a later
suit by a minority shareholder in the corporation, the corporation
is not entitled to claim the [lawyer-client] privilege as against its
own shareholder, absent some special cause.” Valente v.
PepsiCo, Inc., 68 F.R.D. 361, 367 (D. Del. 1975). As detailed
in Part VI.A, Delaware courts have followed Garner but
declined broadly to apply Valente.
14
The Debtors then expanded their argument by contending
that the scope of the joint representation was broader than BCE
admitted. Specifically, they claimed that various attorneys
represented all of the entities on the matters of BCE’s decision
to cease funding Teleglobe and Teleglobe’s resulting
restructuring. BCE, on the other hand, claimed that it retained
its own attorneys to advise it on those matters. The Special
Master found that the Debtors had not met their burden of
proving an exception to the attorney-client privilege. The
evidence, he concluded initially, merely showed that BCE’s in-
house counsel represented Teleglobe and the Debtors
occasionally; it did not show a broad joint representation as to
the abandonment of Teleglobe. Recognizing, however, that the
Debtors did not trust BCE’s representation that the documents
marked as privileged reflected advice provided solely to BCE,
the Special Master ordered a 50-document audit by his in
camera review to ensure the accuracy of BCE’s representations.
The Special Master also rejected the Debtors’ conflicted
fiduciary argument, noting that the Delaware Court of Chancery
has refused to adopt it in its broader form. Deutsch v. Cogan,
580 A.2d 100, 105 (Del. Ch. 1990) (“Although neither the
Garner nor Valente case is binding on this Court, Delaware
courts have consistently followed Garner and declined to
broadly apply Valente.”) (citations omitted). More importantly,
the Special Master forestalled any further “conflicted fiduciary”-
style argument by ruling that neither Teleglobe nor the Debtors’
boards were conflicted in any sense because all of their duties
15
flowed back up to BCE (and not, as the Debtors argued, to their
creditors). See Anadarko Petroleum Corp. v. Panhandle
Eastern Corp., 545 A.2d 1171, 1174 (Del. 1988) (“[I]n a parent
and wholly-owned subsidiary context, the directors of the
subsidiary are obligated only to manage the affairs of the
subsidiary in the best interests of the parent and its
shareholders.”). The Special Master, however, did not make an
express finding of fact on when the Debtors became insolvent
(or entered the amorphous9 “zone of insolvency”), reasoning
instead that there was no way to get from the Debtors’ directors
owing fiduciary duties to creditors of the Debtors on one hand
to BCE owing a duty to those creditors on the other.
According to the Special Master, “[s]hortly after the
Debtors made their selection of documents for in camera
review, the wheels started coming off [BCE’s] privilege
wagon.” App. at A0030. Before the review, BCE withdrew its
privilege assertion for six of the 50 documents that the Debtors
9
A footnote from the Delaware Supreme Court’s latest
opinion on a related issue explains that this “zone” is yet ill-
defined: “In light of its ultimate ruling, the Court of Chancery
did not attempt to set forth a precise definition of what
constitutes the ‘zone of insolvency.’ Our holding in this opinion
also makes it unnecessary to precisely define a ‘zone of
insolvency.’” N. Am. Catholic Educ. Programming Found., Inc.
v. Gheewalla, ___ A.2d ___, 2007 WL 1453705, at n.20 (Del.
2007).
16
selected. Then, the Special Master determined that three of the
documents did not involve the provision of legal advice at all,
and three lent credence to the Debtors’ argument that BCE
attorneys jointly represented BCE and Teleglobe on the issue of
BCE’s abandonment. After the initial in camera review, BCE
withdrew the privilege assertion for still more documents.
Having reviewed 44 documents in camera, the Special
Master issued a supplemental decision in which he concluded
that BCE’s revised privilege claims and his review of documents
in camera “raised serious questions about” the reliability of the
privilege log, whether BCE attorneys jointly represented BCE
and Teleglobe on the abandonment issue, whether the
documents withheld reflected legal advice provided solely to
BCE, and whether the documents withheld were in fact
privileged. App. at A0031. He ordered BCE to review and
revise the privilege log and to submit all purportedly privileged
documents to him for in camera review.
BCE culled its privilege log to just over 1,000
documents. Then, between the submission of the revised
privilege log and the submission of the actual documents, BCE
withdrew the assertion of privilege for over 100 additional
documents. BCE still wasn’t finished; while the in camera
review proceeded, it withdrew its assertion of privilege in four
separate letters to the Special Master, covering well over 100
more documents.
17
One of the issues raised by the Debtors in supplemental
briefing was BCE’s apparent over-designation of privileged
documents. According to the Debtors, this was substantial
enough to merit wholesale disclosure of the documents on
BCE’s privilege log as a discovery sanction. The Special
Master agreed that BCE “failed the audit in multiple
ways—withdrawing documents before in camera review,
claiming privilege over documents that did not reflect legal
advice, and claiming privilege over documents where it
appeared that BCE in-house attorneys and outside counsel
jointly represented BCE, Teleglobe, or the Debtors on matters
of common interest.”
In his final decision, the Special Master declined to
impose disclosure as a discovery sanction. But he nonetheless
reversed himself and ordered the production of all of the
documents on the privilege log. Having reviewed some 800
documents in camera, he found that they “revealed a broad legal
representation of both BCE and Teleglobe by BCE’s in-house
attorneys relating to Teleglobe’s restructuring alternatives.”
App. at A0047–48. He further found that all of the documents
on the privilege log were disclosed to BCE’s in-house counsel,
which made them discoverable because those attorneys were
jointly representing Teleglobe and could not, therefore, withhold
the documents from it. Id. at A0055. He applied this reasoning
even to documents produced by outside counsel hired only to
18
work for BCE.10
The District Court affirmed the Special Master’s decision
and ordered BCE to turn over to the Debtors all of the
documents. BCE argued that the Special Master’s finding of a
broad joint representation between it and Teleglobe was
irrelevant because he had not found a joint representation
between it and the Debtors. Unless the Debtors were a party to
the joint representation, BCE argued, they could not invade its
privilege. The Court rejected this argument on three grounds:
(1) BCE made a binding agreement to disclose all
communications generated as part of a BCE/Teleglobe joint
representation, and so finding a joint representation between the
two was all that was needed; (2) the Debtors, as wholly owned
subsidiaries of Teleglobe, were parties to the joint representation
as a matter of law, and (3) even the documents that fell outside
of the joint representation (i.e., were produced by outside
counsel) must be disclosed because they were shared with
BCE’s in-house attorneys, who jointly represented Teleglobe.
II. Jurisdiction
10
Specifically, the Special Master concluded that the law
firms Strikeman Elliot and Shearman & Sterling produced at
least some documents for the sole benefit of BCE, but he
ordered the production of those documents because they were
shared with BCE’s in-house attorneys, who were jointly
representing it and Teleglobe.
19
This is an appeal from an interlocutory order.
Nevertheless, we have jurisdiction under the collateral order
doctrine, which provides an exception to the finality requirement
of 28 U.S.C. § 1291. Under it, an immediate appeal lies if the
following elements are met: “(1) the order from which the
appellant appeals conclusively determines the disputed question;
(2) the order resolves an important issue that is completely
separate from the merits of the dispute; and (3) the order is
effectively unreviewable on appeal from a final judgment.” In
re Ford Motor Co., 110 F.3d 954, 958 (3d Cir. 1997) (citing
Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 32 F.3d 851,
860 (3d Cir. 1994)).
Here, the first and third prongs are clearly met, as the
District Court ordered the production of some 800 documents
currently in dispute. See In re Ford Motor Co., 110 F.3d at 958(holding that the first prong is met when a district court orders
the production of documents). Once documents are disclosed,
any dispute over their privileged status is effectively moot and
unreviewable, as the very purpose of the privilege is frustrated
by compelled disclosure. Id. at 963 (“[T]he limited assurance
that the protected material will not be disclosed at trial ‘will not
suffice to ensure free and full communication by clients who do
not rate highly a privilege that is operative only at the time of
trial.’” (quoting Chase Manhattan Bank, N.A. v. Turner &
Newall, PLC, 964 F.2d 159, 165 (2d Cir. 1992))).
The only question, then, is whether the privilege issue is
20
sufficiently separate from the merits of the suit. It is, as we have
no occasion to consider the issues that lie at the heart of the
case: the existence, content, and alleged breach of any contract
between BCE, Teleglobe, and/or the Debtors; the content and
fraudulent or negligent nature of any representations made by
BCE; and the alleged breach by BCE of fiduciary duties it
purportedly owed to the Debtors. Rather, we concern ourselves
with the extent to which BCE, Teleglobe, and the Debtors were
jointly represented by counsel and the effect any joint
representation has on BCE’s ability to shield documents from
disclosure. In this context, we have little trouble concluding that
we have jurisdiction over this appeal.
III. Choice of Law
BCE argues that Canadian law should govern all aspects
of this appeal; the Debtors, on the other hand, argue for
Delaware law. As a federal court exercising jurisdiction over
state-law claims, we apply the choice-of-law rules of Delaware,
the forum state. Hammersmith v. TIG Ins. Co., 480 F.3d 220,
226 (3d Cir. 2007).
“Delaware courts look to the Restatement (Second) of
Conflict[s] of Laws for guidance in choice of law disputes.”
Gloucester Holding Corp. v. U.S. Tape & Sticky Prods., LLC,
832 A.2d 116, 124 (Del. Ch. 2003). Here, § 139 of the
Restatement applies:
21
(1) Evidence that is not privileged under the local law of
the state which has the most significant relationship with
the communication will be admitted, even though it
would be privileged under the local law of the forum,
unless the admission of such evidence would be contrary
to the strong public policy of the forum.
(2) Evidence that is privileged under the local law of the
state which has the most significant relationship with the
communication but which is not privileged under the
local law of the forum will be admitted unless there is
some special reason why the forum policy favoring
admission should not be given effect.
RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 139 (1971).
These provisions presuppose a conflict between the law
of the forum state and the law of the state with the most
significant relationship. This is because courts typically wade
into choice-of-law determinations when those laws truly
conflict. See Huber v. Taylor, 469 F.3d 67, 74 (3d Cir. 2006)
(citing On Air Entm’t Corp. v. Nat’l Indem. Co., 210 F.3d 146,
149 (3d Cir. 2000)). While there are no reported Delaware cases
on this point, we predict that Delaware would follow the
practice of the federal system and most states, and decide a
choice-of-law dispute only when the proffered legal regimes
actually conflict on a relevant point.
22
BCE argues for Canadian law here, but concedes that it
has found no relevant conflict of Canadian with Delaware law.11
This undercuts BCE’s argument, particularly given that the
Restatement favors the admission of evidence when the law of
the forum state so requires; thus, if applying Canadian law will
safeguard the privilege, it is BCE’s responsibility not only to
highlight the legal conflict, but also to point to “some special
reason” favoring protection. See RESTATEMENT (SECOND) OF
CONFLICTS OF LAWS § 139 cmts. c & d. As BCE has not
informed us of a conflict, cites Delaware law extensively (with
comparatively few Canadian decisions noted), and concedes that
the law in Canada is not materially different than Delaware, we
rely on Delaware authority in reaching our conclusions. See
Huber, 469 F.3d at 74.
We recognize that BCE has informed us of a true conflict
on an issue the Debtors raise as an alternate sustaining
ground—namely, whether the Debtors are entitled to the
disputed documents under the fiduciary exception to the
attorney-client privilege. Though that exception is well-
entrenched in Delaware law, it does not exist in Canada. We
deal with this issue more fully in Part VI.A.
11
In oral argument before our Court, BCE’s counsel stated
that BCE and he “don’t think there’s a difference” between
Delaware and Canadian law on the issues presented by this
appeal.
23
IV. Summary of the Law
This appeal raises core questions about the proper
operation of a corporate family’s centralized in-house legal
department. Because answering those questions requires
delving into a variety of concepts related to the co-client (or
joint-client) privilege, its exceptions, its scope, and a lawyer’s
ethical obligations, a summary of relevant law sets the backdrop.
We begin with a basic review of the attorney-client
privilege—and how it has been adapted to accommodate the
corporate client. We continue with a discussion of how
disclosing otherwise privileged communications to third parties
waives the privilege. Next, we explore two oft-confused
privileges: (1) the co-client (or joint-client) privilege, which
applies when multiple clients hire the same counsel to represent
them on a matter of common interest,12 and (2) the community-
of-interest (or common-interest) privilege, which comes into
play when clients with separate attorneys share otherwise
privileged information in order to coordinate their legal
activities. Neither the co-client nor community-of-interest
privilege is effective in adverse litigation between the former
clients, so we next discuss the contours of the adverse-litigation
12
Though the term “common interest” is used in describing
both the co-client and community-of-interest privileges, these
privileges are distinct. See Part IV.C.2, infra.
