Noncompete Ripple EffectA recent court opinion is a cautionary tale for business owners and entrepreneurs and their attorneys about the importance of protecting attorney-client communications. It is also a reminder of how easily that privilege can be inadvertently waived and the downstream impact it can have on noncompete disputes.

The Decision

The court opinion comes from a case in Michigan federal court, Prudential Defense Solutions, Inc. v. Graham et al., Case No. 20-11785. The opinion stemmed from a subpoena on the defendants’ former business attorney. At issue was whether that attorney must produce documents and information relating to the noncompete and trade secret misappropriation claims. Here, the attorney-client privilege was inadvertently waived because of poor pre-business planning by the entrepreneurial defendants.

Why it Matters

Usually, the attorney-client privilege bars the disclosure of “confidential communications” between an attorney and client on matters that relate to the representation. Specific requirements must exist for this privilege to apply. But once established, clients can waive it without proper care and attention. Once waived, devastating results often follow.

Going Deeper

After Prudential Defense Solutions Inc.’s former VP signed a noncompete agreement, Prudential alleges he breached it by establishing a competing security company and misappropriated trade secret information to use in the competing business. Prudential sued the former vice president and his business partners for trade secret misappropriation claims under federal and Michigan law. There are many moving pieces to this case, including the typical request for injunctive relief, motions to dismiss, and other procedural matters.

But as it relates to the waiver of attorney-client communications, one of the defendants emailed his business partners about specific customers to pursue and profit margins for those customers. The email was sent before Prudential filed its lawsuit. However, and here’s where the critical mistake was made, the defendant disclosed the content of discussions with legal counsel:

I spoke with [the attorney] he says go get them. They are fair game. No contracts exist so [the attoreny] says it’s all good news.

In addressing the waiver issue, the Court first noted that the email was produced by the Defendants’ litigation counsel. The Court also underscored that the production by litigation counsel was made with no objections, conditions, or qualifications by counsel before “it was handed over.” ECF No. 42, p. ID 1411. Thus, the waiver was “intentional.”

Second, the email was not sent by the attorney. Nor was the attorney included as a recipient.

Third, the email disclosed the attorney by name, it described the attorney’s advice about three specific customers, and it referenced the attorney’s conclusion.

And here is why it is so crucial for entrepreneurs to protect the attorney-client privilege; once waived it extends to all information related to the subject matter of the details on which the waiver occurred. Thus, the defendants and the attorney had to produce “all documents or communications” relating to the “topics and substance” of the email.

Take-aways on the attorney-client privilege

Presently, I am lead counsel in a trade secret misappropriation claim where we are now litigating and briefing the issue of whether the attorney-client communication was waived. But in my case, I am arguing the former employer waived its attorney-client communication in relation to its trade secret misappropriation claims. This waiver and anticipated information concern whether the former employer improperly pursued trade secret misappropriation claims in bad-faith against my client.

So based on the Prudential case and our experience, here are three recommendations for protecting the attorney-client privilege if litigation later arises:

  1. We discuss with our business clients at the beginning of an engagement the importance and parameters of the attorney-client privilege. We also discuss who should be part of any legal discussions. We also stress what to say and not to say to employees or others outside the business-legal team. Make sure you do the same with your attorneys. And if in doubt, ask.
  2. For startups, make sure you and any business partners are appropriately represented by counsel so the attorney-client privilege can be properly documented if it later needs to be asserted. Don’t assume because one person has legal counsel that the privilege will extend to all business partners.
  3. For entrepreneurs and business owners, it is also important to consult with counsel before making any disclosures that could inadvertently open up the door for waiving attorney-client communications. On this point, the Prudential opinion listed many examples of where businesses inadvertently waived their attorney-client privilege because of discussions with third parties. Some examples included a business that disclosed a PowerPoint presentation made as part of an investigation into its earnings. The presentation described interviews and investigative findings made by legal counsel. In another instance, a business owner met with government investigators over Medicare billing. The owner disclosed its marketing plan covering services billed to Medicare and represented it “legally compliant” per the business’ attorney’s conclusion. This disclosure waived the attorney-client privilege. Again, improper disclosures may not be obvious. And the ripple effect from inadvertently waiving the privilege may prove devastating.

Use this link to contact Michigan attorney Jason Shinn if you have questions about this article, or litigating noncompete, trade secret, or other business claims. Since 2001, Mr. Shinn has handled these matters on behalf of companies and individuals throughout Michigan in both state and federal courts.