Tennessee Supreme Court Adopts 'Functional Equivalent' Analysis for Extending Attorney-Client Privilege to Non-Employee Third Parties

The Tennessee Supreme Court, in a unanimous opinion written by Justice Sharon Lee, has adopted the “functional equivalent” test for determining whether communications between counsel and a third-party nonemployee of the client are subject to the attorney-client privilege. In Dialysis Clinic, Inc. v. Medley, the plaintiff, Dialysis Clinic, had hired an agent, XMi Commercial Real Estate, to manage several commercial rental properties it owned in Nashville. After Dialysis Clinic filed an unlawful detainer action against one of its tenants, the defendant tenant subpoenaed XMi, a nonparty, for production of documents related to the properties in question. XMi withheld as privileged emails it had exchanged between it and Dialysis Clinic’s in-house and outside counsel. Following the rationale previously set forth by the Eighth Circuit in In re Bieter, 16 F. 3d 929 (8th Cir. 1994), two federal district courts in Tennessee, the Tennessee Court of Appeals in Waste Administrative Services, Inc. v. Krystal Co. (summarized in our Oct. 30, 2018 Connect), and numerous other federal and state courts, the Supreme Court held that “the functional equivalent analysis is a sound approach” for determining whether the attorney-client privilege should extend to communications between counsel and a third-party non-employee. The court adopted a non-exclusive list of factors for courts to use in determining whether the third party is the “functional equivalent” of an employee, including:

• whether the nonemployee performs a specific role on behalf of the entity;

• whether the nonemployee acts as a representative of the entity in interactions with other people or other entities;

• whether, as a result of performing its role, the nonemployee possesses information no one else has;

• whether the nonemployee is authorized by the entity to communicate with its attorneys on matters within the nonemployee’s scope of work to facilitate the attorney’s representation of the entity; and

• whether the nonemployee’s communications with the entity’s attorneys are treated as confidential.

Once a court, by applying these factors, determines that the third-party non-employee is the “functional equivalent” of an employee of the client, “the court should use the standard already in place in Tennessee to determine whether the privilege attaches.” Applying the new standard to the facts of the case, the court held that the attorney-client privilege covered the communications between Dialysis Clinic’s attorneys and XMi.

 

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