24
exception. Then, we explore how courts deal with joint
representations that go wrong because of impermissible attorney
conflicts of interest. Finally, we put all of these doctrines
together to address how they interact in the modern corporate in-
house counsel’s office.
A. The Attorney-Client Privilege
The attorney-client privilege protects communications
between attorneys and clients from compelled disclosure. It
applies to any communication that satisfies the following
elements: it must be “(1) a communication (2) made between
privileged persons (3) in confidence (4) for the purpose of
obtaining or providing legal assistance for the client.”
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 68
(2000). “Privileged persons” include the client, the attorney(s),
and any of their agents that help facilitate attorney-client
communications or the legal representation. Id. § 70.
The attorney-client privilege is the oldest of the common-
law privileges. Klitzman, Klitzman & Gallagher v. Krut, 744
F.2d 955, 960 (3d Cir. 1984). Like all privileges, it is an
exception to the common-law maxim that the public has a right
to “‘every man’s evidence.’” United States v. Bryan, 339 U.S.
323, 331 (1950) (quoting 8 J. WIGMORE, EVIDENCE § 2192 (3d
ed. 1940)). Though initially confined to communications made
in anticipation of litigation, American courts rejected that
limitation at the outset. PAUL R. RICE, ATTORNEY-CLIENT
25
PRIVILEGE IN THE UNITED STATES § 1:12 (2d ed. 1999)
(hereinafter “RICE”) (citing, e.g., Parker v. Carter, 4 Munf. 273,
1814 WL 667, at *9 (Va. 1814) (“The court is also of [the]
opinion[] that [the privilege] is not confined to facts disclosed,
in relation to suits actually depending at the time, but extends to
all cases in which a client applies . . . to his counsel or attorney
. . . for his aid in the line of his profession.”)). This is because
so confining the privilege would discourage clients from seeking
the advice of counsel before problems arise. Parker, 1814 WL
at *9.
As the Supreme Court has noted more recently, the
purpose of the attorney-client privilege
is to encourage full and frank communication
between attorneys and their clients and thereby
promote broader public interests in the
observance of law and administration of justice.
The privilege recognizes that sound legal advice
or advocacy serves public ends and that such
advice or advocacy depends upon the lawyer’s
being fully informed by the client.
Upjohn Co. v. United States, 449 U.S.383, 389 (1981); accord
The Queen v. McClure, [2001] 1 S.C.R. 445, at ¶¶ 32–33 (Can.
2001); Deutsch v. Cogan, 580 A.2d at 104. Because the
privilege carries through policy purposes—encouraging
attorney-client communication to enhance compliance with the
26
law and facilitating the administration of justice, the Supreme
Court has not applied it mechanically. Upjohn, 449 U.S. at 392.
It is essential that parties be able to determine in advance with
a high degree of certainty whether communications will be
protected by the privilege. Id. at 393; see also Deutsch, 580
A.2d at 106.
As common-law courts developed the privilege in an age
in which clients were almost exclusively natural persons, more
modern courts sought to adapt it to the now ubiquitous corporate
client. For more than a century, common-law courts have
recognized that communications between corporate clients and
their attorneys are indeed privileged. See Radiant Burners, Inc.
v. Am. Gas Ass’n, 320 F.2d 314, 319 & n.7 (7th Cir. 1963)
(citing English cases dated as early as 1833, and American cases
as early as 1885, for the proposition that corporations can assert
the attorney-client privilege).
Because corporations act through human agents, the
question of whose communications with the corporation’s
attorneys are entitled to protection comes up often. RICE § 4:11.
In Upjohn the Supreme Court rejected the so-called “control
group theory”—that only communications between high-level
managers and corporate attorneys merit protection. 449 U.S. at
392. Instead, it held that when a corporation’s managers require
its employees to give information to its attorneys in the course
of providing legal advice, those communications also are
protected. Id. at 396. This serves the policy goals of the
27
privilege—to enhance compliance with the law and facilitate the
administration of justice—by encouraging open communication
between attorneys and clients. Id. at 389, 394.
The lesson for us is that it is important not to confuse
these overarching policy goals with the means of achieving
them. Communication between counsel and client is not, in and
of itself, the purpose of the privilege; rather, it only protects the
free flow of information because it promotes compliance with
law and aids administration of the judicial system. Cf. United
States v. Zolin, 491 U.S. 554, 563 (1989) (explaining that
attorney-client communication facilitating fraud is not
privileged because that sort of communication impedes the
administration of justice). Thus, following Upjohn’s lead in not
applying the privilege mechanically does not counsel in favor of
applying the privilege anytime it might increase the flow of
information; rather, Upjohn counsels a more nuanced inquiry
into whether according a type of communication protection is
likely to encourage compliance-enhancing communication that
makes our system for resolving disputes more operable.
B. The Disclosure Rule
A communication is only privileged if it is made “in
confidence.” RESTATEMENT (THIRD) OF THE LAW GOVERNING
LAWYERS § 68. In other words, if persons other than the client,
its attorney, or their agents are present, the communication is not
made in confidence, and the privilege does not attach. The
28
disclosure rule operates as a corollary to this principle: if a client
subsequently shares a privileged communication with a third
party, then it is no longer confidential, and the privilege ceases
to protect it. See DEL. R. EVID. 510. This is because the act of
disclosing signals that the client does not intend to keep the
communication secret. RICE § 9:28. In addition, it prevents
clients from engaging in strategic selective disclosure. United
States v. Bernard, 877 F.2d 1463, 1465 (10th Cir. 1989). The
privilege does, after all, hinder the truth-seeking process, and so
we carefully police its use. United States v. Doe, 429 F.3d 450,
453 (3d Cir. 2005).13
Disclosing a communication to a third party
unquestionably waives the privilege. A harder question is
whether the waiver also ends the privilege as to any related but
not disclosed communications. In answering this question, our
touchstone is fairness. See Tackett v. State Farm Fire & Cas.
Ins. Co., 653 A.2d 254, 259 (Del. 1995); see also Westinghouse
Elec. Corp. v. Republic of the Philippines, 951 F.2d 1414, 1426
n.12 (3d Cir. 1991). When one party takes advantage of another
by selectively disclosing otherwise privileged communications,
courts broaden the waiver as necessary to eliminate the
13
In stating that we construe the privilege strictly, we do not
mean that it is disfavored. As Upjohn, McClure, and Deutsch
indicate, the attorney-client privilege is integral to the
functioning of our legal system. Recognizing, however, that it
limits the truth-seeking process, we carefully monitor it to
prevent its abuse.
29
advantage. Zirn v. VLI Corp., 621 A.2d 773, 781–82 (Del.
1993) (“The purpose underlying the rule of partial disclosure is
one of fairness to discourage the use of the privilege as a
litigation weapon.”); see also RICE § 9:31. Extending the
waiver, however, is not a punitive measure, so courts do not
imply a broader waiver than necessary to ensure that all parties
are treated fairly.14 See RICE 9:31. Moreover, when the
disclosure does not create an unfair advantage, courts typically
limit the waiver to the communications actually disclosed. See
In re Keeper of Records (Grand Jury Subpoena Addressed to
XYZ Corp.), 348 F.3d 16, 24–25 (1st Cir. 2003); cf.
Westinghouse, 951 F.2d at 1427 n.14.
C. Privileged Information Sharing
1. The Co-Client (or Joint-Client)
Privilege
It is often expedient for two or more people to consult a
single attorney. The rules of professional conduct allow a
lawyer to serve multiple clients on the same matter so long as all
clients consent, and there is no substantial risk of the lawyer
being unable to fulfill her duties to them all. RESTATEMENT
(THIRD) OF THE LAW GOVERNING LAWYERS §§ 128–31. Just as
14
This is not to say that district courts may not separately
impose disclosure as an sanction for improper behavior; it
merely means that the scope of the waiver is only as broad as
necessary to remedy any unfair advantage.
30
in single-client representation, the lawyer and co-clients15 begin
their relationship when the co-clients convey their desire for
representation, and the lawyer consents. Id. § 14. Like single-
client representation, nothing prevents joint representation from
arising by implication, but, as a District Court in Maryland
recently noted, courts must be careful not to imply joint
representations too readily:
What the Court takes exception to is [the
plaintiff’s] effort to . . . argue, in effect, that a
joint representation of Party A and Party B may
somehow arise through the expectations of Party
B alone, despite Party A’s views to the contrary.
This position is untenable, because it would . . .
allow the mistaken (albeit reasonable) belief by
one party that it was represented by an attorney
. . . to serve to infiltrate the protections and
privileges afforded to another client.
Neighborhood Dev. Collaborative v. Murphy, 233 F.R.D. 436,
441–42 (D. Md. 2005) (internal citations and quotation marks
deleted). Moreover, as the Restatement details, it is important
to remember that
15
We use the terms “co-clients” and “joint clients”
interchangeably. Both refer to multiple clients engaging one or
more common attorneys to represent them on a matter of interest
to all.
31
clients of the same lawyer who share a common
interest are not necessarily co-clients. Whether
individuals have jointly consulted a lawyer or
have merely entered concurrent but separate
representations is determined by the
understanding of the parties and the lawyer in
light of the circumstances.
Co-client representations must also be
distinguished from situations in which a lawyer
represents a single client, but another person with
allied interests cooperates with the client and the
client’s lawyer.
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 75
cmt. c (internal cross-references omitted).
Once begun, a co-client representation generally
continues until a client discharges the lawyer or the lawyer
withdraws. Id. § 31. In addition, numerous courts have
recognized that the relationship may terminate by implication.
Fed. Deposit Ins. Corp. v. Ogden Corp., 202 F.3d 454, 463 (1st
Cir. 2000) (“A joint attorney-client relationship remains intact
until it is expressly terminated or until circumstances arise that
readily imply to all the joint clients that the relationship is
over.”) (emphasis in original); see also Flynt v. Brownfield,
Bowen, & Bally, 882 F.2d 1048, 1051 (6th Cir. 1989) (holding
that terminating attorney-client relationship requires “conduct
32
dissolving the essential mutual confidence” between them); In
re Dow, 132 B.R. 853, 858 (Bankr. S. D. Ohio 1991) (same). In
particular, a joint representation terminates when it becomes
clear to all parties that the clients’ legal interests have diverged
too much to justify using common attorneys. RICE § 2:4 (citing
Mass. Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 167
F. Supp. 2d 128, 129 (D. Mass. 2001)).
While it is permissible for lawyers and clients to limit the
scope of representation in a single-client representation, see
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS
§ 19, it is particularly common in co-client situations because of
the limited congruence of the clients’ interests. As the
Restatement notes, a co-client relationship is limited by “the
extent of the legal matter of common interest.” Id. § 75 cmt. c.
While written agreements limiting the scope of a joint
representation might be preferable, nothing requires this so long
as the parties understand the limitations.
The District Court for the Northern District of California
noted in Sky Valley Ltd. P’ship v. ATX Sky Valley Ltd., 150
F.R.D. 648, 652–53 (N.D. Cal. 1993), that a wide variety of
circumstances are relevant to the determination of whether two
or more parties intend to create a joint-client relationship,
particularly how the parties interact with the joint attorneys and
with each other. These same circumstances are relevant to
33
determining the scope of any joint representation.16 The keys to
deciding the scope of a joint representation are the parties’ intent
and expectations, and so a district court should consider
carefully (in addition to the content of the communications
themselves) any testimony from the parties and their attorneys
on those areas. As explained in section D of this Part, finding
too broad the scope of a joint representation gives the parties
more control over each other’s ability to waive the privilege
than they intended, and it subjects them to losing it in litigation
with one another.
When co-clients and their common attorneys
communicate with one another, those communications are “in
confidence” for privilege purposes. Hence the privilege protects
those communications from compelled disclosure to persons
outside the joint representation. Moreover, waiving the joint-
client privilege requires the consent of all joint clients.
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS
§ 75(2). A wrinkle here is that a client may unilaterally waive
the privilege as to its own communications with a joint attorney,
so long as those communications concern only the waiving
client; it may not, however, unilaterally waive the privilege as
to any of the other joint clients’ communications or as to any of
16
The Sky Valley Court’s list of more than 20, often
overlapping, factors strikes us as excessive; thus we do not
repeat them here.
34
its communications that relate to other joint clients.17 Id. at cmt.
e.
2. The Community-of-Interest (or
Common-Interest) Privilege18
17
As the Reporter’s Note in the Restatement laments, the
caselaw on this point is not as uniform as one would hope. Id.
