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Most of us have taken but one bar exam; one was quite enough, thank you. But we have a national practice; we are routinely admitted in courts outside our home state. And, when we fill out the paperwork for our pro hac vice admission to a new jurisdiction, we diligently study the local substantive procedural and ethical rules so that we are up to speed on the variances from what we studied and live by at home. Privilege education: If you wait, you’re much too late Uh-oh. Too late. Long before litigation takes you outside your home state, although you have set neither foot nor briefcase beyond your borders, you may have blown a client’s privileges if you have not already informed yourself about and observed the laws of the other 49 states. In Sterling Finance Management L.P. v. UBS PaineWebber Inc., 782 N.E.2d 895 (Ill. App. Ct. 1st Dist. 2002), the Illinois Appellate Court held that Illinois law governs whether a document in dispute in an Illinois proceeding is privileged, despite the fact that it was created and maintained in another state, was privileged under the law of that other state and was never physically in Illinois-until it was ordered to be produced in Illinois discovery because it is not privileged under Illinois law. Sterling makes it clear that counsel cannot safely follow the rules of privilege he or she studied for her bar exam, the rules that apply where he or she is located nor the rules that apply where the client does business. Rather, counsel must be acquainted with the rules of Illinois-and every other jurisdiction which might adopt a similar position-and follow the lowest possible common denominator. We are not talking about some casual dicta or venal local chauvinism-and we would say this even if we were not attorneys who practice regularly before this court-but this opinion of the Illinois Appellate Court, even for a court that is usually thoughtful, deliberate and fair, is exceptionally well reasoned. Red Tangent Alert. OK, this is an aside, but an important one. This opinion arose on interlocutory appeal. We all know that discovery rulings generally cannot be independently appealed, but contempt citations can be. So, rather than comply with the trial court’s order to produce the document, PaineWebber “respectfully” declined, was held in contempt and fined $500. And because it was so respectful about being contumacious, the appellate court found that PaineWebber was not actually in contempt so the contempt order and fine were vacated. Go figure. We totally agree with the court’s practical outcome, but maybe it’s time to allow interlocutory appeals of important discovery orders without the charade of contempt machinery. Ah, but that’s a topic for another time. Back to subject; tangent alert over. Sterling was no mere academic exercise in abstract legal scholarship; the importance of the disputed document was real. Allen Meyer, in-house counsel for PaineWebber, commissioned an outside lawyer, Robert Mendelson, to conduct a legal-compliance review of PaineWebber’s collateralized mortgage obligations (CMO) derivatives trading operations. Mendelson prepared a written report with his recommendations. PaineWebber’s legal department later asked Terry Ann Goulard, manager of PaineWebber’s internal audit function, to review the CMO trading desk to see how it measured up against the recommendations made by Mendelson. Goulard submitted a draft report to PaineWebber’s deputy general counsel, which set out verbatim quotations from the Mendelson report and, for each item of Mendelson’s legal advice, Goulard’s observations of the trading desk’s procedures. Although there was dispute over whether the Mendelson report itself was truly privileged when delivered, the court did not need to resolve that issue because it found that any privilege that existed was destroyed when the report was shared with Goulard. There was no lawsuit when the report was shared with Goulard; there was not so much as a threatened suit. So PaineWebber could not characterize Goulard’s activities as work product; either Goulard was within the group of persons to whom PaineWebber’s privilege attached or she was not. If so, the document was still privileged; if not, then the disclosure to her waived the privilege. A quick check of Martindale-Hubbell reveals that Meyer and Mendelson were admitted to practice in New York in 1989 and 1985, respectively; no other admissions are listed for either, and we thus presume neither studied for the bar of any other state, certainly not Illinois. Both Meyer and Mendelson officed in New York. PaineWebber’s principal office was in New York. Seeing a trend here? New York, New York, as the song goes. So, as Meyer, Mendelson and PaineWebber took steps to preserve the privilege of the Mendelson report, what possible law could they follow other than New York’s? PaineWebber could not have known when it shared the Mendelson report with Goulard that Sterling would later file a suit in Illinois. Meyer had done everything he could under New York law, hadn’t he? He could not reasonably have contemplated that any law other than New York’s might apply to the privilege question, could he? Surely, the report maintained its privilege, right? No. Despite the pop wisdom imparted by the well-known poster, there is a civilization west of the Hudson River, and clients regularly cross it. Clients do business-and sometimes mischief-all over, and they may be sued all over. There are, of course, two major lines of authority. The “control group” test limits the privilege to a small group of persons who actually control the affairs of the corporation. The “subject matter” test is broader and includes any employee whose consultation with counsel is necessary to enable the attorney to render his or her advice. Despite PaineWebber’s attempt to paint Goulard as an important PaineWebber employee, the court assumed that she was a row or two short of the top box on the organization chart. She may have been within the subject-matter test, but she was, opined the court, well outside the control group. The U.S. Supreme Court rejected the control-group test in Upjohn Co. v. United States, 449 U.S. 383 (1981): “The control group test . . . frustrates the very purpose of the privilege by discouraging the communication of relevant information by employees of the client to attorneys seeking to render legal advice to the client corporation. The attorney’s advice will also frequently be more significant to noncontrol group members than to those who officially sanction the advice, and the control group test makes it more difficult to convey full and frank legal advice to the employees who will put into effect the client corporation’s policy.” Id. at 392. Control-group test remains the law in Illinois New York hasn’t been particularly clear on whether or not it is one of those states that follow Upjohn, but the Illinois court took as a given that New York would accept the U.S. Supreme Court’s reasoning, would not follow the control-group test and would find that the Mendelson report retained its privilege despite disclosure to Goulard. It is a wise court, the U.S. Supreme Court, but in its wisdom it allows the 50 states to set their own individual policies on such things. And the individual and sovereign state of Illinois has decided that the control group remains the law in Illinois. Consolidation Coal Co. v. Bucyrus-Erie Co., 89 Ill. 2d 103, 432 N.E.2d 250 (1982). So under Illinois law, the Mendelson report lost its privilege when it was shown to Goulard. So whose law applies? PaineWebber argued that New York is the state with the most significant relationship to the Mendelson report. Well, goodness, the court said, “we agree.” But so what? The fact that another state has more significant contacts to a document does not govern the question of which state’s law governs the document’s privilege status. Under Section 139 of the Restatement (Second) of Conflict of Laws, “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.” (Emphasis added-by the court.) Illinois has articulated a strong policy-it recognizes that the privilege is at tension with the truth-finding process and thus chooses to place strict limits on the scope of the privilege by following the control-group test. In fact, the court said, it could not conceive of any factual scenario in which Illinois should not follow its own policy. So when New York lawyers retained New York auditors to review legal advice of other New York lawyers to advise their New York client, wasn’t it reasonable to assume their actions would be measured against New York law? No. Illinois law applied because a case was long later filed in Illinois. These lawyers are not to be criticized. It is hard to imagine that many, if any, New York practitioners would have done more. But if it wasn’t already clear to you before, the Sterling case should serve as a wake-up klaxon. It is not enough to observe the rules of your own jurisdiction. “When in Rome, do as the Romans do?” Nope. The rule must now be: “When at home in Rome, consider the entire Empire.” Jerold S. Solovy and Robert L. Byman are fellows of the American College of Trial Lawyers (ACTL) and partners at Chicago’s Jenner & Block. Solovy, the firm’s chairman, can be reached at [email protected]. Byman, chairman of the ACTL civil procedure committee, can be reached at [email protected].

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