Fundamental to the application of New York's attorney-client privilege to a claimed confidential communication is a finding that the communication was "made between the attorney or his or her employee and the client in the course of professional employment." CPLR 4503(a). Thus, to be protected by the privilege, a communication must originate from a person who may make privileged communications, and be addressed to persons who may receive them, e.g., the client and the client's attorney, so-called "privileged persons." See generally Martin, et al., New York Evidence Handbook (2d ed.) §5.2.2. The privilege does not extend to communications between non-privileged persons, even if the communication relates to the attorney's representation of those clients. Id. (Such communications may, however, be given a qualified immunity from discovery pursuant to CPLR 3101(d)(2).)

No one questions now a "corporation's confidential communications with counsel, no less than the communications of other clients with counsel, are encompassed within the legislative purposes of CPLR 4503." Rossi v. Blue Cross & Blue Shield of Greater N.Y., 73 N.Y.2d 588, 592 (1989). However, defining a "client" in a corporate setting, and specifically, as corporations can only communicate through their employees, who within the corporate hierarchy speaks for the corporation and is thus protected by the corporations' privilege as a client has not been definitively resolved.

Until the New York Court of Appeals says otherwise, the New York courts, relying upon the U.S. Supreme Court's decision in Upjohn Co. v. United States, 449 U.S. 383 (1981), uniformly hold that officers and directors, as well as low and mid-level employees of the corporation who are "speaking" to the corporation's lawyer in confidence about his or her corporate duties in connection with the lawyer's performance of legal services for the corporation can be viewed as the "client." Alexander, Practice Commentaries to CPLR 4503, McKinney's Cons. Laws of NY, C4503:4. (While the Court of Appeals has not endorsed or otherwise addressed this formulation of the "corporate client," its attorney-client privilege jurisprudence strongly suggests that the Court would not disagree with it.) As noted by U.S. Magistrate Judge Randolph F. Treece, "employees of any station or level within a corporation or a sophisticated business structure" who speaks to the corporation's attorney can potentially be viewed as speaking for the corporate client. Lugosch v. Congel, 218 F.R.D. 41, 47 (N.D. N.Y. 2003).

In Frank v. Morgans Hotel Group Mgt., 66 Misc.3d 770 (Sup. Ct. N.Y. Co. 2020), Acting Supreme Court Judge Gerald Lebowitz addressed a novel issue regarding New York's corporate client Upjohn standard. The issue Judge Lebowitz was asked to determine was whether a corporation's former high-level employee who would have been viewed as the client under the Upjohn standard while employed, retained that status when his employment with the corporation was terminated and is now working for the corporation in the same capacity but as a "consultant" on a contractual basis. Upon the facts before him, Judge Lebowitz in a thoughtful opinion concluded the former employee was a privileged person, a "client," and the communications post-termination between him and the corporation's attorney were privileged.

The significance of Judge Lebowitz's opinion on the issue presented cannot be overstated. In this regard, corporations appear to be reaching out more and more to retired, laid-off or furloughed employees when there is a present need for their skills and knowledge, but the need does not contemplate a formal employment relationship. The corporation will certainly want to ensure as much as possible that in this type of out-sourcing any communications the person has with corporate counsel will be protected by the privilege. Judge Leibowitz's decision provides considerable guidance in this regard. This column will discuss those takeaways.

'Frank' Facts

Plaintiff in Frank alleged that in the fall of 2015, while a patron at a bar at a hotel owned and operated by the defendants (collectively, Morgans), she fell and seriously injured her foot due to unsafe conditions on the premises. In the pre-trial stage of the action, the Morgans produced Steven Benjamin, a non-party, for deposition as a person with knowledge. Benjamin had been employed by the Morgans as its director of risk management from 2007-2018. However, his position was eliminated in 2018, but he was immediately retained as a consultant, on a contract basis, to perform many of the same duties, retaining the title of director of risk management. Frank, 66 Misc.3d at 774.

In his current capacity, Benjamin retained responsibility for performing significant corporate functions, including managing Morgans' insurance programs nationwide, and working with Morgans' financial staff regarding insurance-related budget and loss forecasting issues. Id. He also had substantial decision-making authority, including the assignment of defense counsel to represent Morgans in actions brought against them, and to make settlement offers within certain insurance policy limits. Id. at 775. Benjamin also reported directly to Morgans' general counsel and had a direct line of communication with Morgans' chief operating officer. Id.

