In Re:Teleglobe Comm

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

7-17-2007

In Re:Teleglobe Comm

Precedential or Non-Precedential: Precedential

Docket No. 06-2915

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 06-2915

IN RE: TELEGLOBE COMMUNICATIONS

CORPORATION, et al,

Debtor

TELEGLOBE USA INC.; OPTEL

COMMUNICATIONS INC.;

TELEGLOBE HOLDINGS (U.S.) CORPORATION;

TELEGLOBE MARINE (U.S.) INC.;

TELEGLOBE HOLDING CORP.;

TELEGLOBE TELECOM CORPORATION;

TELEGLOBE INVESTMENT CORP.;

TELEGLOBE SUBMARINE, Teleglobe Submarine Inc.;

OFFICIAL COMMITTEE OF UNSECURED CREDITORS

OF TELEGLOBE

COMMUNICATIONS CORPORATION;

TELEGLOBE COMMUNICATIONS

CORPORATION; TELEGLOBE LUXEMBOURG, LLC;

TELEGLOBE PUERTO RICO INC.

v.

BCE INC.; MICHAEL T. BOYCHUK;

MARC A. BOUCHARD;

SERGE FORTIN; TERENCE J. JARMAN;

STEWART VERGE;

JEAN C. MONTY; RICHARD J. CURRIE;

THOMAS KIERANS;

STEPHEN P. SKINNER; H. ARNOLD STEINBERG,

Appellants

VARTEC TELECOM, INC.,

Defendants/Intervenor in District Court

Appeal from the United States District Court

for the District of Delaware

(D.C. Civil Action No. 04-cv-01266)

Chief District Judge: Honorable Sue L. Robinson

Argued January 8, 2007

Before: McKEE, AMBRO and FISHER, Circuit Judges

(Opinion filed July 17, 2007)

Pauline K. Morgan, Esquire

John T. Dorsey, Esquire

Margaret B. Whiteman, Esquire

Young, Conaway, Stargatt & Taylor

1000 West Street, P.O. Box 391

17th Floor, Brandywine Building

Wilmington, DE 19899-0391

2

Stuart J. Baskin, Esquire

Jaculin Aaron, Esquire

Shearman & Sterling

599 Lexington Avenue

New York, NY 10022

Stephen J. Marzen, Esquire (Argued)