§ 75 Reporter’s Note cmt. e. The divergence seems to rest on
difficulties in understanding the following statement from
Wigmore’s treatise: “Where the consultation was had by several
clients jointly, the waiver should be joint for joint statements,
and neither could waive for the disclosure of the other’s
statements; yet neither should be able to obstruct the other in the
disclosure of the latter’s own statements.” 8 J. WIGMORE,
EVIDENCE § 2328 (J. McNaughton rev. 1961) (second emphasis
added). Obtuse as this statement may seem, we believe that the
Restatement’s interpretation of it is sensible and, in any event,
correctly states the law in Delaware. Cf. Interfaith Hous. Del.,
Inc. v. Town of Georgetown, 841 F. Supp. 1393, 1402 (D. Del.
1994) (predicting that one common-interest client’s waiver of
the privilege does not waive it on behalf of all common-interest
clients).
18
Because the issues in our case involve clients of the same
attorneys, not clients with separate counsel, which would call for
a community-of-interest analysis, the rest of this section may
seem surplusage. But because the District Court (erroneously)
ruled that the Debtors and BCE were in a “community of
interest,” we examine the contours of that privilege. Indeed,
much of the caselaw confuses the community-of-interest
privilege (which is the same as the “common-interest privilege,”
35
Recognizing that it is often preferable for co-defendants
represented by different attorneys in criminal proceedings to
coordinate their defense, courts developed the joint-defense
privilege. In its original form, it allowed the attorneys of
criminal co-defendants to share confidential information about
defense strategies without waiving the privilege as against third
parties. Moreover, one co-defendant could not waive the
privilege that attached to the shared information without the
consent of all others.19 Later, courts replaced the joint-defense
privilege, which only applied to criminal co-defendants, with a
broader one that protects all communications shared within a
proper “community of interest.” whether the context be criminal
or civil.20 RICE § 4:35; see also Andrew R. Taggart, Parent-
Subsidiary Communications & the Attorney-Client Privilege, 65
see RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS
§ 76 Reporter’s Note cmt.b.) with the co-client privilege. Thus
it is important to detail the community-of-interest privilege for
the purpose of explaining how it and the co-client privilege
differ, and why only the latter applies in this case.
19
For a history of the joint-defense privilege, see generally
Craig S. Lerner, Conspirators’ Privilege & Innocents’ Refuge:
A New Approach to Joint Defense Agreements, 77 NOTRE DAME
L. REV. 1449, 1480–90 (2002).
20
According to the Restatement, the community-of-interest
privilege has completely replaced the old joint-defense privilege
for information sharing among clients with different attorneys.
Thus, courts should no longer purport to apply the joint-defense
privilege. RESTATEMENT (THIRD) OF THE LAW GOVERNING
LAWYERS § 76 Reporter’s Note cmt. b.
36
U. CHI. L. REV. 315 (1998). Thus, the community-of-interest
privilege allows attorneys representing different clients with
similar legal interests to share information without having to
disclose it to others. It applies in civil and criminal litigation,
and even in purely transactional contexts. RICE 4:35;
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS
§ 76.
Two aspects of the modern community-of-interest
privilege are noteworthy. First, to be eligible for continued
protection, the communication must be shared with the attorney
of the member of the community of interest. Cf. Ramada Inns,
Inc. v. Dow Jones & Co., 523 A.2d 968, 972 (Del. Super. Ct.
1986) (emphasizing that the relevant Delaware evidentiary rule
protects communications disclosed to an attorney). Sharing the
communication directly with a member of the community may
destroy the privilege.21 Second, all members of the community
must share a common legal interest in the shared
communication. RICE § 4:35. Delaware Rule of Evidence
502(b)(3), which sets out the State’s version of the community-
of-interest privilege, incorporates both requirements (that the
clients’ separate attorneys share information and that the clients
have a common legal interest):
21
Neither the Restatement nor Professor Rice emphasize this
requirement, though it appears in the plain text of the relevant
Delaware evidentiary rule, and Professor Rice acknowledges it.
See DEL R. EVID. 502(b)(3); RICE § 4:35 & n.44.1.
37
A client has a privilege to refuse to disclose and
to prevent any other person from disclosing
confidential communications[,] made for the
purpose of facilitating the rendition of
professional legal services to the client . . .[,] by
the client or the client’s representative or the
client’s lawyer or a representative of the lawyer to
a lawyer or a representative of a lawyer
representing another in a matter of common
interest.
DEL. R. EVID. 502(b)(3).
The requirement that the clients’ separate attorneys share
information (and not the clients themselves) derives from the
community-of-interest privilege’s roots in the old joint-defense
privilege, which (to repeat) was developed to allow attorneys to
coordinate their clients’ criminal defense strategies. See
Chahoon v. Commw., 21 Gratt. 822, 1871 WL 4931, at *11 (Va.
1871). Because the common-interest privilege is an exception
to the disclosure rule, which exists to prevent abuse, the
privilege should not be used as a post hoc justification for a
client’s impermissible disclosures. The attorney-sharing
requirement helps prevent abuse by ensuring that the common-
interest privilege only supplants the disclosure rule when
attorneys, not clients, decide to share information in order to
coordinate legal strategies.
38
Similarly, the congruence-of-legal-interests requirement
ensures that the privilege is not misused to permit unnecessary
information sharing. In a leading case, a District Court in South
Carolina explained the contours of the requirement:
A community of interest exists among different
persons or separate corporations where they have
an identical legal interest with respect to the
subject matter of a communication between an
attorney and a client concerning legal advice. The
third parties receiving copies of the
communication and claiming a community of
interest may be distinct legal entities from the
client receiving the legal advice and may be a
non-party to any anticipated or pending litigation.
The key consideration is that the nature of the
interest be identical, not similar, and be legal, not
solely commercial. The fact that there may be an
overlap of a commercial and a legal interest for a
third party does not negate the effect of the legal
interest in establishing a community of interest.
Duplan Corp. v. Deering Milliken, Inc., 397 F. Supp. 1146,
1172 (D.S.C. 1974).
The Restatement takes a more flexible approach than
Duplan toward the similarity and types of interests that qualify
as “common”: “[T]he common interest . . . may be either legal,
39
factual, or strategic in character. The interests of the separately
represented clients need not be entirely congruent.”
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 76
cmt. e. Professor Rice criticizes Duplan’s strictness and cites a
few cases announcing that the interest need not be identical
(though maintaining, contrary to the Restatement, that the
interest must be legal, rather than “factual or strategic”). RICE
§ 4:36 (citing, e.g., SCM Corp. v. Xerox Corp., 70 F.R.D. 508,
524–25 (D. Conn. 1976) (Newman, J.) (holding that legal
interests must be “demonstrably common” or the clients must
have a “substantial” risk of shared exposure to justify privileged
information-sharing)). Rice, however, still recognizes Duplan
as the leading approach. Id. (“This . . . standard . . . coined in
Duplan . . . has been widely followed.”). The Delaware courts
seem not to have taken a position on whether the common legal
interest must be identical, and we need not resolve the
congruence-of-legal-interests question here. For our purposes,
it is sufficient to recognize that members of the community of
interest must share at least a substantially similar legal interest.
We conclude with two points of caution. First, the
privilege only applies when clients are represented by separate
counsel. Thus, it is largely inapplicable to disputes like this one
that revolve around corporate family members’ use of common
attorneys (namely, centralized in-house counsel).22 Second,
22
This means that BCE’s invocation of the “common
interest” privilege in the Bankruptcy Court was out of place, as
BCE has never asserted that the parties were represented by
40
while the Restatement (confusingly) uses the term “common
interest” to describe the congruence of the parties’ interests in
both co-client and community-of-interest situations, the
concepts are not the same. Compare RESTATEMENT (THIRD) OF
THE LAW GOVERNING LAWYERS § 75(1) (“If two or more
persons are jointly represented by the same lawyer in a matter,
a communication of either co-client that . . . relates to matters of
common interest is privileged as against third persons.”), with
id. § 76(1) (“If two or more clients with a common interest in a
litigated or nonlitigated matter are represented by separate
lawyers and they agree to exchange information concerning the
matter, a communication of any such client . . . is privileged as
against third persons.”); cf. id. § 76 cmt. e & Reporter’s Note
cmt. b (explaining that co-client and community-of-interest
situations differ). In particular, because co-clients agree to share
all information related to the matter of common interest with
each other and to employ the same attorney, their legal interests
must be identical (or nearly so) in order that an attorney can
represent them all with the candor, vigor, and loyalty that our
ethics require. See Ogden, 202 F.3d at 461. In the community-
of-interest context, on the other hand, because the clients have
separate attorneys, courts can afford to relax the degree to which
clients’ interests must converge without worrying that their
separate counsel who properly shared information. Confusing
as this area of law is, parties asserting the privilege (who,
incidentally, bear the burden of proving it applies) are expected
to explain themselves with more precision than BCE has
throughout this litigation.
41
attorneys’ ability to represent them zealously and single-
mindedly will suffer.
D. The Exception for Adverse Litigation
The great caveat of the joint-client privilege is that it only
protects communications from compelled disclosure to parties
outside the joint representation. When former co-clients sue one
another, the default rule is that all communications made in the
course of the joint representation are discoverable. DEL. R.
EVID. § 502(d)(6); RESTATEMENT (THIRD) OF THE LAW
GOVERNING LAWYERS § 75(2). This rule has two bases: (1) the
presumed intent of the parties, and (2) the lawyer’s fiduciary
obligation of candor to both parties. Id. § 75 cmt. d. According
to the Restatement, it is permissible for co-clients to agree in
advance to shield information from one another in subsequent
adverse litigation, though the drafters concede finding no direct
authority for that proposition.23 Id. Reporter’s Note cmt d.
BCE argues that the default rule should be flipped when
the joint clients are a parent company and its wholly owned
subsidiary—i.e., courts should assume that communications
23
Indeed, the only case we have found dealing with such an
agreement is In re Mirant Corp., 326 B.R. 646, 652 (Bankr.
N.D. Tex. 2005) (applying Georgia law), in which the
Bankruptcy Court refused to give it effect. We have no
occasion here to predict whether Delaware courts would enforce
such agreements.
42
generated in the course of the joint representation are not
discoverable in adverse litigation. BCE’s rationale is that no
parent would want its subsidiary to be able to invade the
privilege in subsequent litigation, and so courts should not
presume that intent. Moreover, because parents and wholly
owned subsidiaries share the same interests, the parent’s intent
(to shield information) effectively controls.
Delaware courts have recognized that parents and their
wholly owned subsidiaries have the same interests because all
of the duties owed to the subsidiaries flow back up to the parent.
Cf. Anadarko, 545 A.2d at 1174 (“[I]n a parent and wholly-
owned subsidiary context, the directors of the subsidiary are
obligated only to manage the affairs of the subsidiary in the best
interests of the parent and its shareholders.”). While we
normally assume that a corporation’s primary interest is in
maximizing its economic value, the only interest of a wholly
owned subsidiary is in serving its parent. Id. at 1174. That
doing so may not always involve maximizing the subsidiary’s
economic value is of little concern. Trenwick Am. Litig. Trust
v. Ernst & Young LLP, 906 A.2d 168, 192 (Del. Ch. 2006).24 If
24
As Vice Chancellor Strine noted in that case, there is
nothing wrong (or even unusual) about a parent causing its
solvent wholly owned subsidiary to act in a way that benefits the
corporate family but harms the individual subsidiary. He
explained:
Assume for a moment that Trenwick [parent]
itself never went bankrupt. Imagine further that
it had bought another insurer and pledged a key
43
the subsidiary is not wholly owned, however, in the interest of
protecting minority shareholders we revert to requiring that
whoever controls the subsidiary seek to maximize its economic
value with requisite care and loyalty. See id. at 192 n.66.
Similarly, if the subsidiary is insolvent, we require the same in
the interest of protecting the subsidiary’s creditors. Id. at 204
n.96 (approving In re Scott Acquisition Corp., 244 B.R. 283,
286 (Bankr. D. Del. 2006) (holding that the fiduciary duties of
directors of an insolvent wholly owned subsidiary inure to the
benefit of the subsidiary’s creditors)); see also N. Am. Catholic
asset of Trenwick America [subsidiary] as
security for the purchase price. The purchase
goes wrong and causes Trenwick to become less
profitable, but not insolvent. To satisfy its
creditors, Trenwick causes Trenwick America to
sell the key pledged asset and uses the proceeds to
pay off the acquisition debt. As a result,
Trenwick America is less profitable and less
valuable. In this scenario, even though the course
of events posed no prospect of benefit for
Trenwick America when it is conceived solely as
an entity, there would be nothing troubling about
it from a fiduciary perspective. Rather, the
scenario would involve a garden-variety situation
when a parent corporation used the asset value of
one of its wholly-owned subsidiaries to help it
finance and absorb the down-side of the parent’s
larger business strategy.
Trenwick, 906 A.2d at 192 (emphasis added).
