Civil Litigation FlashPoints March 2013

Center Partners, Ltd. v. Growth Head GP, LLC: The Subject Matter Waiver Doctrine Does Not Apply To The Disclosure Of Privileged Documents During Business Negotiations

No attorney can deny the importance of the attorney-client privilege.  It is what enables them to counsel their clients freely and without fear of their advice falling into the wrong hands.  Yet, Illinois law also has a “strong policy of encouraging disclosure” because disclosure helps to determine the truth and to dispose of litigation properly.  As a result, Illinois courts long have struggled with the boundaries of the attorney-client privilege and doctrine of waiver.  However, in its recent opinion Center Partners, Ltd. v. Growth Head GP, LLC, the Illinois Supreme Court provided some clarity, holding that the disclosure of privileged documents during the course of business negotiations or other extrajudicial settings does not waive the attorney-client privilege for all communications between the attorney and client on the same subject matter in later litigation.  2012 IL 113107.

In Center Partners, the Defendants, three independent real estate companies, jointly purchased the assets of another company in late 2001 and early 2002.  Id. at ¶3.  As part of that acquisition, the Defendants obtained a majority interest in a limited liability partnership.  Id.  The Plaintiffs are the minority limited partners of that partnership.  Id.  In 2004, the Plaintiffs filed suit against the Defendants, alleging that the Defendants ignored the terms of the partnership agreement, their fiduciary duties and stole business opportunities for themselves.  Id. at ¶¶8-10.  Moreover, the Plaintiffs claimed that the Defendants received legal advice while structuring the asset purchase agreement on how to evade their contractual and fiduciary responsibilities.  Id. at ¶10.  As a result, the Plaintiffs filed various motions to compel in Center Partners to obtain the Defendants’ communications with their attorneys during the negotiations of the asset purchase.  Id. at ¶¶12-14.

In response to the first motion, the trial court ordered the Defendants to produce any attorney-client communications that had been shared among the Defendants during the negotiations.  Id. at ¶12.  The common interest doctrine did not apply.  Id.  Subsequently, in response to the third motion to compel, the trial court directed the Defendants to produce all attorney-client communications relating to the asset purchase negotiations even if those communications had not been disclosed among the Defendants.  Id. at ¶20.  The Defendants declined to comply however, so were held in contempt and appealed the ruling.  Id.  

On appeal, the First District Appellate Court affirmed, holding that the Defendants’ disclosure to each other in 2001 and 2002 of some privileged attorney-client communications regarding the assert purchase resulted in a subject-matter waiver of all privileged communications regarding that purchase.  Id. at ¶22.  In reaching this holding, the appellate court found “no reason to distinguish between a waiver occurring during the course of litigation or during a business negotiation.”  Id.  Thus, the appellate court found it irrelevant that no Illinois case had ever extended the subject matter waiver doctrine to extrajudicial settings in the past.  Id.

Upon review, the Illinois Supreme Court came to the opposite conclusion and reversed.  Id. at ¶76.  The Court framed the question before it as “whether, as a matter of law, the subject matter waiver doctrine applies to the disclosure of privileged statements made outside of a litigation or judicial setting, i.e., in an ‘extrajudicial’ setting,” and noted that it was a question of first impression.  Id. at ¶26.  Thus, the Court began its analysis by setting forth the two conflicting principles that guided its opinion: (1) the importance of the attorney-client privilege “to the proper functioning of our adversary system of justice”; and (2) Illinois law’s “strong policy of encouraging disclosure, with an eye toward ascertaining that truth which is essential to the proper disposition of a lawsuit.”  Id. at ¶¶30-32.  

The Court then explained the doctrine of subject-matter waiver.  Id. at ¶¶35-40. In particular, the Court stated that attorney-client privilege belongs to the client, rather than the attorney, and is waivable because a client disclosure “is inherently inconsistent with the policy behind the privilege of facilitating a confidential attorney-client relationship.”  Id. at ¶35.  But the Court stated that “when a client voluntarily testifies and waives the privilege, such waiver extends no further than the subject-matter concerning which testimony had been given by the client.”  Id. at ¶38.  This prevents a party from selectively disclosing favorable material while withholding the unfavorable.  Id. at ¶39.  The Court described “this reasoning as the ‘sword’ and the ‘shield’ approach, in that a litigant should not be able to disclose portions of privileged communications with his attorney to gain a tactical advantage in litigation (the sword), and then claim the privilege when the opposing party attempts to discover the undisclosed portion of the communication or communications relating to the same subject matter” (the shield).  Id.

The Court next noted that no prior Illinois case had applied the doctrine of subject matter waiver to an extrajudicial setting.  Id. at ¶43.  The Court therefore looked to other jurisdictions for guidance and found the opinions by the Second and First Circuit particularly instructive.  Id. at ¶¶43-50.  Both of these opinions contained thorough and detailed reasoning as to why the subject matter waiver doctrine should not extend beyond a litigation setting, the Court said.  Id. at ¶58.  For instance, in In re von Bulow, 828 F.2d 94 (2d. Cir. 1987), the Second Circuit explained that “disclosures made in public rather than in court – even if selective – create no risk of legal prejudice until put at issue in the litigation by the privilege-holder.”  Id. at ¶47 (quoting von Bulow).  Similarly, in In re Keeper of the Records, 348 F.3d 16 (1st Cir. 2003), the First Circuit held that “[i]n the business negotiation setting,” “concerns of prejudice are absent, as the introduction of a party’s attorney into the proceedings does nothing to cause prejudice to the opposition or subvert the truth-seeking process.”  Id. at ¶50 (quoting Keeper).  In contrast, the Court noted that the cases cited by the Plaintiffs in support of extending the subject matter waiver doctrine to extrajudicial settings contained little to no analysis or simply analyzed the issues incorrectly.  Id. at ¶¶58-59.   

Ultimately, the Illinois Supreme Court agreed with the reasoning of the First and Second Circuits and held that “limiting application of subject matter waiver to disclosures made in litigation better serves the purpose of the doctrine” – “to prevent a party from strategically and selectively disclosing partial attorney-client communications with his attorney to use as a sword, and then invoking the privilege as a shield to other communications so as to gain a tactical advantage in litigation.”  Id. at ¶57.  Moreover, the Court found that so limiting the application of the subject matter waiver doctrine is “sound policy.”  Id. at ¶60.  To do otherwise, the Court said, would encourage parties to “leave attorneys out of commercial negotiations for fear that inclusion would later force wholesale disclosure of confidential information.”  Id.  Indeed, the Court stated that “business negotiations would be uniquely burdened by extending subject matter waiver.”  Id. at ¶60.  Accordingly, the Court reversed and declined to extend the doctrine of subject matter waiver to business negotiations or any other extrajudicial settings. Id. at ¶¶62, 76.

In short, Center Partners provides attorneys with comfort that all of their advice will not leak into later litigation merely because some advice was disclosed during the course of business negotiations.  A client’s disclosure of an attorney-client communication during a business negotiation will not result in the automatic waiver of all privileged communications on the same subject.  The subject matter waiver doctrine does not apply to the disclosure of privileged documents in the course of business negotiations or other extrajudicial settings.