Washington Appeals Court Rejects “Functional Equivalent” Test for Corporate Attorney-Client Privilege

UPDATE: The Washington Supreme Court has granted review of the Court of Appeals decision in Hermanson v. MultiCare and will hear the case in 2020. We will provide an analysis once the Court has decided this case.

A recent decision from Division II of the Washington Court of Appeals will significantly impact clients who contract with independent contractors and other non-employee agents. In Hermanson v. MultiCare Health System Inc., Division II held that a hospital’s corporate attorney-client privilege does not extend to treating physicians who are agents of the hospital but not employees.

In doing so, the court rejected the “functional equivalent” test used by the 8th and 9th Circuits, as well as most jurisdictions. That test holds the attorney-client privilege extends to independent contractors and non-employee agents who serve as the “functional equivalent” of an employee.

Though the court acknowledged that federal courts have adopted the functional equivalent test, it expressly declined to do so, reasoning that the Washington Supreme Court has previously expressed “reluctance to expand the reach of the corporate attorney-client privilege.”

By rejecting that test and holding the privilege does not extend to a non-employee agent, the court in Hermanson signaled corporate counsel’s communications with independent contractors and other non-employee agents will not be protected by the corporate attorney-client privilege in Washington.

Background of the Hermanson Case

Plaintiff Doug Hermanson filed suit against MultiCare Health System in 2016, alleging that healthcare providers at MultiCare improperly disclosed Mr. Hermanson’s blood alcohol level to law enforcement after treating him for injuries from a car accident. Treating physician Dr. Patterson was employed by a physician group that contracted with the hospital for treating privileges.

The group’s contract with the hospital gave these physicians the authority to act as the hospital’s agents when providing care in the hospital, and made the hospital responsible for the care the physician provided. During the litigation, the same law firm represented the treating physician, physician’s group, and MultiCare.

When MultiCare’s counsel notified the plaintiff of their representation of all of these defendants, Hermanson objected to that representation. Hermanson argued that counsel for MultiCare was prohibited from having ex parte privileged communications with Dr. Patterson because of the patient-physician privilege.

In response, MultiCare sought a protective order determining whether MultiCare attorneys could have privileged communications with Dr. Patterson—whom they also represented.

Underlying Privilege Law

The dispute over MultiCare’s attorneys communicating with Dr. Patterson arises at the intersection of several previous cases surrounding privilege. Generally, under the Upjohn rule which Washington has endorsed, a corporation’s attorney-client privilege encompasses communications between lawyers and any employee, regardless of their position within the business.

The core rationale for this privilege is to “encourage full and frank communication between attorneys and their clients” because “sound legal advice or advocacy serves public ends and …, such advice or advocacy depends upon the lawyer’s being fully informed by the client¹.” The Washington Supreme Court has held the corporate attorney-client privilege excludes former employees “after the agency relationship ends” —in other words, after employment ends— in Newman v. Highland School District².

At the same time, Washington courts prohibit counsel from communicating with a person’s non-party treating physician without the patient’s counsel present³. This rule recognizes the unique relationship between patients and their physicians and the physician-patient privilege that attaches to their communications under Washington law.

These two principles come into conflict where counsel for a healthcare corporation seeks to communicate with a patient’s treating physician. The Washington Supreme Court held in Youngs v. PeaceHealth⁴ that the corporate attorney-client privilege extends to communications between corporate counsel and employee physicians in certain circumstances, overriding the physician-patient privilege.

For the Youngs exception to apply, the communication must satisfy the typical requirements for privilege, involve a physician “who has direct knowledge” of the events underlying the case, and be about the facts related to those event.

Hermanson’s New Rule

In Hermanson, the Washington Court of Appeals held that non-employee agent physicians are not within the scope of a hospital’s corporate attorney-client privilege. The court rejected the argument that Youngs encompasses a non-employee agent physician, reasoning instead that in Newman, “the court expressly declined to expand the scope of corporate attorney-client privilege beyond the employer-employee context.”

The court also expressly declined to adopt the rule from other jurisdictions, including the 9th Circuit, that corporate attorney-client privilege extends to non-employee agents who are the “functional equivalent” of an employee.