44
Programming Found., ___ A.2d at ___, 2007 WL 1453705, at
*7 (“[T]he creditors of an insolvent corporation have standing
to maintain derivative claims against directors on behalf of the
corporation for breaches of fiduciary duties. The corporation’s
insolvency makes the creditors the principal constituency
injured by any fiduciary breaches that diminish the firm’s value.
Therefore, equitable considerations give creditors standing to
pursue derivative claims against the directors of an insolvent
corporation. Individual creditors of an insolvent corporation
have the same incentive to pursue valid derivative claims on its
behalf that shareholders have when the corporation is solvent.”)
(emphasis in original) (internal citations and quotation marks
omitted).
In the context of a joint attorney representing a parent
and its solvent wholly owned subsidiary, BCE’s argument that
we should flip the normal default rule (that all information
shared in the course of a joint representation is not privileged in
subsequent adverse litigation between the former joint clients)
has some appeal, as it probably is more in line with the typical
parent company’s intent. But because parent-subsidiary
relationships often change, having opposite default rules for
wholly owned, solvent subsidiaries, and not-wholly owned or
insolvent subsidiaries, seems unwieldy. In the course of a joint
representation, a subsidiary could go from being wholly owned
and solvent to majority-owned or insolvent (or both). Under
those circumstances, it is not clear which default rule BCE
would have us apply. Because of the need for clarity and
45
certainty in privilege law, see Upjohn, 449 U.S. at 393, creating
multiple, ever-shifting default rules would be unwise. Simply
following the default rule against information shielding creates
simpler, and more predictable, ground rules.
Moreover, BCE’s argument overlooks the joint attorney’s
fiduciary obligations to both parties. In undertaking a joint
representation, the prospective joint attorney must always
consider whether she can fulfill her duties to each co-client. See
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS
§§ 128–31. When the co-clients desire to shield information
from one another, this inquiry becomes more difficult in light of
the prospective joint attorney’s duty of candor to each. See id.
§ 60 cmt. l. In situations in which the subsidiary may become
either partially owned or insolvent, a prospective joint attorney
would have to consider her ability not only to counsel both
clients, but to do so in the face of an information-shielding
agreement that could harm one of them. Thus applying the
default rule against information shielding, absent an affirmative
agreement to shield, makes good sense. The rule is widely
accepted and dovetails with the joint attorney’s duty of candor.
We predict that Delaware courts would apply the adverse
litigation exception in all situations, even those in which the
joint clients are wholly owned by the same person or entity.
E. When Joint Representation Goes Awry: The
Eureka Principle
46
The Restatement’s conflicts rules provide that when a
joint attorney sees the co-clients’ interests diverging to an
unacceptable degree, the proper course is to end the joint
representation. RESTATEMENT (THIRD) OF THE LAW GOVERNING
LAWYERS § 121 cmts. e(1)–(2). As the Court of Appeals for the
D.C. Circuit noted in Eureka Inv. Corp. v. Chicago Title Ins.
Co., 743 F.2d 932 (D.C. Cir. 1984) (per curiam), courts are
presented with a difficult problem when a joint attorney fails to
do that and instead continues representing both clients when
their interests become adverse. Id. at 937–38. In this situation,
the black-letter law is that when an attorney (improperly)
represents two clients whose interests are adverse, the
communications are privileged against each other
notwithstanding the lawyer’s misconduct. Id.; see also 8 J.
WIGMORE, EVIDENCE § 2312 (McNaughton rev. ed. 1961).
The context of the Eureka case was the joint
representation of an insured and insurer. Over the course of the
litigation, the parties began to disagree. The insured, a
developer trying to effect a condo conversion, wanted to settle
in order to get its conversion plans back on track. The title
insurer, on the other hand, wanted to continue opposing liability
and would not agree to within-policy-limits settlement terms.
Having decided that the insurer’s refusal to settle was tortious,
the insured entered into a unilateral settlement with its
adversaries and promptly sued the insurer for indemnification
and consequential damages. The trouble was that the insured
continued to use the joint attorneys throughout the process,
47
relying on their advice in deciding to enter into a unilateral
settlement and to sue the insurer. Thus, upon filing its action,
the insurer sought discovery of the insured’s communications
with the joint attorneys in the hope that those communications
would support the affirmative defense of non-cooperation. The
insurer argued that because those communications were
generated during the attorneys’ joint representation of the parties
on the claim against the insured, they were discoverable in an
action between the joint clients.
The Court rejected the insurer’s argument, holding
instead that “[t]he policy behind [the co-client privilege]—to
encourage openness and cooperation between joint
clients—does not apply to matters known at the time of
communication not to be in the common interest of the
attorney’s two clients.” Eureka, 743 F.2d at 937. It emphasized
that both the insured and the joint attorneys thought that they
had begun a separate, individual representation of the insured on
the insurance bad-faith claim that was distinct from the
underlying liability action, calling these understandings
“crucial.” Id. Noting the attorneys’ potential ethical violations,
the Court concluded that they were of no moment: “[C]ounsel’s
failure to avoid a conflict of interest should not deprive the
client of the privilege. The privilege, being the client’s, should
not be defeated solely because the attorney’s conduct was
ethically questionable.” Id. at 938. Though not yet explicitly
adopted by the Delaware courts, the Eureka principle is widely
accepted. See RESTATEMENT (THIRD) OF THE LAW GOVERNING
48
LAWYERS § 60 cmt. l.; RICE 4:33.
F. Putting It All Together: Parents, Subsidiaries,
and the Modern Corporate Counsel’s Office
“A striking development in the legal profession . . . has
been the rapid growth in both importance and size of in-house,
or corporate, counsel.” Abram Chayes & Antonia Chayes,
Corporate Counsel and the Elite Law Firm, 37 STAN. L. REV.
277, 277 (1985). The roles of in-house counsel are many, e.g.,
overseeing the corporation’s compliance with myriad regulatory
regimes. The primary advantages of in-house (rather than
outside) counsel are the breadth of their knowledge of the
corporation and their ability to begin advising senior
management on important transactions at the earliest possible
stage, often well before anyone would think to hire a law firm.
See id. at 280–81; Carl D. Liggio, The Changing Role of
Corporate Counsel, 46 EMORY L.J. 1201, 1208 (1997). While
there is much debate over how corporate counsel should go
about promoting compliance with law (e.g., the usefulness of
“noisy withdrawal” requirements versus going up the corporate
chain with concerns), both sides of the debate seem to see in-
house counsel as the “front lines” of the battle to ensure that
compliance while preserving confidential communications.
Compare William W. Horton, A Transactional Lawyer’s
Perspective on the Attorney-Client Privilege: A Jeremiad for
Upjohn, 61 BUS. LAW. 95 (2005), with Letter from Susan P.
Koniak, Roger C. Cramton & George M. Cohen (endorsed by
49
named academics) to Securities Exchange Commission (Dec.
1 7 , 2 0 0 2 ) , a v a i l a b l e a t
http://www.sec.gov/rules/proposed/s74502/skoniak1.htm.
Because in-house counsel are crucial and clear rules are needed
to sort out attorney-client privilege problems (particularly for
corporate groups), this section sets out how the various
principles we have discussed apply to a parent company’s in-
house counsel.
1. Intra-group Information Sharing:
Parents and Subsidiaries as Joint
Clients
Because parent companies often centralize the provision
of legal services to the entire corporate group in one in-house
legal department, it is important to consider how the disclosure
rule affects the sharing of information among corporate
affiliates. Recognizing that any other result would wreak havoc
on corporate counsel offices, courts almost universally hold that
intra-group information sharing does not implicate the
disclosure rule. This result is unquestionably correct. The
cases, however, vary in how they reach the result. The Glidden
case, which both parties cite, illustrates the conceptual muddle:
The universal rule of law, expressed in a variety
of contexts, is that the parent and subsidiary share
a community of interest, such that the parent (as
well as the subsidiary) is the “client” for purposes
50
of the attorney-client privilege. See Crabb v.
KFC Nat'l Management Co., No. 91-5474, 1992
WL 1321 (6th Cir. Jan.6, 1992) (“‘The cases
clearly hold that a corporate ‘client’ includes not
only the corporation by whom the attorney is
employed or retained, but also parent, subsidiary
and affiliate corporations.”’ (quoting United
States v. AT & T, 86 F.R.D. 603, 616 (D.D.C.
1979))). Consequently, disclosure of legal advice
to a parent or affiliated corporation does not work
a waiver of the confidentiality of the document,
because of the complete community of interest
between parent and subsidiary. Id. at * 2.
Numerous courts have recognized that, for
purposes of the attorney client privilege, the
subsidiary and the parent are joint clients, each of
whom has an interest in the privileged
communications. See, e.g., Polycast Tech. Corp.
v. Uniroyal, Inc., 125 F.R.D. 47, 49 (S.D.N.Y.
1989); Medcom Holding Co. v. Baxter Travenol
Lab., 689 F. Supp. 841, 842 (N.D. Ill. 1988).
Glidden Co. v. Jandernoa, 173 F.R.D. 459, 472–73 (W.D. Mich.
1997) (applying Delaware law). In the above-quoted paragraph,
the Court calls the members of the corporate family a single
client and joint clients—all in the same breath. Moreover, it
invokes the community-of-interest privilege, which we
explained in section C of this Part, supra, applies only when the
51
parties have separate counsel. In quoting Glidden, we do not
mean to single out that Court for criticism, for there are many
cases that reach the result of non-waiver of privilege without
persuasively explaining how.
Courts typically offer versions of three arguments for not
construing the sharing of communications within the corporate
family as a waiver: (1) the members of the corporate family
comprise one client, see, e.g., Glidden, 173 F.R.D. at 472;
United States v. Am. Tel. & Tel. Co., 86, F.R.D. 603, 616
(D.D.C. 1979); (2) the members of the corporate family are joint
clients, see, e.g., Glidden, 173 F.R.D. at 473; Polycast Tech.
Corp. v. Uniroyal, Inc., 125 F.R.D. 47, 49 (S.D.N.Y. 1989);
Medcom, 689 F. Supp. at 842; and (3) the members of the
corporate family are in a community of interest with one
another. See, e.g., Glidden, 173 F.R.D. at 472; see generally
JOHN K. VILLA, CORPORATE COUNSEL GUIDELINES § 1:22(C)
(2006) (discussing community-of-interest and joint-client
rationales); RICE § 4:24 & n.54 (discussing various rationales for
not applying the disclosure rule). Of these three rationales, we
believe only the second withstands scrutiny.
Within the wholly owned corporate family, it
superficially makes sense to hold, as BCE urges, that the family
is really one client for purposes of the privilege and that the
privilege is held exclusively by the parent because all fiduciary
duties flow to the parent. Indeed, in other contexts courts have
treated parents and their wholly owned subsidiaries as one
52
entity. For example, parents and their wholly owned
subsidiaries cannot constitute a “combination” or “conspiracy”
of two or more persons under the Sherman Act. Copperweld
Corp. v. Independence Tube Corp., 467 U.S. 752, 772 (1984).
The Supreme Court reasoned that parents and subsidiaries could
not effectively “agree” for Sherman Act purposes because
[a] parent and its wholly owned subsidiary have a
complete unity of interest. Their objectives are
common, not disparate; their general corporate
actions are guided or determined not by two
separate corporate consciousnesses, but one.
They are not unlike a multiple team of horses
drawing a vehicle under the control of a single
driver. With or without a formal “agreement,” the
subsidiary acts for the benefit of the parent, its
sole shareholder. . . . [I]n reality a parent and a
wholly owned subsidiary always have a unity of
purpose or a common design. They share a
common purpose whether or not the parent keeps
a tight rein over the subsidiary; the parent may
assert full control at any moment if the subsidiary
fails to act in the parent’s best interests.
Id. at 771–72 (internal citations and quotation marks omitted).
Applying similar logic, courts have held that a parent cannot
tortiously interfere with its subsidiary’s contracts merely by
directing the subsidiary to breach the agreements. Boulevard
53
Assocs. v. Sovereign Hotels, Inc., 72 F.3d 1029, 1036 (2d Cir.
1995) (applying Connecticut law).
BCE also points out that Congress has recently pushed
members of corporate families to act more in concert with one
another by requiring the officers of public companies to certify
each quarter that they “have designed such internal controls to
ensure that material information relating to the issuer and its
consolidated subsidiaries is made known to such officers by
others within those entities.” 15 U.S.C. § 7241(a)(4)(B).
According to SEC regulations, the general rule is that majority-
owned subsidiaries must be consolidated for purposes of
financial reporting. 17 C.F.R. § 210.3A–02(a). Thus our
regulatory structure also treats the corporate family as a unified
enterprise for at least some purposes.
On the other hand, treating members of a corporate
family as one client fails to respect the corporate form. It is a
bedrock principle of corporate law in Delaware and elsewhere
that courts must respect entity separateness unless doing so
would work inordinate inequity. Pauley Petroleum, Inc. v.