Shearman & Sterling

801 Pennsylvania Avenue, N.W., Suite 900

Washington, D.C. 20004

Counsel for Appellants

Gregory V. Varallo, Esquire

C. Malcom Cochran, IV, Esquire (Argued)

Chad M. Shandler, Esquire

Richards, Layton & Finger

One Rodney Square

P.O. Box 551

Wilmington, DE 19899

Philip A. Lacovara, Esquire

Andrew Tauber, Esquire

Mayer, Brown, Rowe & Maw

1909 K Street, N.W.

Washington, D.C. 20006

Counsel for Appellees

Mark I. Levy, Esquire

Kilpatrick Stockton

3

607 14th Street, N.W., Suite 900

Washington, D.C. 20005

Susan Hackett, Esquire

Senior Vice President and General Counsel

Association of Corporate Counsel

1025 Connecticut Avenue, N.W., Suite 200

Washington, D.C. 20036

David C. Frederick, Esquire

Robert A. Klinck, Esquire

Kellogg, Huber, Hansen, Todd, Evans & Figel

1615 M Street, N.W., Suite 400

Washington, D.C. 20036

Counsel for Amici-Appellants

OPINION OF THE COURT

TABLE OF CONTENTS

I. Facts and Procedural History . . . . . . . . . . . . . . . . . . . 8

A. The Parties and Underlying Causes

of Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

B. The Privilege Dispute . . . . . . . . . . . . . . . . . . 11

II. Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

III. Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

4

IV. Summary of the Law . . . . . . . . . . . . . . . . . . . . . . . . . 24

A. The Attorney-Client Privilege . . . . . . . . . . . . 25

B. The Disclosure Rule . . . . . . . . . . . . . . . . . . . 28

C. Privileged Information Sharing . . . . . . . . . . . 30

1. The Co-Client (or Joint-Client)

Privilege . . . . . . . . . . . . . . . . . . . . . . . 30

2. The Community-of-Interest

(or Common-Interest) Privilege . . . . . 35

D. The Exception for Adverse Litigation . . . . . . 42

E. When Joint Representation Goes

Awry: The Eureka Principle . . . . . . . . . . . . . 46

F. Putting It All Together: Parents,

Subsidiaries, and the Modern

Corporate Counsel’s Office . . . . . . . . . . . . . . 49

1. Intra-group Information Sharing:

Parents and Subsidiaries as Joint

Clients . . . . . . . . . . . . . . . . . . . 50

2. Keeping Control of the Privilege . . . . 57

3. When Conflicts Arise . . . . . . . . . . . . . 59

V. Issues on Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

A. Whether the Debtors Are Entitled to

Documents Generated in the Course

of a BCE/Teleglobe Joint

Representation . . . . . . . . . . . . . . . . . . . 61

1. Whether BCE’s Concession

in the Bankruptcy Court Prevents

it from Arguing that the Debtors

are not Entitled to the

Disputed Documents . . . . . . . . . . . . . 62

5

a. Background . . . . . . . . . . . . . . . 62

b. Merits . . . . . . . . . . . . . . . . . . . . 67

I. Issue Waiver . . . . . . . . . 67

ii. Judicial Admission . . . . 69

iii. Judicial Estoppel . . . . . . 70

iv. Implied Prospective

Waiver of the

Privilege . . . . . . . . . . . . 71

2. Whether the Community-

of-Interest Privilege Entitles the

Debtors to the Documents as a

Matter of Law . . . . . . . . . . . . . . . . . . 72

3. Whether Teleglobe’s Waiver

of the Privilege for the Debtors’

Benefit in the Canadian

Insolvency Proceedings Entitles

them to the Documents . . . . . . . . . . . . 74

4. Conclusion and Remand . . . . . . . . . . . 77

B. The Effect of Funneling Documents

Through BCE’s In-House Counsel . . . . . . . . 78

VI. Potential Alternate Sustaining Grounds . . . . . . . . . . 85

A. The Fiduciary Exception to the

Attorney-Client Privilege . . . . . . . . . . . . . . . . 85

B. Affirming as a Discovery Sanction . . . . . . . . 92

VII. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

AMBRO, Circuit Judge

This is a twist on a classic corporate divorce story. It

6

begins much as Judge Richard Cudahy’s “classic corporate love

story”: “Company A meets Company B. They are attracted to

each other and after a brief courtship, they merge.” GSC

Partners CDO Fund v. Washington, 368 F.3d 228, 232 (3d Cir.

2004). Sadly, it does not last. Not long after Company A

acquires Company B, they start taking risks together, some of

which go terribly wrong. After only a year or so, Company B

is steeped in debt, and, not surprisingly, Company A begins to

“los[e] that lovin’ feelin’.”1 It leaves Company B, explaining

that it simply must do so in order to save itself. Jilted and out of

money, Company B promptly turns to that shelter for abandoned

corporations, the bankruptcy system.

In bankruptcy, Company B’s children (subsidiaries), also

in the shelter of bankruptcy, become indignant, and they sue

Company A for all manner of ills relating to the break-up. Here,

we deal not with the merits of the action, but with a pre-trial

dispute over corporate documents. Everyone agrees that the

attorney-client privilege protects these documents against third

parties. The wrinkle is that they were produced by and in

communication with attorneys who represented the entire

corporate family back when they all got along.

The question, then, is whether Company A may assert the

1

Righteous Brothers, You’ve Lost That Lovin Feelin, on YOU’VE

LOST THAT LOVIN FEELIN (Phillies 1965).

7

privilege against its former family members. Because we

conclude that the District Court’s factual findings do not support

setting aside the parent company’s privilege in this case, we

vacate its order compelling production and remand for further

proceedings.

