Consultants’ Communications Privileged from Discovery

In healthcare, companies often hire consultants to review billing and coding, privacy and security and a host of other technical issues that regular staff does not have the time or expertise to pursue.  A recent discovery ruling in federal court in the Eastern District of Pennsylvania holds that communications with such outside consultants are privileged from discovery if they are made for the purpose of assisting the company in securing legal advice or making legal decisions.

In Smith v. Unilife Corporation, a whistleblower brought an action under Sarbanes-Oxley and Dodd-Frank alleging shareholder fraud and failure to comply with certain FDA requirements.  The plaintiff sought discovery of two non-lawyer consultants regarding drafts of the company’s SEC Form 10-K filing.  The Court’s decision to deny the plaintiff’s motion to compel was based on the “functional equivalent” doctrine, a principle already adopted in the 8th, 9th and D.C. Circuits, but not yet in the 3rd Circuit.

Under this doctrine, an independent consultant may be viewed as an employee if the consultant is the “functional equivalent” of an employee.   Just as an employee’s communications with counsel would be privileged, the consultant’s communications are not subject to discovery if the consultant is simply performing a function that a company employee could also provide.  This common-sense approach replaces the narrow “control group” test, rejected by the U.S. Supreme Court in Upjohn Company v. U.S., that limited the privilege to communications of officers and agents able to direct the company’s actions.

The Smith decision points out that some courts nominally invoking the “functional equivalent” test actually impose “control group” criteria, thereby defeating the purpose of the broader definition.  In particular, the Court rejected the four-factor test outlined by the District of New Jersey in In re Bristol-Myers Squibb Securities Litigation.  The third factor of that test — that the consultant possess authority to make decisions on behalf of the company — was viewed in Smith as an unnecessary requirement in light of the reality of company fact-finding and decision-making.

Thus, healthcare companies in need of assistance by outside consultants to conduct review or investigations of internal operations may retain them with some assurance that the consultants’ communications and reports will be privileged from discovery.  It is important for asserting the privilege that any letter or agreement engaging a consultant be handled through counsel and document that the consultant’s service is needed for the purpose of assisting the company in securing legal advice and making legal decisions.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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