Cont’l Oil Co., 239 A.2d 629, 633 (Del. 1968); see also In re
Owens Corning, 419 F.3d 195, 211 (3d Cir. 2005) (concluding
that courts must “respect entity separateness absent compelling
circumstances calling equity . . . into play”). By structuring its
various activities by forming separate corporations, a parent
company realizes numerous benefits, not the least of which are
the liability shields. With that structure comes the responsibility
54
to treat the various corporations as separate entities. In a tort
suit, for example, it is doubtful that we would treat the Debtors,
Teleglobe, and BCE as one entity.
We acknowledge that a core concept of Copperweld and
Boulevard Associates is that when a legislature seeks to attach
conspiracy-like liability,25 it rarely means to include the garden-
variety situation in which one who controls a corporation directs
that corporation to do something. After all, a corporation can
only act at the direction of whoever controls it, and we do not
think of every corporate action as a “conspiracy.” These
decisions, though, are tethered to the statutes (or common-law
causes of action) they interpret,26 and do not give us license to
disregard entity separateness in other contexts. Thus they are
inapplicable here.
Put simply, BCE wants to have it both ways: it wants us
to view the corporate group as a single client, and it wants the
controlling entity to own the privilege in perpetuity. But the
Supreme Court held in Commodity Futures Trading Comm’n v.
Weintraub, 471 U.S. 343, 350 (1985), that control of the
25
By this we mean statutes or common-law causes of action
that impose additional liability on bad behavior when two or
more entities act in concert, usually to account for the additional
danger that acting in concert engenders.
26
Indeed, there are conspiracy-type statutes that do attach
liability to parent-subsidiary actions. See, e.g., Ashland Oil, Inc.
v. Arnett, 875 F.2d 1271, 1281 (7th Cir. 1989) (holding that
RICO liability attaches to intracorporate conspiracies).
55
privilege passes with control of the corporation, so it is unclear
(even accepting BCE’s theory) that it is the initial corporate
parent who should control the privilege unilaterally once the
group breaks up. In any event, absent some compelling reason
to disregard entity separateness, in the typical case courts should
treat the various members of the corporate group as the separate
corporations they are and not as one client.
The community-of-interest rationale does not fit as a
matter of black-letter law because the community-of-interest
privilege only comes into play when parties are represented by
separate counsel, which often is not the case for parents and
subsidiaries. See Part IV.C.2, supra. Moreover, the
community-of-interest privilege only applies when those
separate attorneys disclose information to one another, not when
parties communicate directly. Id. Finally, it assumes too much
to think that members of a corporate family necessarily have a
substantially similar legal interest (as they must for the
community-of-interest privilege to apply, see id.) in all of each
other’s communications. Thus, holding that parents and
subsidiaries may freely share documents without implicating the
disclosure rule because of a deemed community of interest
stretches, we believe, the community-of-interest privilege too
far.
It makes the most sense, then, to rest not applying the
disclosure rule to many intra-group disclosures on the ground
that the members of the corporate family are joint clients. This
56
reflects both the separateness of each entity and the reality that
they are all represented by the same in-house counsel (whether
that counsel typically takes up office with the parent or with a
subsidiary).
2. Keeping Control of the Privilege
In its amicus brief, the Association of Corporate Counsel
(“ACC”) has as a theme a parent company’s desire to keep
control of the attorney-client privilege. One particular ACC
(and BCE) concern is that disclosures to parent/subsidiary cross-
directors risk creating broad joint representations that
subsidiaries can use to invade the parent’s privilege in
subsequent adverse litigation. Not so. In thinking about these
situations, courts should keep in mind the definition of
disclosure. For purposes of the disclosure rule, a disclosure
occurs when the parent shares an otherwise confidential
attorney-parent communication with an officer, director, or
agent of a subsidiary in that capacity. See DEL. R. EVID. 510.
Courts recognize corporate officers’ and directors’ ability to sit
on multiple boards by “‘chang[ing] hats.’” United States v.
Bestfoods, 524 U.S. 51, 69 (1998) (quoting Lusk v. Foxmeyer
Health Corp., 129 F.3d 773, 779 (5th Cir. 1997)). Thus it does
not break confidence to share an attorney-parent communication
with an officer of the parent in her capacity as officer of the
parent, even though she is also a director or officer of a
subsidiary. Because this sort of information sharing is not a
disclosure for purposes of the disclosure rule, courts need not
57
bother trying to apply a joint representation analysis to save the
privilege in these situations, nor should they use such
“disclosures” to find a joint representation with the relevant
subsidiary.
A similar concern is that courts may find too broad of a
joint representation, which in a spin-off situation ends up
allowing the subsidiary to invade the parent’s privilege. When,
for example, in-house counsel of the parent seek information
from various subsidiaries in order to complete the necessary
public filings, the scope of the joint representation is typically
limited to making those filings correctly. It does not usually
involve jointly representing the various corporations on the
substance of everything that underlies those filings.27 Contrary
to the Debtors’ argument, it is permissible (subject, of course, to
conflict rules) for attorneys and clients to limit the scope of a
joint representation in a sophisticated manner; nothing requires
construing the scope of a joint representation more broadly than
the parties to it intend.
27
Indeed, in some of these circumstances in-house counsel
may not need to represent the subsidiaries at all. When a parent
company directs its subsidiaries’ employees to provide
information to its in-house counsel that is critical to their
representation of the parent, the communication may be
privileged under Upjohn because of in-house counsel’s
representation of the parent alone, thus obviating any need for
these attorneys to represent the subsidiary as well. See Admiral
Ins. Co. v. U.S. Dist. Ct. for the Dist. of Ariz., 881 F.2d 1486,
1493 n.6 (9th Cir. 1989); see also Upjohn, 449 U.S. 394.
58
3. When Conflicts Arise
It is inevitable that on occasion parents and subsidiaries
will see their interests diverge, particularly in spin-off, sale, and
insolvency situations. When this happens, it is wise for the
parent to secure for the subsidiary outside representation.
Maintaining a joint representation for the spin-off transaction
too long risks the outcome of Polycast,28 125 F.R.D. at 49, and
Medcom,29 689 F. Supp. at 844—both cases in which parent
companies were forced to turn over documents to their former
28
The privilege dispute in Polycast followed the sale of a
wholly owned subsidiary. Before the sale, Uniroyal (the seller)
and its subsidiary were jointly represented by in-house counsel.
After the sale, Polycast (the buyer) sued Uniroyal for allegedly
misrepresenting the subsidiary’s financial condition. It sought
the production of notes taken by the subsidiary’s officer during
a phone conversation with in-house counsel. The District Court
ordered production because the subsidiary, now in Polycast’s
control, waived the joint privilege in its favor. 125 F.R.D. at 51.
As we explain in Part V.A.3, infra, we do not agree with much
of the Polycast Court’s reasoning.
29
The facts and result of Medcom are substantially similar to
those of Polycast. Essentially, the acquirer of a subsidiary sued
the seller/parent for misrepresentation related to the sale, and
sought production of documents produced while the subsidiary
and seller/parent were jointly represented by in-house counsel.
689 F. Supp. at 842. As with Polycast, we disagree with much
of the Medcom Court’s reasoning, which we explain in Part
V.A.3, infra.
59
subsidiaries in adverse litigation—not to mention the attorneys’
potential for running afoul of conflict rules. That the companies
should have separate counsel on the matter of the spin-off
transaction, however, does not mean that the parent’s in-house
counsel must cease representing the subsidiary on all other
matters. After all, spin-off transactions can be in the works for
months (or even years), and during that time it is proper (and
obviously efficient) for in-house counsel to continue to represent
the subsidiary (jointly or alone) on other matters.
Once conflicts begin coming to the surface, the question
of when to acquire separate counsel is often difficult. As
Medcom and Polycast demonstrate, from the perspective of
protecting the privilege the best answer is that once the parties’
interests become sufficiently adverse that the parent does not
want future controllers of the subsidiary to be able to invade the
parent’s privilege, it should end any joint representation on the
matter of the relevant transaction. Polycast, 125 F.R.D. at 49;
Medcom, 689 F. Supp. at 844. This standard is, of course, only
relevant if the parties have already begun a joint representation
on that transaction; if they have not, then the parent has nothing
to fear as far as the privilege goes (though other concerns, such
as their fiduciary duties to their subsidiaries, may argue in favor
of separating counsel).
In sum, in-house counsel have available numerous means
to protect a parent company’s privilege. By taking care not to
begin joint representations except when necessary, to limit the
60
scope of joint representations, and seasonably to separate
counsel on matters in which subsidiaries are adverse to the
parent, in-house counsel can maintain sufficient control over the
parent’s privileged communications.
V. Issues on Appeal
A. Whether the Debtors Are Entitled to
Documents Generated in the Course of a
BCE/Teleglobe Joint Representation
The District Court ruled that any documents generated
out of a BCE/Teleglobe joint representation are subject to
discovery by the Debtors. BCE argues that the Court erred
because the Debtors were not a party to any such joint
representation. (BCE admits that its attorneys jointly represented
it and Teleglobe on some matters; it denies that they jointly
represented it and the Debtors.) Indeed, the Court did not enter
a factual finding that any attorney jointly represented both BCE
and any of the Debtors.30 Rather, the Court ruled that the
30
We understand that the Debtors argue otherwise. We note,
however, that the Special Master wrote that “there was a joint
representation by BCE’s attorneys of BCE and Teleglobe
relating to a matter of common interest.” App. at A0047
(emphasis added). Similarly, in affirming the Special Master,
the District Court described his finding as a “joint representation
of BCE and Teleglobe by in-house counsel for BCE . . . .” App.
at A0013 (emphasis added). Because Teleglobe and the Debtors
are separate entities, we cannot read these statements as finding
61
Debtors were entitled to the product of any BCE/Teleglobe joint
representation because BCE had conceded this point.
Alternatively, it noted the Debtors, as Teleglobe’s wholly owned
subsidiaries, were entitled to the disputed documents as a matter
of law, and in any event Teleglobe waived the privilege for the
Debtors’ benefit in the Canadian insolvency proceedings. We
address all three grounds.
1. Whether BCE’s Concession in the
Bankruptcy Court Prevents it from
Arguing that the Debtors are not
Entitled to the Disputed Documents
a. Background
The District Court determined that BCE made a binding
concession that it would produce all documents arising out of
any BCE/Teleglobe joint representation and waived any
argument that the Debtors are not entitled to those documents.
Given the convoluted nature of the record, it is important to
understand what BCE argued at each stage of the litigation.
The first reference to joint representation came from BCE
itself; in a related proceeding before the Bankruptcy Court, BCE
opposed a motion to compel production of various documents to
the Creditors’ Committee in the course of a Rule 2004
investigation. In its opposition brief, BCE stated that “BCE
that the Debtors were also jointly represented.
62
attorneys consulted with attorneys, officers, or employees of
Teleglobe, Inc. or its subsidiaries to discuss or provide legal
advice in matters where BCE and Teleglobe Inc. (or its
subsidiaries) shared a common legal interest.” App. at A01110.
Furthermore, BCE declared that “such common interest
privilege31 will continue to exist until the Debtors file a litigation
against BCE.” App. at A01110. At the hearing, BCE stipulated
that its in-house counsel, Michel Lalande, held documents
relating to “two types of matters.” App. at A0172. The first
category of documents “was where the common interest was
involved.” App at A0172. The second category comprised
documents in which “Mr. Lalande was counseling . . . BCE
alone.” App. at A0172. The Bankruptcy Court ordered BCE to
produce to the Debtors and Creditors’ Committee “the common
interest documents.” App. at A0172. Indeed, BCE agreed to do
so. In the course of the hearing, however, the parties never
honed in on what the “common interest” was.
The issue came up again when the Debtors filed suit. In
front of the District Court (before it referred discovery matters
to the Special Master), BCE stated in its initial brief in
opposition to the motion to compel production that “documents
were produced pursuant to the Bankruptcy Court’s Order
because they were subject to the common interest privilege.
31
We reiterate that the term “common-interest privilege” is
inapt here, as that term typically refers to the community-of-
interest privilege. What BCE appears to have been asserting is
a co-client privilege. See supra Part IV.C.
63
Those documents were shared with [various attorneys and
accountants representing the Debtors].” App. at A0218. At the
first hearing before the District Court, BCE described the
situation thus: “[T]here were some places where BCE attorneys
clearly worked with what they conceived of as the common
interest of Teleglobe and BCE. And there were areas of
common interest. Judge Walrath said . . . produce them . . . .
We did.” App. at A00264. Again, none of these statements sets
out a definition or clarified the perceived scope of the “common
interest.”