I. Facts and Procedural History

A. The Parties and Underlying Causes of Action

This action began with a complaint brought in a Chapter

11 bankruptcy case. The debtors (“Debtors”) are the wholly

owned United States subsidiaries of a Canadian

telecommunications company formerly known as Teleglobe,

Inc. (“Teleglobe”). Teleglobe and the Debtors are undergoing

reorganization in Ontario in accordance with the Canadian

Companies’ Creditors Arrangement Act (the “Arrangement

Act”), a form of bankruptcy protection similar to Chapter 11. In

addition, the Debtors (but not Teleglobe), all but one2 of which

are Delaware corporations, are simultaneously undergoing

Chapter 11 reorganization in the District of Delaware. Until

recently, Teleglobe was a wholly owned subsidiary of Bell

Canada Enterprises, Inc. (“BCE”), Canada’s largest

2

One is a Puerto Rico corporation.

8

telecommunications company.3

In 2000, BCE, which had previously owned a 23%

minority stake in Teleglobe, purchased all its remaining shares

(directly and indirectly through subsidiaries), thus taking control

of the company. According to the Debtors, in late 2000 BCE

directed Teleglobe to accelerate the development of a fiberoptic

network called GlobeSystem. BCE pledged its financial support

to the project and caused Teleglobe and its subsidiaries (the

Debtors) to borrow some $2.4 billion from banks and

bondholders. The bond debt was guaranteed by one of the

Debtors. Teleglobe exhausted its funding in 2001, and in

November of that year BCE approved an additional $850

million equity infusion for Teleglobe and its subsidiaries. These

monies were to be disbursed at the sole discretion of Jean

Monty, then Chairman and CEO of BCE as well as Chairman

and CEO of Teleglobe. BCE announced its intention to

continue funding Teleglobe in December 2001.

About this time BCE began working on what personnel

referred to as Project X—a comprehensive reassessment of

BCE’s plans for Teleglobe. Lurking in the background was

3

As a result of the Canadian reorganization process,

Teleglobe, now known as VSNL International Canada, operates

as a subsidiary of VSNL, a telecommunications company

organized in India, which itself is owned by the Tata Group, an

Indian conglomerate.

9

BCE’s declining confidence in GlobeSystem’s ultimate

potential.4 In the course of Project X, BCE considered a variety

of options, including maintaining its funding in the hope that

GlobeSystem would be profitable, restructuring Teleglobe in

such a way that it could continue as a viable subsidiary, and

simply cutting off funding (which would send Teleglobe and its

subsidiaries into a liquidating bankruptcy). In early April 2001,

BCE publicly announced that it was reassessing its funding of

Teleglobe; just a few weeks later, it ceased its funding,

effectively abandoning Teleglobe. GlobeSystem was not

operational, and so Teleglobe had no means of paying back its

multi-billion dollar debt. Consequently, within weeks Teleglobe

and the Debtors filed for Arrangement Act relief in Canada, and

the Debtors also filed for Chapter 11 relief in Delaware.

4

As stock market junkies may recall, Teleglobe was but one

of many victims of the “telecom meltdown” of 2000–2001. In

the late 1990s deregulation in the United States and Europe

touched off a rush to build new telecom infrastructure. Like so

many other companies in that period, Teleglobe spent much debt

capital to build fiberoptic lines around the world. Because of

the ensuing glut of infrastructure, prices tumbled, and Teleglobe,

along with a host of other over-leveraged telecom firms, went

bankrupt. See, e.g., Peter Elstrom & Heather Timmons,

Telecom Meltdown, BUSINESSWEEK, Apr. 23, 2001, at 100;

Gordon Pitts, When Friends Do Business with Each Other,

GLOBE & MAIL (CANADA), Apr. 27, 2002, at B1.

