Southern District of New York Applies the “Functional Equivalent” Doctrine

February 1, 2012

Under what is called the “functional equivalent” doctrine, the attorney-client privilege can protect communications to and from a non-employee considered to be the “functional equivalent” of an employee. This doctrine represents an enormously important expansion of the attorney-client privilege for companies which have reduced their employee head count, and rely on independent contractor/temporary workers.

In Steinfeld v. IMS Health Inc., No. 10 Civ. 3301 (CS)(PED), 2011 U.S. Dist. LEXIS 142288, at *1 (S.D.N.Y. Dec. 9, 2011), Magistrate Judge Davison found that an “independent equity compensation consultant” did not meet the “functional equivalent” standard. The court examined six factors: (1) whether the company relied on the independent contractor “because its business is sporadic”; (2) whether the independent contractor appeared on behalf of the company, corresponded with third parties as a representative of the company, or was ever viewed by others as a company employee; (3) whether the independent contractor was “physically present” at the company, such as maintaining an office there, or spending “a substantial amount of his time” there; (4) whether the company “lacked the internal resources necessary for an [actual] employee to perform” the services; (5) whether the independent contractor “exercises any measure of independent decision-making authority” within the company; (6) whether the independent contractor “has ever sought out legal advice from [the company’s] attorneys as part of his work with the [company].” Id. at *9-11. The court found that the company fell short in trying to establish several of these factors.

While corporations should welcome the “functional equivalent” doctrine’s expansion of the privilege, they should also fear the sometimes disastrous effects of failing to satisfy the doctrine’s standards: (1) communications with an independent contractor generally do not deserve privilege protection; (2) the presence of an independent contractor during otherwise privileged communications usually aborts the privilege; and (3) sharing preexisting privileged communications with an independent contractor usually waives the privilege.