Another round of briefing followed the District Court’s
reference to the Special Master. At a hearing before the Special
Master, the Debtors’ attorney went through BCE’s Rule 2004
privilege log and summarized that BCE claimed a “common-
interest privilege” on documents covering the following
subjects: “Teleglobe financing, financial transaction between
Teleglobe and BCE, issuance and redemption of preferred
shares . . .[,] [r]efinancing of bank facilities . . ., developing
Teleglobe financial statements, . . . public disclosures, . . . .
[and] Teleglobe restructuring.” App. at A00496–97. He further
stated that “[BCE] claims a common interest on Project X, and
so on. . . . [H]aving claimed common interests and having
assigned lawyers to effectively represent both sides of the
common interest, it would seem to us to be inconsistent now to
say that we can’t have all documents relating to the common
interests[,] particularly when we’re talking about documents that
were reviewed and considered by our fiduciaries.” App. at
64
A00497.
BCE responded that its in-house counsel provided limited
legal services to Teleglobe on an ad hoc basis and that BCE’s
in-house counsel did not serve the Debtors at all because they
had their own counsel in Reston, Virginia. App. at A00497. As
to Project X, BCE responded that in-house counsel Michel
Lalande and Martine Turcotte provided very limited advice to
Teleglobe on its public filings, its management representation
letters, its board resolutions, and its engagement letter with an
investment bank. App. at A00498. Moreover, BCE argued that
this advice was limited in scope and all other Project X advice
was provided solely to and for the benefit of BCE. In sum, BCE
argued that “what [is reflected on the privilege log] is BCE-
privileged advice, not advice . . . where BCE has a common
interest with [Teleglobe], not advice given to [Teleglobe] or [the
Debtors,] if there is any.” App. at A00503.
Recognizing that there was a dispute whether the
documents on the privilege log reflected advice provided solely
to BCE (and thus outside of the scope of any joint
representation), the Special Master ordered an audit of 50
documents to “see if I can satisfy myself that they are what you
[BCE] term exclusively related to advice provided to BCE.”
App. at A00504. To clarify the issue, the Special Master asked:
“[Y]ou’ve [BCE] given them [the Debtors] the documents that
deal with advice provided [to Teleglobe], by lawyers who might
have been representing both BCE and [Teleglobe] at the same
65
time, but have not given them documents that may have
addressed [Teleglobe], but were only involved with advice given
to BCE?” App. at A00505. BCE counsel responded, “That’s
correct.” App. at A00505.
After the Special Master ordered production of all of the
documents, BCE clearly raised, in its brief in opposition to the
Debtors’ motion in the District Court to affirm and adopt the
Special Master’s decision, the issue of its obligation to turn over
documents arising from its and Teleglobe’s joint representation
by BCE in-house counsel. App. at A00826. This was probably
a reaction to the Special Master’s finding that the joint
representation was so broad in scope that it covered all advice
rendered on Project X. In other words, BCE had not objected to
producing the “common interest” documents so long as its
understanding of the narrow scope of the common interest
prevailed, but when the Special Master found a broad scope, it
asserted that it need not produce the common-interest documents
at all. The District Court rejected this argument out-of-hand,
finding that BCE was bound by its concession in the Bankruptcy
Court that it would produce to the Debtors and the Creditors’
Committee all of the documents of common interest to BCE and
Teleglobe.32
32
BCE also told the Bankruptcy Court that if its attorneys
jointly represented BCE and the Debtors on a matter related to
this case, it would produce any documents that arose out of that
representation. But BCE claims that its attorneys did not in fact
jointly represent those parties on any related matter, and the
66
b. Merits
BCE should not, the Debtors argue, be able to raise now
the issue of whether they and BCE were part of a joint
representation. They base this contention on issue waiver,
judicial admission, and judicial estoppel grounds. We address
each, as well as whether BCE’s waiver of the privilege in the
Bankruptcy Court prospectively waived it as to any documents
found to be within the scope of a BCE/Teleglobe joint
representation.
I. Issue Waiver
Our longstanding rule is that a party must raise an issue
before the District Court in order to press it on appeal.33 To
raise an issue, a party must present it with sufficient specificity
District Court did not find otherwise. Thus the issue is whether
the Court’s finding that BCE attorneys did jointly represent BCE
and Teleglobe is sufficient to support its production order in
favor of the Debtors.
33
As the Court of Appeals for the Fifth Circuit has noted,
when a district court employs a special master, it may be that the
parties must, to avoid waiver, raise all relevant issues before the
master. See Harris Corp. v. Ericsson, Inc., 417 F.3d 1241, 1263
(5th Cir. 2005). Because we conclude that BCE did properly
raise before the Special Master whether its attorneys jointly
represented the Debtors, we need not decide here whether a
party must raise all issues before a special master to preserve
them.
67
to allow the court to pass on it. See Keenan v. City of
Philadelphia, 983 F.2d 459, 471 (3d Cir. 1992); accord Shell
Petroleum, Inc. v. United States, 182 F.3d 212, 218 (3d Cir.
1999) (“A party . . . must unequivocally put its position before
the trial court at a point and in a manner that permits the court
to consider its merits.”). At oral argument before the Special
Master, BCE stated unequivocally that its in-house attorneys
never represented the Debtors on anything related to Teleglobe’s
restructuring. The Special Master was skeptical of this
assertion, and asked the Debtors to respond to it. They stated
that they were entitled to documents generated through a
BCE/Teleglobe joint representation because they, as third-level
wholly owned subsidiaries, were members of the same
community of interest (once again, an instance where someone
conflates the community-of-interest privilege with the co-client
privilege). This exchange properly put before the Special
Master the issue of whether the Debtors were (or needed to be)
parties to the BCE/Teleglobe joint representation for production
to be ordered. Moreover, BCE again raised the issue in its
objections to the Special Master’s decision. App. at A00826.
With this context, we cannot conclude BCE waived contending
that it and the Debtors were not jointly represented on any
matter relevant to this case.
ii. Judicial Admission
The Debtors argue, however, that BCE’s statement to the
Bankruptcy Court that it would turn over to the Debtors (and the
68
Creditors’ Committee) the “common interest” documents arising
out of the BCE/Teleglobe joint representation was a binding
judicial admission. To be binding, admissions must be
unequivocal. Glick v. White Motor Co., 458 F.2d 1287, 1291
(3d Cir. 1972). Similarly, they must be statements of fact that
require evidentiary proof, not statements of legal theories. Id.Applying those principles, BCE’s statements on any joint
representation of BCE and the Debtors were never unequivocal.
All references to a joint representation of BCE and the
subsidiaries were couched in alternative language. See, e.g.,
app. A01110 (“BCE attorneys consulted with attorneys, officers,
or employees of Teleglobe, Inc. or its subsidiaries to discuss or
provide legal advice in matters where BCE and Teleglobe, Inc.
(or its subsidiaries) shared a common legal interest.”) (emphases
added). To the extent that BCE admitted that it was obligated
to turn over documents related to a joint representation on a
matter of common interest, such an admission appears more like
a statement of a legal theory or position than a statement about
an issue of fact. Thus the judicial admission doctrine is not
applicable.
iii. Judicial Estoppel
Judicial estoppel prevents a party from “playing fast and
loose with the courts” by adopting conflicting positions in
different legal proceedings (or different stages of the same
proceeding). Delgrosso v. Spang & Co., 903 F.2d 234, 241 (3d
69
Cir. 1990) (internal quotation marks and citations omitted).
Here, the Debtors claim that BCE’s position that its attorneys
never jointly represented it and the Debtors is impermissible
because BCE relied on the joint representation in the
Bankruptcy Court to assert a claim of privilege and because it
induced the Bankruptcy Court and Special Master to rely on its
concession that common-interest documents had been produced,
only changing its position when the Special Master found its
representations untrue. Judicial estoppel requires (1) a clear
inconsistency and (2) that the party estopped obtain an unfair
advantage from that inconsistency. In re Armstrong World
Indus., Inc., 432 F.3d 507, 517–18 (3d Cir. 2005). This case
looks more like a legitimate disagreement over the scope of any
joint representation (mixed with a dose of sloppiness) than it
does a bad faith attempt to mislead the courts. BCE’s position
throughout has been that it has turned over the documents that
arose out of a BCE/Teleglobe joint representation. It told the
Bankruptcy Court—in equivocal terms—that there may have
been a BCE/Debtors joint representation (and if so, it agreed to
turn over any such documents). In front of the Special Master,
BCE’s counsel specifically stated that its attorneys did not
jointly represent the Debtors, and it has maintained that position
since. In this limited context, that BCE was “playing fast and
loose” with the courts appears too strong a statement. Perhaps
it was being hyper-technical, and indeed up against the “too
close for cricket” line, but that is as far as we can conclude on
the record before us.
70
iv. Implied Prospective
Waiver of the Privilege
To repeat, in the Bankruptcy Court BCE agreed to
produce to the Debtors and the Creditors’ Committee what it
termed the “common interest” documents to resolve a discovery
dispute. It did not explain the scope of the common interest, but
it did agree to produce the documents. BCE views the Debtors’
contention that it may not now assert the privilege over other
documents alleged to arise from the same joint representation as
an implied prospective waiver argument. That analysis makes
some sense.
In discovery disputes, implied waivers are construed
narrowly, In re Lott, 424 F.3d 446, 453 (6th Cir. 2005), and a
party is only forced to produce documents under a prospective
waiver theory if it agrees to disclose only favorable privileged
documents while keeping for itself the unfavorable ones to gain
an advantage in litigation. See Westinghouse, 951 F.2d at 1426
n.12 (“When a party discloses a portion of otherwise privileged
materials while withholding the rest, the privilege is waived
only as to those communications actually disclosed, unless a
partial waiver would be unfair to the party’s adversary. If
partial waiver does disadvantage the disclosing party’s
adversary by, for example, allowing the disclosing party to
present a one-sided story to the court, the privilege will be
waived as to all communications on the same subject.”); accord
Tackett, 653 A.2d at 260 (holding that Delaware courts will only
71
find an prospective waiver when a party uses partial disclosure
as a weapon).
On the record here, it appears that BCE agreed to produce
documents that fell within its understanding of the
BCE/Teleglobe joint representation, not the masses of
documents that the Special Master eventually found to fall
within that category. Moreover, the Debtors have not argued
that BCE is seeking an improper benefit by selectively
disclosing documents. Thus we find no implied prospective
waiver in favor of the Debtors as to whatever documents a court
might conclude were part of a BCE/Teleglobe joint
representation.
2. Whether the Community-of-Interest
Privilege Entitles the Debtors to the
Documents as a Matter of Law
The District Court also ruled that the Debtors were
entitled to the documents as a member of BCE’s community of
interest. But as explained in Part IV.F.1, supra, it is not the case
that parents and subsidiaries are in a community of interest as a
matter of law. Moreover, the community-of-interest privilege
only applies to parties represented by separate counsel, see Part
IV.C.2, supra. Even some of the cases that the Debtors cite
suggest more nuance than they admit. See, e.g., In re S. Air
Transp., Inc., 255 B.R. 706, 711 (Bankr. S.D. Ohio 2000)
(“Parent and subsidiary corporations generally share a common
72
interest, and may, in appropriate circumstances, be considered
a single client for purposes of the attorney-client privilege.”
(emphases added)). The majority—and more sensible—view is
that even in the parent-subsidiary context a joint representation
only arises when common attorneys are affirmatively doing
legal work for both entities on a matter of common interest. See,
e.g., Polycast, 125 F.R.D. at 49 (finding a joint representation
when a parent’s officer and general counsel affirmatively
advised subsidiary on how to comply with merger agreement to
which parent and subsidiary were both parties). A broader rule
would wreak havoc because it would essentially mean that in
adverse litigation a former subsidiary could access all of its
former parent’s privileged communications because the
subsidiary was, as a matter of law, within the parent entity’s
community of interest.
3. Whether Teleglobe’s Waiver of the
Privilege for the Debtors’ Benefit in the
Canadian Insolvency Proceedings
Entitles them to the Documents
The Debtors argue that they are entitled to any documents
generated in the course of the BCE/Teleglobe joint
representation because Teleglobe, through its Plan
73
Administrator in the Canadian insolvency proceedings, has
waived the attorney-client privilege in their favor.34 The
question before us is whether one party to a joint representation
(Teleglobe) may unilaterally waive the privilege and thereby
force the other (BCE) to turn over documents generated in the
course of the joint representation to third parties (the Debtors).