Conflict Between the New Hermanson Rule and Other Jurisdictions

The Hermanson decision places Washington at odds with the majority of jurisdictions, which have overwhelmingly extended the corporate attorney-client privilege to “functional equivalents” of employees, including the 8th⁵ and 9th Circuits⁶, the Southern⁷ and Eastern⁸ Districts of New York, the Eastern District of Virginia⁹, the District of Colombia¹⁰, the District of Maryland¹¹, the Eastern District of Pennsylvania¹², the Middle District of Alabama¹³, the Middle District of Florida¹⁴, Colorado¹⁵, and Tennessee¹⁶.

The conflict with the 9th Circuit will create particularly difficult issues for corporations that operate in Washington and rely on independent contractors or non-employee agents, as their communications with corporate counsel may be privileged in federal court but not in Washington state court.

Practical Implications

• Under Hermanson, corporate counsel’s communications with non-employee physicians, including independent contractors, fall outside the attorney-client privilege in a Washington state court action, or in an action arising under Washington state law. These communications may not take place ex parte.
• While Hermanson specifically addresses physicians and the interaction between the attorney-client privilege and physician-patient privilege, corporate counsel in other industries should understand their communications with independent contractors and non-employee agents may not be privileged. Hermanson, and Newman before it, suggests judicial antipathy to the corporate attorney-client privilege.
• Where possible, corporate counsel should rely on employees rather than non-employees for fact investigations and gathering information for the provision of legal advice.
• When litigation is anticipated, businesses should consider securing counsel for non-employee agents involved in the underlying events and entering into joint defense or common-interest arrangements.
• In the healthcare context, this solution is limited because corporate counsel still will not be permitted to communicate ex parte with treating physicians. But in other industries, counsel for the company and for the individual non-employee agent should be able to communicate and coordinate their efforts.
• In an appropriate case about events involving non-employee agents, counsel should consider seeking a protective order determining whether the non-employee agent falls under the corporate privilege umbrella. It may be worth appealing the denial of any such protective order on an interlocutory basis if the agent’s knowledge is essential to the company’s defense.
• Once a Washington state court action has commenced, counsel should consider removing an action to federal court, if possible, to take advantage of the “functional equivalent” doctrine’s extension of the corporate attorney-client privilege to non-employee agents.

FOOTNOTES

1 Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S. Ct. 677, 682 (1981).

2 186 Wash. 2d 769, 782, 381 P.3d 1188, 1194 (2016).

3 Loudon v. Mhyre, 110 Wash. 2d 675, 756 P.2d 138 (1988).

4 179 Wash. 2d 645, 653, 316 P.3d 1035, 1039 (2014).

5 In re Bieter Co., 16 F.3d 929 (8th Cir. 1994).

6 United States v. Graf, 610 F.3d 1148 (9th Cir. 2010).

7 In re Copper Mkt. Antitrust Litig., 200 F.R.D. 213 (S.D.N.Y. 2001).

8 Am. Mfrs. Mut. Ins. Co. v. Payton Lane Nursing Home, Inc., No. CV 05-5155 SJF/AKT, 2008 WL 5231831 (E.D.N.Y. Dec. 11, 2008).

9 Digital Vending Servs. Int’l, Inc. v. Univ. of Phoenix, Inc., No. 2:09CV555, 2013 WL 1560212 (E.D. Va. Apr. 12, 2013).

10 Trustees of Elec. Workers Local No. 26 Pension Tr. Fund v. Tr. Fund Advisors, Inc., 266 F.R.D. 1 (D.D.C. 2010).

11 Neighborhood Dev. Collaborative v. Murphy, 233 F.R.D. 436, 440 (D. Md. 2005).

12 In re Flonase Antitrust Litig., 879 F. Supp. 2d 454 (E.D. Pa. 2012).

13 Hope For Families & Cmty. Serv., Inc. v. Warren, No. 3:06-CV-1113-WKW, 2009 WL 1066525 (M.D. Ala. Apr. 21, 2009).

14 United States v. Advanced Pain Mgmt. & Spine Specialists of Cape Coral & Fort Myers, No. 217CV272FTM29MRM, 2018 WL 4381192, (M.D. Fla. June 28, 2018).

15 All. Const. Sols., Inc. v. Dep’t of Corr., 54 P.3d 861 (Colo. 2002).

16 Dialysis Clinic, Inc. v. Medley, 567 S.W.3d 314 (Tenn., 2019).