Recently, the Ninth Circuit clarified its approach to determining the nature of the attorney-client relationship between corporate employees and corporate counsel. In U.S. v. Graf, the Ninth Circuit adopted the Third Circuit's Bevill test in holding that although an outside consultant to a corporation was a "functional employee," the consultant had no joint, personal attorney-client relationship with corporate counsel.
Defendant James Graf was the founder of and self-described "consultant" to Employers Mutual LLC, a fraudulent healthcare provider based in California. Because he had been banned from practicing in the insurance industry in California, Graf did not list himself as an officer or employee of Employers Mutual in the company's incorporation documents, despite the fact that he was heavily involved in all aspects of its operations. Graf and his colleagues marketed Employers Mutual to insurance agents who sold the plans to individuals and companies around the country. Graf and his colleagues also incorporated Columbia Health Network, an entity that appeared to be a preferred provider organization, but was in fact merely a shell company that enabled Graf and his co-conspirators to funnel payments from plan members directly into their own pockets.1
In May 2001, the Employee Benefits Security Administration of the Department of Labor ("DOL") began investigating Employers Mutual. Almost immediately, Graf took actions that obstructed that investigation, including: (1) asking Employers Mutual employees to hide documents and information from the DOL, (2) lying to Employers Mutual's attorneys about the continued marketing of the fraudulent plans, and (3) providing false information to the DOL in response to subpoenas. In December 2001, the DOL filed a civil suit in the District of Nevada, resulting in the installation of an independent fiduciary to run Employers Mutual going forward.
Graf was indicted on April 29, 2004. Around the same time, the independent fiduciary waived Employers Mutual's attorney-client privilege with respect to all communications between the company and its outside counsel. Graf moved to exclude the testimony of these attorneys at his trial on the basis that, as a purported outside consultant, he was a joint holder of the attorney-client privilege, and had not waived its protection. The district court held that Graf did not have a personal attorney-client relationship with the testifying attorneys for two main reasons: (1) Graf had not sought personal legal advice from the attorneys and (2) Graf's subjective belief that he had been personally represented by the company's attorneys was insufficient to create a privileged relationship because it was either unreasonable or had not been expressed to the attorneys themselves.
Graf was eventually convicted of conspiracy to commit mail fraud, four counts of mail fraud, nine counts of misappropriation in connection with a health care benefit program, six counts of conducting unlawful monetary transactions, and one count of obstruction of justice. Graf appealed, and argued, in part, that the convictions were improperly based on the attorney testimony presented at trial – testimony that Graf believed should have been excluded as protected by attorney-client privilege.
The Court of Appeals affirmed and, for the first time, articulated a standard by which to determine whether a corporate employee holds a joint privilege with the employer company over communications with corporate counsel. Those who follow this issue may recall that the Ninth Circuit came close to deciding the issue last year in U.S. v. Ruehle, 583 F.3d 600 (9th Cir. 2009), but declined to adopt a standard because the statements at issue were deemed not to be privileged. Because the statements at issue in Graf were privileged, Graf presented an opportunity to establish a definitive test. The Ninth Circuit, by applying the Third Circuit's so-called "Bevill test" to decide the privilege issue, aligned itself with the First, Second, Third and Tenth Circuits.
In In re Bevill, Bresler & Schulman Asset Mgmt. Corp., the Third Circuit held that "any privilege that exists as to a corporate officer's role and functions within a corporation belongs to the corporation, not the officer." 805 F.2d 120, 124 (3d Cir.1986). Under the test established in that case, now adopted by the Ninth Circuit in Graf, that privilege extends to officers or employees in an individual, personal capacity only when the employee satisfies the following five-factor test:
First, they must show that they approached counsel for the purpose of seeking legal advice. Second, they must show that when they approached counsel they made it clear that they were seeking legal advice in their individual rather than in their representative capacities. Third, they must demonstrate that the counsel saw fit to communicate with them in their individual capacities, knowing that a possible conflict could arise. Fourth, they must prove that their conversations with counsel were confidential. And fifth, they must show that the substance of their conversations with counsel did not concern matters within the company or the general affairs of the company.