Put differently, the question is whether the co-client privilege is
subject to a unilateral control rule (either co-client may waive
the privilege unilaterally and thus force the other to turn over
documents produced during the course of the joint
representation to third parties) or a bilateral control rule (both
clients must agree to waive the privilege in order for the waiver
to take effect). The general answer is bilateral control. As
explained in Part IV.D, supra, this rule is in the Restatement:
[I]n the absence of an agreement with co-clients
to the contrary, each co-client may waive the
privilege with respect to that co-client’s own
communications with the lawyer, so long as the
communication relates only to the communicating
and waiving client. One co-client does not have
34
That Teleglobe’s Plan Administrator purported to waive
the privilege in the Debtors’ favor is not disputed. What is
disputed is whether she had the authority under the Arrangement
Act to do so. Because we hold that, under both Delaware and
Canadian law, Teleglobe cannot waive the privilege without
BCE’s consent in any event, we need not pass on the legal
validity of Teleglobe’s purported waiver.
74
authority to waive the privilege with respect to
another co-client’s communications to their
common lawyer. If a document or other
recording embodies communications from two or
more co-clients, all those co-clients must join in
a waiver, unless a nonwaiving co-client’s
communication can be redacted from the
document.”
RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 75
cmt. e. The Delaware District Court has predicted that
Delaware law accords with this principle. Interfaith Hous. of
Del., 841 F. Supp. at 1402, and the Delaware Court of Chancery
(albeit in an unpublished decision) has agreed. Tenneco Auto.,
Inc. v. El Paso Corp., 2001 WL 1456487, at *2 (Del. Ch. 2001).
Canadian law on this point is the same. Ashburton Oil Ltd. v.
Sharp, 67 B.C.L.R.2d 64, ¶ 24 (B.C. 1992).
The cases the Debtors cite are not explicitly
contradictory. In re Grand Jury Subpoenas, 902 F.2d 244, 248
(4th Cir. 1990), for instance, deals with the transfer of the
subsidiary’s own privilege from old to new management, not
with joint representation. Three other cases the Debtors
cite—Bass Public Co. v Promus Cos., 868 F. Supp. 615(S.D.N.Y. 1994), Polycast, and Medcom—are muddier, as there
are statements in all three that seem to disagree with the
Restatement. See Bass, 868 F. Supp. at 621 (stating that the
bilateral control rule only applies if the two clients are actual or
75
potential co-defendants); Polycast, 125 F.R.D. at 50 (same);
Medcom, 689 F. Supp. at 844–45 (same).35 At the same time,
none of the three decisions actually violated the Restatement.
In Bass, one of the plaintiffs was the subsidiary (i.e., the joint
client); it therefore was entitled to everything generated in the
course of the joint representation as a matter of right. Bass, 868
F. Supp. at 617. In Polycast and Medcom, the disputed
communications were between the subsidiary and the joint
attorneys; thus the subsidiary could waive the privilege by itself.
Medcom, 689 F. Supp. at 844; Polycast, 125 F.R.D. at 48. Here,
however, we have third parties seeking documents produced for
35
The problem is that Bass, Polycast, and Medcom all treat
the old joint-defense privilege (which applied only to actual co-
defendants in criminal litigation), see Part IV.C, supra, as a
doctrine separate from the co-client and community-of-interest
privileges. Those cases accord only joint-defense clients (again,
actual co-defendants) the protection of the bilateral control rule
(that neither co-client may unilaterally waive the privilege). See
also Taggart, 65 U. CHI. L. REV. at 320 (arguing against the
bilateral control rule). The Restatement has rejected this
approach; it now treats the joint-defense privilege as obsolete
and applies the bilateral control rule to the broader community-
of-interest privilege. RESTATEMENT (THIRD) OF THE LAW
GOVERNING LAWYERS § 76 cmts. b. & g. Moreover, the Bass,
Polycast, and Medcom approach is inconsistent with even
relatively old understandings of the co-client privilege. See,
e.g., 8 J. WIGMORE, EVIDENCE § 2328 (J. McNaughton rev.
1961) (explaining that co-clients are always subject to the
bilateral control rule). To the extent that Bass, Polycast, and
Medcom are at odds with the Restatement, we apply the latter.
76
BCE as (allegedly) part of a BCE/Teleglobe joint representation.
Under these circumstances, we predict that the Delaware
Supreme Court would follow the Restatement rule (as accepted
by both the Delaware Court of Chancery and the federal District
of Delaware Court) that Teleglobe alone cannot waive the
privilege as to communications involving BCE.
4. Conclusion and Remand
Ordering the production of documents on the privilege
log must be predicated on a factual finding that BCE and the
Debtors were parties to a joint representation. Because there is
no such finding on record, we remand for further factfinding on
this issue. On remand, that factfinding should consider § 14 of
the Restatement, which details how a lawyer/client relationship
arises, and our discussion in Part IV.C, supra, on the existence
and scope of a co-client relationship.
B. The Effect of Funneling Documents Through
BCE’s In-House Counsel
The District Court held that because BCE funneled all of
the contested documents through in-house counsel who were
jointly representing Teleglobe, all of those documents are
discoverable to the Debtors as part of the BCE/Teleglobe joint
representation. This ruling applied even to documents produced
77
by outside counsel that did not represent Teleglobe (or the
Debtors). As an initial matter, the District Court’s reasoning
cannot survive our determination in section A of this Part that
whether BCE and Teleglobe were jointly represented does not
matter without an additional finding that the Debtors were also
parties to that representation. Still, we examine the Special
Master and District Court’s reasoning because it may be relevant
on remand.
In reaching his decision on this issue, the Special Master
relied primarily on In re Mirant Corp., 326 B.R. 646, 651
(Bankr. N.D. Tex. 2005). In that case, a parent company and its
wholly owned subsidiary formally engaged the Troutman
Sanders law firm to represent them jointly with regard to the
sale of 20% of the subsidiary’s stock. Id. at 648. The Court
held that the subsidiary/debtor could obtain documents arising
out of the joint representation despite the fact that the
engagement letter stipulated that the parties agreed that their
individual communications with the joint attorneys would be
privileged against one another. Id. at 652. That holding is off
point here because it did not speak to whether documents
outside of the scope of the joint representation and provided by
outside attorneys are brought within that scope merely because
they pass through in-house counsel who are jointly representing
the subsidiary as well as the parent; rather, it dealt only with
documents produced within the scope of the joint representation
by the joint attorneys.
78
Here, the Eureka principle seems most apt: when BCE
took the trouble of hiring outside counsel to provide advice only
to it on divestiture issues, it reasonably expected that those
communications would be privileged. Whether BCE in-house
counsel should have refused to look at the documents because
of their own conflicts is, under Eureka, beside the point, as is
whether its in-house counsel had a fiduciary duty to share
information with Teleglobe. 743 F.2d at 937–38. (Not to be
forgotten is that BCE’s in-house counsel also had a duty to keep
its communications confidential.)
The guiding principle of Eureka is that when an attorney
errs by continuing to represent two clients despite their conflicts,
the clients—who reasonably expect their communications to be
secret—are not penalized by losing their privilege. Id. Indeed,
Eureka is merely one in a line of cases that hold that
communications outside the scope of the joint representation or
common interest remain privileged. See, e.g., CSX Transp., Inc.
v. Lexington Ins. Co., 187 F.R.D. 555, 560 (N.D. Ill. 1999)
(holding that documents outside the scope of the common
interest need not be disclosed); Strategem, 153 F.R.D. at 543
(same); Pittston Co. v. Allianz Ins. Co., 143 F.R.D. 66, 69–71
(D.N.J. 1992) (same); Carey-Canada Inc. v. Aetna Cas. & Sur.
Co., 118 F.R.D. 250, 2501 (D.D.C. 1987) (same).
The District Court relied primarily on policy analysis: it
noted that forcing BCE to choose between (1) allowing in-house
counsel to filter the information from outside counsel while
79
losing the privilege, and (2) maintaining the privilege by not
working directly with outside counsel, is “harsh.” App. at
A0015. It stated, however, that the result was required by the
law of the adverse-litigation exception to the joint-client
privilege, and that BCE could have protected itself by clearly
terminating any representation of Teleglobe by its in-house
lawyers when it began reconsidering its funding of Teleglobe.
The Mirant Court also engaged in policy analysis that the
Debtors endorse:
Even were there merit in the arguments of
Troutman and [the parent company] TSC, the
court would be most reluctant to deny Debtors the
requested discovery for reasons of public policy.
It is black-letter law that the attorney-client
privilege is meant to foster open communications
between attorney and client. . . . In a bankruptcy
case, the need for investigation is far more acute
than is any concern for attorney-client
communications. . . . Debtors, acting as
fiduciaries for the benefit of their creditors, are
pursuing an investigation which is important not
only to those who may have lost money as a result
of Debtors’ demise. It is critical that both those
who purchased Mirant’s (and its subsidiaries’)
securities and the public have confidence that
potential liability of TSC (and Troutman) has
80
been thoroughly explored. That Debtors sought
chapter 11 relief less than two and one half years
after TSC completed their divestiture is reason
enough to raise concern that all might not have
been right in the transactions between TSC and
Mirant. . . . Given the short time between
divestiture and commencement of these chapter
11 cases and given the pre-divestiture history of
Debtors’ problems, it is essential to the integrity
of the chapter 11 process that no stone be left
unturned in ensuring satisfactory completion of
Debtors’ investigation.
326 B.R. at 654–55 (citations omitted).
In a similar vein, the Debtors argue that BCE created and
controlled this situation, i.e., it tried to have it both ways by
having in-house counsel work primarily for BCE while still
jointly representing Teleglobe. Because of its control over the
situation, the Debtors argue, BCE should not be heard to
complain about the legal ramification of losing its privilege
against producing documents. They further contend that BCE
could have obtained outside counsel for Teleglobe at any time
and ceased its joint representation, and because it did not do so,
it must relinquish its documents.
As noted, the District Court here conceded that this result
was harsh, as did the Mirant Court. Both, however, seemed to
81
believe that allowing the privilege to stand would make it too
easy for parent companies to hide their wrongdoing. This truth-
seeking rationale, however, is a problem because the privilege
is admittedly not truth-seeking. United States v. Liebman, 742
F.2d 807, 810 (3d Cir. 1984) (“It does not advance resolution of
the issue to argue . . . that the attorney-client privilege is an
obstacle to the search for the truth.” (internal citations and
quotations marks omitted)). Moreover, Delaware abrogates the
privilege in the face of serious wrongdoing facilitated by the
attorney through the crime/fraud exception. DEL. R. EVID.
§ 502(d)(1) (“There is no privilege under this rule . . . [i]f the
services of the lawyer were sought or obtained to enable or aid
anyone to commit or plan to commit what the client knew or
reasonably should have known to be a crime or fraud.”). This
reflects a policy choice that, absent well-founded allegations not
only of serious wrongdoing but of serious wrongdoing
facilitated by the attorney, the privilege should stand. Here, the
Debtors do not appear to have alleged that BCE’s attorneys
aided any wrongdoing. Moreover, invoking the crime-fraud
exception requires that the plaintiff make a prima facie showing
of evidence supporting the elements of the exception. In re
Grand Jury Investigation, 445 F.3d 266, 274 (3d Cir. 2006).
While that showing is not onerous, it is necessary, for “a mere
charge of wrongdoing will [not] . . . put the privilege to flight.”
Clark v. United States, 289 U.S. 1, 14 (1933) (Cardozo, J.). The
adverse-litigation exception to the joint-client privilege should
not be a back-door means of destroying the attorney-client
privilege on the basis of alleged wrongdoing; if the Debtors had
82
wanted to lay to rest the privilege on those grounds, they should
have asserted the crime-fraud exception directly and allowed the
District Court to pass on whether they could make the required
prima facie showing.
In addition, Eureka counsels that it is the scope of the
joint representation—not whether communications were shared
with joint attorneys—that is dispositive. 743 F.2d at 937–38.
If the communications were outside the scope of the joint
representation, then sharing them with a conflicted joint attorney
is of no moment, even if the conflicted attorney acted
improperly in accepting the communications. Id. If the
communications were within the scope, then they are
discoverable. Id. at 937. Either way, the fact that documents
prepared by outside counsel were shared with in-house counsel
does not have the significance that the District Court and Special
Master attached to it. What we believe is significant is that, on
remand, the District Court needs to determine whether any
attorneys jointly represented BCE and the Debtors on a matter
of common interest. If they did, then any documents within the
scope of that joint representation are discoverable.
Amicus curiae ACC fears that invoking Eureka implies
that in-house counsel act improperly when they review
documents from outside counsel. Not so. Here we have a
finding of fact that BCE’s in-house counsel jointly represented
BCE and Teleglobe on all issues relating to Teleglobe’s ultimate
spin-off. If that finding is correct, then it was bad judgment for
83
BCE’s in-house attorneys to take part in outside counsel’s
separate representation of BCE on the same issues if it still
wanted the shield of the attorney-client privilege. We note,
however, that the factual finding gives us pause. As we detailed
in Part IV.F, supra, parent-subsidiary joint representations are
typically quite narrow in scope. Still, we have not reviewed all
of the documents that the Special Master and District Court did,
so we can neither affirm nor vacate that finding on the record
before us—and we need not because the Debtors’ status as third
parties to any BCE/Teleglobe joint representation makes its
scope irrelevant as a matter of law.
