S.D.N.Y. Takes a Demanding View of the “Functional Equivalent” Doctrine

September 27, 2023

Under the common law “functional equivalent” doctrine, corporations sometimes may claim privilege protection for communications to or from a non-employee who is the “functional equivalent” of an employee. This common sense privilege expansion can be extremely helpful for corporations reducing employee head count and outsourcing some important functions.

But some courts take a very restrictive view. In SEC v. Rayat, No. 21-cv-4777 (LJL), 2023 U.S. Dist. LEXIS 118257, at *9-13 (S.D.N.Y. July 10, 2023), Judge Liman noted that the Second Circuit has not adopted the doctrine, and that “[m]ost [SDNY] decisions . . . reject the assertion of privilege based on the functional employee exception.” The court predictably rejected the doctrine’s applicability to the “strategic advisor” to a defendant accused of a “pump-and-dump” scheme. Id. at *2, *4. The court found “no evidence” that the advisor engaged in “necessary tasks that he alone accomplished,” or that the advisor had “primary responsibility for a ‘key corporate job.'” Id. at *19-20 (citation omitted). For the coup de grâce, the court quoted the advisor’s concession that he “did not have management authority under the express terms of his agreement,” and pointed to the company’s Form 10-K’s statement that “[n]one of the consultants are required to expend all of their time and efforts on our behalf and may engage in other activities.” Id. at *21 (alteration in original).

Depending on the court, corporations may have a very difficult time applying the often helpful “functional equivalent” doctrine to protect communications with their non-employee consultants.