Graf at [8] (citing Bevill, 805 F.2d 120 (3d Cir.1986)) (additional citations omitted).
The Court of Appeals in Graf cited "strong policy reasons" behind its decision to adopt the Bevill test. Primarily, the Court recognized that corporate counsel often must speak to individual employees in order to effectively represent the company. "The Bevill test responds to this reality by ensuring that a corporation is free to obtain information from its officers, employees, and consultants about company matters and then control the attorney-client privilege, waiving it when necessary to serve corporate interests." Graf at [9]. Furthermore, the Court stated that the Bevill test still provides employees the opportunity to establish and rely on a personal attorney-client privilege, so long as the above-articulated factors have been shown. Finally, by joining several other circuits, the Court intended to promote clarity and consistency in this delicate area of the law. Quoting Upjohn v. U.S., the Court noted that "[a]n uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all." 449 U.S. 383, 393 (1981).
Applying this reasoning, the Court held that Graf failed to meet the second, third and fifth factors described above, and therefore upheld his conviction. Regarding the second and third Bevill factors, the Court noted that none of the time entries kept by Employers Mutual's attorneys referenced advice given to Graf with regard to personal matters, nor had any Employers Mutual attorney testified that Graf made it clear to counsel that he was seeking legal advice in his personal capacity. As a result, none of Employers Mutual's attorneys were presented with the opportunity to choose to represent Graf despite the fact that a potential conflict could arise. With respect to the fifth Bevill factor, the Court noted Graf presented no evidence to indicate that he discussed anything other than his official duties and the operation of Employers Mutual with the outside counsel in question. Graf at [10] – [12].
The significance of the Graf decision reaches beyond the borders of the Ninth Circuit. It is an indication that the Bevill test has become even more deeply rooted in corporate jurisprudence, and is likely to expand to other circuits. Although this arguably creates consistency and clarity around the country with regard to attorney-client privilege issues, the Bevill test is not without its critics. Advocates for employees have argued that it is nearly impossible for a typical employee to affirmatively show all Bevill test factors, leaving employees, more often than not, without the protection of attorney client privilege unless they retain their own personal counsel. All lawyers who represent companies should be aware of the Bevill test and its application, and must carefully explain the limits of the attorney-client relationship to any employees who communicate with counsel.
The Graf decision raises an additional interesting question and challenge for corporate counsel: does the Bevill test, which was intended to apply to employees, officers and directors, also apply to outside consultants? Graf had argued on appeal that his conversations with corporate counsel did not fall within the company's privilege because he was not a company employee. Both the district court and the court of appeals rejected that logic, holding that Graf was a "functional employee" of Employers Mutual, because he acted as the company's agent, communicated with clients and agents on behalf of the company, and was authorized by the company to communicate with corporate counsel. Graf at [6]. Corporate counsel should be aware that the status of outside consultants will depend on a fact-based inquiry, and that, depending on their activities and responsibilities, outside consultants could be considered the functional equivalent of company employees when evaluating the scope of the company's attorney-client privilege.
Footnote
1. In one year of operation, Employers Mutual managed to collect $14 million in payments from individuals and employers with medical coverage. $1,749,725.63 of that amount was paid to medical providers who had provided treatment. Graf and his colleagues used the remainder to buy luxury items. $20 million in claims were outstanding as of December 2001. As the Ninth Circuit observed,
That $20 million represents thousands of victims whose medical bills were not paid by Employers Mutual. People who had purchased health insurance expecting to receive benefits instead received collection notices. A kidney dialysis patient was unable to receive a kidney transplant because Employers Mutual refused to process the request or even pay for his required dialysis. A woman suffering from breast cancer almost had her life-saving chemotherapy cancelled, and her reconstructive surgery postponed for over a year due to Employers Mutual's failure to pay her medical bills. Several victims testified that they were unable to receive health care from their regular doctors because of thousands of dollars in unpaid medical bills. Others had trouble renting homes because of their ruined credit.
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