We agree with ACC that a rule forcing parent companies
to choose between relinquishing the privilege on one hand and
relinquishing any control over their subsidiaries makes little
sense. If the parent chooses to forgo the use of its in-house
counsel on an important transaction, then it loses the advisors
that know the most about its legal health. If it chooses to cut off
its subsidiary, then it risks liability when the subsidiary and
parent do not operate in tandem. Putting that choice in the
context of this case, it appears that BCE spent some four months
deciding what to do with Teleglobe. Over the course of Project
X, it considered a variety of options that did not involve
abandoning Teleglobe. Moreover, during this time it was still
responsible for reviewing Teleglobe’s public filings. Thus for
BCE’s in-house counsel to cut Teleglobe off would have been
an expensive and risky proposition. Similarly, given that BCE
was in the process of making a very serious business decision
84
with important legal implications, to deprive it of its in-house
counsel simply so that those attorneys could continue to advise
Teleglobe on other matters seems overly harsh.
To prevent this outcome, it is important for in-house
counsel in the first instance to be clear about the scope of
parent-subsidiary joint representations. By properly defining the
scope, they can leave themselves free to counsel the parent
alone on the substance and ramifications of important
transactions without risking giving up the privilege in
subsequent adverse litigation.
VI. Potential Alternate Sustaining Grounds
A. The Fiduciary Exception to the Attorney-
Client Privilege
Before the Special Master and in supplemental briefing,
the Debtors argue that they should be allowed access to the
disputed documents under the fiduciary exception to the
attorney-client privilege as articulated in Garner v.
Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The core holding
of Garner is as follows:
The attorney-client privilege still has
viability for the corporate client. The corporation
is not barred from asserting it merely because
those demanding information enjoy the status of
85
stockholders. But where the corporation is in suit
against its stockholders on charges of acting
inimically to stockholder interests, protection of
those interests as well as those of the corporation
and of the public require that the availability of
the privilege be subject to the right of the
stockholders to show cause why it should not be
invoked in the particular instance.
Garner, 430 F.2d at 1103–04. Garner thus allows shareholders
of a corporation to invade the corporation’s privilege in order to
prove fiduciary breaches by those in control of the corporation
upon showing good cause.
As the Debtors note, while the Delaware Supreme Court
has never adopted Garner, the Court of Chancery has adopted
and applied it in numerous decisions. Indeed, Vice Chancellor
Lamb wrote that “Delaware courts follow the approach outlined
in Garner.” Grimes v. DSC Comm. Corp., 724 A.2d 561, 568
(Del. Ch. 1998) (citing Deutsch v. Cogan, 580 A.2d 100, 105
(Del. Ch. 1990) (“Delaware courts have consistently followed
Garner.”)).
In Deutsch, the Court of Chancery extended Garner to a
situation in which cashed-out minority shareholders of a
subsidiary sought to abrogate the attorney-client privilege of the
parent company’s controlling shareholder in a dispute over a
merger transaction that the minority shareholders contended was
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not fundamentally fair. 580 A.2d at 102–03. The Court held
that Garner applied by analogy because the parent’s controlling
shareholder, as the entity in fact controlling the subsidiary, owed
the minority shareholders fiduciary duties. Id. at 107.
Therefore, in a dispute over compliance with those duties, the
minority shareholders could—upon showing good
cause—overcome the privilege with regard to documents related
to the challenged transaction. Id. at 108.
The Debtors’ argument here is similar: because BCE
controlled the Debtors while they were insolvent, it owed
fiduciary duties to the Debtors of which their creditors (not
BCE) were the primary beneficiaries. See generally N. Am.
Catholic Programming Found., __ A.2d at ___, 2007 WL
1453705, at *7. Thus, in this dispute, in which the Debtors are
asserting a breach of those duties for the benefit of their
creditors, the Debtors should be able to put aside the privilege
upon showing good cause. It is possible that Delaware courts
would extend the Garner fiduciary exception to a situation like
this one. The key, however, is insolvency. If the Debtors were
not insolvent (or in that hazy “zone of insolvency,” see supra
note 9) at the time of the otherwise privileged communications,
then BCE was the only beneficiary of the Debtors’ success, and
it could not, therefore, breach its fiduciary duty to itself.
Whether a corporation is insolvent, and when it becomes
so, are an issues of fact. Trenwick, 906 A.2d at 195. Under
Delaware law, a corporation is insolvent if it has: “1) a
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deficiency of assets below liabilities with no reasonable prospect
that the business can be successfully continued in the face
thereof, or 2) an inability to meet maturing obligations as they
fall due in the ordinary course of business.” Prod. Res. Group,
LLC v. NCT Group, Inc., 863 A.2d 772, 782 (Del. Ch. 2004)
(Strine, V.C.) (internal citations and quotation marks omitted).
Here, both parties seem to agree that the Debtors were all deeply
in debt with no significant revenue stream other than BCE’s
funding. The dates on which each Debtor became insolvent,
however, are issues of fact that we cannot resolve here.
In addition, the Debtors’ argument appears to have a
significant deficiency: they must have a colorable claim of
breach of fiduciary duty to show “good cause.” Garner, 430
F.2d at 1104. Even if BCE owed the Debtors and their creditors
fiduciary duties, it seems a stretch to argue that BCE’s decision
not to fund Teleglobe implicated those duties. A fiduciary
ordinarily has the obligation (protected by the business
judgment rule) to manage the affairs of a corporation in such a
way as to maximize its economic value; it does not have a duty
to guarantee or bail out a corporate family member when it loses
money. Trenwick, 906 A.2d at 205. As Vice Chancellor Strine
noted in Trenwick, insolvency does not render a corporation’s
fiduciaries guarantors of that corporation’s success; rather, it
merely expands the universe of people with standing to assert a
beneficial interest in the fiduciaries’ obligation to maximize the
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value of the corporation.36 Id. Whether BCE would continue to
infuse Teleglobe and the Debtors with funding seems, at least at
first glance, entirely BCE’s decision. Still, we do not have the
entire record before us, and so we leave this issue for the District
Court to resolve in the first instance.
Mopping up, BCE advances seven arguments against
applying Garner in this situation, most of which are unavailing.
First, it argues that Garner does not apply to work product. This
is correct, but as we do not know how many of the 800 different
documents currently in dispute contain work product, we must
leave this issue for the District Court to resolve on remand.
Second, BCE (the appellant) argues that the Debtors (the
appellees) have abandoned the Garner argument. The cases it
cites, however, are off the mark because they address the
appellant’s obligation to raise all grounds for reversal. See
Simmons v. City of Philadelphia, 947 F.2d 1042, 1066 (3d Cir.
1991) (Opinion of Becker, J., announcing the judgment of the
Court); Inst. for Scientific Info., Inc. v. Gordon & Breach, Sci.
Publishers, Inc., 931 F.2d 1002, 1011 (3d Cir. 1991). It is
36
In Trenwick, the Vice Chancellor put to rest the notion that
there is such a thing as a cause of action for so-called
“deepening insolvency” in Delaware law. 906 A.2d at 205.
This effectively prevents extending our holding in Official
Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d
340, 347 (3d Cir. 2001), in which we decided that the cause of
action exists in Pennsylvania, to Delaware cases (and supersedes
those few Delaware District and Bankruptcy Court cases that
have done so).
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firmly established that we may affirm on any ground supported
by the record, so the Debtors’ failure to raise the issue does not
waive it. Azubuko v. Royal, 443 F.3d 302, 303 (3d Cir. 2006).
Moreover, the issue has yet to be addressed by the District
Court, and it remains open on remand.
Third and fourth, BCE argues that Garner has been
rejected by Canadian courts and never adopted by our Court. As
a matter of federal common law, it is correct that we have not
always applied Garner, see Wachtel v. Health Net, Inc., 482
F.3d 225, 233 (3d Cir. 2007), but neither party argues that
federal common law governs this dispute.37 As to the Canadian
law argument, we doubt that Canadian law would apply to this
issue, as the Debtors are Delaware corporations.38 Under the
internal affairs doctrine, anyone controlling a Delaware
corporation is subject to Delaware law on fiduciary obligations
to the corporation and other relevant stakeholders. See In re
Topps Co. S’holders Litig., ___ A.2d ___, 2007 WL 1491451,
at *7 (Del. Ch. 2007) (Strine, V.C.) (explaining that the law of
fiduciary obligations is one of the most important ways a state
regulates a corporation’s internal affairs); RESTATEMENT
37
Federal common law does not apply to disputes about
corporations’ internal affairs. VantagePoint Venture Partners
1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005) (“It is
now well established that only the law of the state of
incorporation governs and determines issues relating to a
corporation’s internal affairs.”).
38
This is the only issue on which BCE argues that there is a
true conflict of law, see Part III, supra.
90(SECOND) OF CONFLICTS OF LAWS § 306. Moreover, if
Delaware law favors admission of the evidence, then BCE must
show some “special reason” why that should not be given effect.
Id. § 139(2); see also Carlton Invs., Inc. v. TLC Beatrice Int’l
Holdings, Inc., No. C.A. 13950, 1996 WL 33167792, at *2 (Del.
Ch. Sept. 27, 1996). Still, because we ultimately conclude that
we cannot apply Garner here without knowing when the
Debtors became insolvent, we will not conduct a full-scale
choice-of-law analysis.
Fifth and sixth, BCE argues that Garner cannot be
extended to this situation because (1) BCE owed the Debtors no
fiduciary duties, and (2) Garner does not permit subsidiaries to
invade the privilege of indirect corporate parents. The answer
to both arguments is that BCE, as the ultimate owner of more
than half (and, indeed, all) of the Debtors’ voting power, owed
them the duties of care and loyalty. See Weinstein Enters. v.
Orloff, 870 A.2d 499, 507 (Del. 2005). If the Debtors were
solvent, then all duties flowed back up to BCE as the only party
with a legitimate interest in the Debtors’ success. If that were
the case, then BCE is correct that it effectively owed the Debtors
no duties. However, if the Debtors were insolvent, then their
creditors also had a legitimate interest in their success. See N.
Am. Catholic Programming Found., ___ A.2d at ___, 2007 WL
1453705, at *7. With multiple stakeholders, BCE’s duties of
care and loyalty would come into play in the same way that the
directors’ duties did in Garner, and its attorney-client privilege
could be set aside by showing good cause.
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Finally, BCE argues that the Debtors cannot show good
cause. As BCE concedes in the next breath, however, it is not
for us to determine whether they can show good cause in the
first instance; so we leave the issue open on remand.
B. Affirming as a Discovery Sanction
The Debtors urge us to affirm the District Court’s order
as a sanction for BCE’s penchant for designating too many
documents as privileged. We cannot do so at this time for the
simple reason that the District Court did not impose such a
sanction. To be sure, both the Special Master and District Court
expressed displeasure with BCE’s litigation conduct, but neither
expressly penalized that behavior, and so we have no sanction
order to review. We do note that preventing a party from
asserting the attorney-client privilege is a legitimate sanction for
abusing the discovery process, and we do not foreclose that
remedy on remand. Disclosure is a serious sanction, but one
that may be imposed only if the District Court finds bad faith,
wilfulness, or fault. See Am. Nat’l Bank & Trust Co. of Chicago
v. Equitable Life Assur. Soc’y of U.S., 406 F.3d 867, 877–80
(7th Cir. 2005).
VII. Conclusion
We hold that the District Court may only compel BCE to
produce disputed documents because of the adverse-litigation
exception to the co-client privilege, see Part IV.D, supra, if it
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finds that BCE and the Debtors were jointly represented by the
same attorneys on a matter of common interest that is the
subject-matter of those documents. Finding that BCE and
Teleglobe were jointly represented is not enough, as Teleglobe
cannot unilaterally waive the co-client privilege that attaches to
documents that involve BCE and were created in the course of
the joint representation. Moreover, BCE has not waived the
argument, and it is not in some “community of interest” with the
Debtors as a matter of law. In addition, that documents prepared
by outside counsel were funneled through in-house counsel for
both BCE and Teleglobe is of no moment. Following Eureka,
what matters is the scope of any joint representation: documents
within the scope are discoverable; documents outside it are not,
irrespective of whether they were improperly funneled through
joint attorneys.
On remand, then, the primary issue is whether any
attorneys jointly represented BCE and the Debtors on a matter
of common interest. Also open on remand are the issues of
discovery sanctions and whether the Garner fiduciary
exception—currently extant in Delaware— applies in this case.
Because of the need to resolve this privilege dispute
efficiently so that the underlying litigation can proceed, this
panel of our Court will continue to review any additional
privilege-related appeals.
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