During Benjamin's deposition plaintiff's attorney sought to question him about, among other things, (1) communications between Benjamin and Morgans' counsel, and (2) a conversation that Benjamin had with another Morgans' employee in a three-way conference call among Benjamin, the employee and Morgans' counsel. Id. at 771. Counsel for Morgans objected and directed Benjamin not to answer these questions, asserting, in essence, that Benjamin was the "functional equivalent" of an employee for purposes of the Upjohn standard, and thus the communications were between privileged persons, and thus within the privilege. Id. at 772, 773.

'Frank' Holding and Analysis in Support

In addressing Morgans' privileged claim, Judge Lebowitz was acutely aware that Morgans' argument was one that was seeking to expand a corporation's ability to enjoy privilege protection to the detriment of creating an "obstacle" to the truth finding process. Id. at 773. As the Court of Appeals has instructed that the privilege must therefore be "narrowly construed" within the narrowest possible limits consistent with the privilege's underlying purpose, Ambac Assur. v. Countrywide Home Loans, 27 N.Y.3d 616, 624 (2016), Judge Lebowitz was keenly aware that his ruling, to the extent it may expand the privilege's coverage, would need to be "carefully defined." Frank, 66 Misc.3d at 773.

Judge Lebowitz' analysis started with the linchpin of Morgans' argument, namely, Benjamin was the "functional equivalent" of a Morgans' employee who enjoyed "client" status under the Upjohn corporate employee analysis. Under the so-called "functional equivalent" doctrine prevalent in the federal courts, an individual providing services to a corporation on a contract basis may be viewed as the "client" where the individual is, functionally speaking, acting as a corporate employee rather than a fully independent contractor. See, e.g., In re Beiter, 16 F.3d 929, 938 (8th Cir. 1994); Export-Import Bank of the U.S. v. Asia Pulp & Paper Co., Ltd., 232 F.R.D. 103, 113 (S.D. N.Y. 2005); Matter of Copper Mkt. Antitrust Litig., 200 F.R.D. 213, 218-19 (S.D. N.Y. 2001). The underlying rationale is that when the individual is a "functional equivalent" of an employee, there is no reason to distinguish for privilege purposes between a person on the corporation's employment payroll and a person hired by the corporation as a consultant on a contract basis if each acts for the corporation and possesses the information needed by the corporate attorney in rendering legal advice.

As Judge Lebowitz noted, the "functional equivalent" inquiry is whether the person has in practice "assum[ed] the functions and duties of [a] full-time employee" and has been "so thoroughly integrated" into the corporation's structure that the person is a "de facto employee of the company." Id. at 773. This inquiry in turn posed the question as to what would be the factors employed in in making such determination. Notably, Judge Lebowitz did not focus exclusively on the presence of the factors that would ordinarily indicate the existence of an employer/employee relationship, such as whether the person had an office; the amount of time the person spent at the corporation's location; the assignment of a corporate email address and corporate phone number; and working exclusively for the corporation and not for other companies. He declined to take into account these factors on a deliberate basis, namely, reliance on these factors would likely result in an expansion of the privilege to most former employees without any principled justification, thereby violating the rule that the privilege should be narrowly construed.

Instead, Judge Lebowitz, drawing from federal cases as well as a seminal New York state court case, William Tell Serv., v. Capital Fin. Planning, 46 Misc.3d 577 (Sup. Ct. Rensselaer Co. 2014) (George Ceresia, J.), enumerated other factors, the presence of which he believed would tend to show that the person should be considered the "client". They are: whether the person had primary responsibility for a key corporate job; whether the person exercised independent decision-making authority within the company; whether the person enjoyed a continuous and close working relationship on matters critical to the corporation's litigation strategy; and whether the person was likely to possess information possessed by no one else in the corporation. Frank, 66 Misc.3d at 774. These factors do not appear to be arbitrarily or randomly closed. Rather, they are the factors that would show the person has been thoroughly integrated into the corporation's structure and staff, such that the person should be viewed as speaking for the corporation under the Upjohn standard. See Upjohn, 449 U.S. at 394-95. In the words of Judge Lebowitz, such a person cannot be viewed as an "outsider," who could not and should not be considered a "privileged person." Rather, when these factors are present, such a person would be precisely the sort of person with whom an attorney would want to have confidentiality conferred in order to better understand the corporation's need for legal representation and advice on corporate matters. The policy of the attorney-client privilege, to further uninhibited dialogue between the client and attorney to best serve the client, is thereby furthered. Rossi, 73 N.Y.3d at 592.

