Pleading an Affirmative Defense Can Waive the Attorney-Client Privilege

December 17, 2003

An “express” waiver of the attorney-client privilege can often result from a client’s (or a lawyer’s) disclosure of privileged communications. The more frightening type of waiver (called an “implied” waiver) can occur without the actual sharing of any privileged communications (and thus is more likely to occur without the client or lawyer recognizing it).

In In re G-I Holdings Inc., Ch. 11/Civ. No. 02-03082(WGB), 2003 U.S. Dist LEXIS 13901 (D. N.J. July 17, 2003), G-I and other debtors were involved in a tax dispute with the IRS. They hoped to avoid a penalty under federal law by arguing that they acted in “good faith” and “had reasonable cause” for their failure to pay taxes. Id. at *4. They sought to bifurcate the trial so that they could avoid any privilege waiver that would be caused by asserting such a defense during the liability phase, and risk a waiver only if they had to litigate the penalty. The court denied the bifurcation, finding that the debtors’ assertion of the affirmative defense caused a waiver that extended beyond just the penalty phase, and covered the entire transaction at issue and “subsequent events.” Id. at *37. Interestingly, the debtors’ only specific reference to their “good faith” reliance on legal advice appears to have been one sentence in their response to a government interrogatory, which mentioned their consultation with “outside legal counsel” (and which did not reveal the substance of any conversations during the consultation). Id. at *13.

Lawyers should remember that their affirmative injection into any litigation of such concepts as “good faith” or “reasonable cause” might create an implied waiver on the entire subject matter of the litigation.