April 22, 2010

LG Electronics USA Inc. v. Whirlpool Corp. – 7th Circuit Court of Appeals Requires Company to Produce Communications Between Its Counsel and Outside Advertising Agencies

4 min

On March 3, 2010, the U.S. Court of Appeals for the Seventh Circuit required that Whirlpool Corporation produce documents to LG Electronics USA Inc. that Whirlpool had claimed fell within the attorney-client privilege. The documents were communications between Whirlpool’s counsel and its outside advertising agencies relating to the content of advertisements prior to publication.

LG sued Whirlpool in 2008, alleging that Whirlpool’s advertising for its Duet Steam, Cabrio Steam, and Maytag Bravos Steam dryers that claimed they use steam to reduce wrinkles on clothing, was false and had hurt sales of LG's products. During discovery, LG requested that Whirlpool produce communications between its attorneys and its outside ad agencies relating to the dryers. Whirlpool refused, arguing that the advertisers were not third parties but instead were de facto employees of Whirlpool. As the functional equivalent of a Whirlpool employee, the legal advice Whirlpool's in-house attorneys provided to them was protected by the attorney-client privilege, and did not have to be turned over in litigation. Alternatively, Whirlpool argued that the ad agencies shared a common legal interest with Whirlpool, which justified an exception to the general rule that disclosure to a third party waives the protection of the attorney-client privilege.

In October 2009, Judge Amy St. Eve of the U.S. District Court for the Northern District of Illinois rejected both of Whirlpool’s arguments and ordered Whirlpool to produce the communications between its lawyers and the ad agencies.

Judge St. Eve noted that some appellate courts have created tests to determine when a person is a de facto employee, but the Seventh Circuit, whose jurisdiction the District Court for the Northern District of Illinois is under, had not done so. But Judge St. Eve found that even if the Seventh Circuit had such a test, Whirlpool would fail it because its circumstances differed from prior cases where a de facto employee relationship was established. Whirlpool’s long-term relationship with the ad agencies was for Whirlpool’s ordinary business dealings and did not implicate the same concerns where an outside firm was hired for the purpose of responding to litigation. In addition, Whirlpool’s claims of privilege did not relate to an agent whose work was necessary to assist counsel in rendering legal advice. Whirlpool gave its ad agencies the legal information by choice and as a matter of expediency, not because it was forced to.

Judge St. Eve stated that Whirlpool could have avoided waiving its attorney-client privilege by having its non-legal employees “screen counsel’s legal advice and communicate Whirlpool’s business concerns to the agencies without revealing Whirlpool’s confidential communications to its counsel.”

Judge St. Eve also rejected Whirlpool’s common-legal-interest argument because she found that the only legal interest Whirlpool shares with its ad agencies is “the fear of a lawsuit.” But “fear of lawsuit is a concern shared by most — if not all — corporations, and it is not clear that this fear justifies the common-interest exception articulated by the Seventh Circuit,” the judge said.

Whirlpool filed an appeal and a petition for a writ of mandamus with the Seventh Circuit appellate court asking that it overturn Judge St. Eve’s decision. But meanwhile, the United States Supreme Court decided Mohawk Indus., Inc. v. Carpenter, 130 S. Ct. 599 (2009), in which it unanimously held that orders requiring disclosure of attorney-client privileged material cannot be appealed until the end of a case. That left Whirlpool with the writ of mandamus as its only option for immediate relief.

But the Seventh Circuit held that Whirlpool hadn't met the tough test for mandamus relief because Whirlpool had “fail[ed] to establish that the district court’s rejection of Whirlpool’s position was patently erroneous or usurpative in character—in other words, a serious error.”

In sum, communications between counsel and outside agencies or firms may not be protected by the attorney-client privilege, particularly if those communications relate to the ordinary business of the outside firm. Courts will likely review the circumstances behind the relationship and whether such relationship is necessary for rendering legal advice or was created for the purpose of litigation. If not, most courts will hold that the privilege is waived with respect to the communications and order such documents to be produced in litigation. Moreover, in light of the Supreme Court’s recent Mohawk Industries opinion, a party will have little to no recourse during the pendency of the litigation to appeal a court’s decision compelling production and as a result, will be forced to produce documents they otherwise believe are privileged.