Applying these factors to the undisputed facts before him, Judge Lebowitz readily concluded that Benjamin was the "functional equivalent" of a Morgans' employee. Frank, 66 Misc.3d at 774-75. In this connection, he pointed to Benjamin's performance of significant corporate functions; he was the only person at Morgans performing those functions; and was the only individual at Morgans with the requisite knowledge and experience of its insurance programs and the overall landscape of claims and litigation brought against it.

With this conclusion that the confidential connections in issue were between privileged persons, Judge Lebowitz then concluded that the communications involved a "legal communication regarding the preparation for this case wherein we discussed legal theory strategy, et cetera, of the nature that is protected by the attorney-client privilege." Id. at 777. In reaching this latter conclusion, Judge Lebowitz found no basis for concluding that the communications did not involve mere discussions about the underlying facts of plaintiff's accident which would not be within the privilege. Id. at 776-77.

Takeaways

Several takeaways from Frank can be found. All are significant and worth considering when advising a corporation which is considering outsourcing a corporate function to a former employee and the corporation is desirous, as it should be, of protecting as privileged confidential communications between the person and corporate counsel involving corporate legal matters.

First, Frank squarely holds that the privilege can extend beyond current corporate employees to former employees possessing knowledge that will aid the attorney in representing the corporation in matters that have arisen after the employee left the corporation.

Second, such extension can be achieved when the former employee is retained on a contract basis to provide services to the corporation. However, the mere retention of the employee as a consultant or independent contractor will not alone achieve the extension. Rather, the person must at a minimum be assigned the functions and duties of a full-time employee and as well thoroughly integrated into the corporation's structure and hierarchy.

Third, to maximize the potential that the desired expansion of the privilege will occur. Frank instructs that the functions and duties be spelled out, and that they involve significant decision-making authority regarding an important part of the corporation's business. To the extent practicable, emulating the status of Benjamin should be the goal. Needless to say, the corporation's attorney should have a role in formulating the position and role of the former employee in the corporation.

Fourth, Frank clearly indicates that the applicable "functional equivalent" standard is a rigorous standard. The absence of any of the factors mentioned by Judge Lebowitz will likely lead a court to conclude that the person is not a "functional equivalent" of an employee. This is the teaching of numerous decisions decided in other jurisdictions, decisions which would be persuasive authority in New York. (The cases are collected in Spahn, The Attorney-Client Privilege and the Work Product Doctrine (3d ed) §6.13.)

Fifth, Frank does not address the thorny issue involving communications by employees who are no longer employed by the corporation and with whom the corporation has no ongoing work relationship. This situation raises different concerns regarding the application of the privilege to not only communications between the employee and corporate attorney that occur after the employment has ended, but also to communications that occurred during the employment. Suffice it to say, the case law in New York does not provide definitive answers to the issue. (See generally Hutter, The Attorney-Client Privilege and Its Application to Communications with Former Corporate Employees, 22 NY Business Law Journal 37 (Spring 2019) (NYSBA).)

Sixth, lest the structuring of the agent with the former employee to bring the employee within the "functional equivalent" standard creates unexpected problems regarding employee benefits and employment rules and regulations, the attorney should consult with the corporation's human resources department to determine what problems, if any, there may be which on balance may preclude the agreement as structured.

Conclusion

Frank is an important decision for these times. Attorneys seeking to maximize the application of the attorney-client privilege for their corporate clients when the corporation is dealing with former employees that the corporation is desirous of bringing back, but not as full-time employees, should be thoroughly familiar with it.

Michael J. Hutter is a professor of law at Albany Law School and is special counsel to Powers & Santola. He is currently serving as the Reporter to the "Guide to NY Evidence." The Guide is accessible to the bench and bar at www.courts.state.ny.us/JUDGES/evidence.