10

For BCE’s role in funding and then abandoning the

GlobeSystem project, the Debtors sued it in this adversary

proceeding.5 They assert several causes of action, including

breach of contract, breach of fiduciary duties, estoppel, and

misrepresentation (whether fraudulent or negligent). All claims

relate to the manner in which BCE ceased funding Teleglobe,

the Debtors’ corporate parent. Debtors’ theme is that BCE

reneged on binding commitments to fund Teleglobe and

fraudulently or negligently induced Teleglobe and the Debtors

to continue incurring debt in reliance on those commitments,

thus harming, inter alia, Teleglobe, the Debtors, and the

Debtors’ creditors. Moreover, they allege that BCE, as the

controlling shareholder of Teleglobe and the Debtors while

those entities were insolvent, breached its fiduciary duties to the

Debtors.

B. The Privilege Dispute

In the District of Delaware Bankruptcy Court, the

Debtors and the Creditors Committee began exploring through

5

At one time the committee of unsecured creditors (the

“Creditors’ Committee”), appointed under 11 U.S.C.

§ 1102(a)(1), was also a plaintiff; it, however, has been

dissolved with the confirmation of the Debtors’ plan of

reorganization.

11

Rule 20046 discovery the possibility of suing BCE for the

manner in which it abandoned Teleglobe and the Debtors. In

response to discovery requests, BCE marked 98 documents as

protected by a “common interest privilege.”7 When the creditors

moved to compel production, BCE responded that the

documents were privileged because “BCE attorneys consulted

with attorneys, officers, or employees of Teleglobe, Inc. or its

subsidiaries to discuss or provide legal advice in matters where

BCE and Teleglobe, Inc. (or its subsidiaries) shared a common

legal interest.” App. at A01110. BCE further stated that the

“privilege will continue to exist until the Debtors file a litigation

against BCE.” Id.

At a hearing in the Bankruptcy Court, BCE—in keeping

with the theme of its argument—agreed to produce (even

without the filing of a suit) the “common interest” documents to

the Debtors, seemingly agreeing that they fell within the scope

of their shared interest, and the Bankruptcy Court entered an

order to that effect. BCE did not specifically admit that it was

required to produce the documents; it merely agreed to do so.

It continued to maintain, however, that the rest of the documents

6

Federal Rule of Bankruptcy Procedure 2004 allows parties

with an interest in the bankruptcy estate to conduct discovery

into matters affecting the estate.

7

We assume that BCE meant to invoke the joint-client

privilege, rather than the common-interest privilege. We

explain the difference in Part IV.C, infra.

12

designated as privileged represented advice provided solely to

it and were not part of any joint representation with Teleglobe

or the Debtors. It is unclear from the record exactly what the 98

“common interest” documents contained that BCE agreed to

produce, but the privilege logs reflect that they primarily

consisted of documents created by BCE’s in-house counsel on

the subject of Teleglobe’s financing and restructuring. At the

same time, the privilege log (exclusive of the 98 “common

interest” documents) lists many other documents reflecting legal

advice on Project X matters that BCE claimed—then and

now—were intended as advice solely to it and not as part of any

joint representation. See generally App. at A00967–A01091.

Once the Debtors and Creditors’ Committee filed their

suit against BCE, the District Court withdrew its automatic

reference to the Bankruptcy Court and began handling the suit

itself. The District Court held an initial discovery conference at

which BCE reasserted that it had produced all of the documents

that it thought were generated as a result of a

BCE/Teleglobe/Debtors joint representation and that the

documents it was withholding reflected advice provided to and

intended solely for BCE. App. at A00264–65. The Debtors did

not press the joint representation/common interest point at that

time, nor did they argue for a broader scope of the joint

representation/common interest than BCE had admitted; rather,

they focused on an extension of the “conflicted fiduciary” line

13

of cases, see Part VI.A, infra.8 App. at A00262–63.

The District Court ended up referring the discovery

dispute to a Special Master—C.J. Seitz, Jr., Esquire. In its

initial written response to the Debtors’ motion to compel

production before the Special Master, BCE stated that it had, in

response to the Bankruptcy Court’s Rule 2004 order, “produced

to the Debtors all the documents that were protected by a

common interest.” App. at A0197. BCE further stated that it

had reviewed all of the documents on the privilege log and that

the only documents that remained designated as privileged were

those “reflect[ing] the provision of legal work solely to BCE.”

Id.

8

In brief, these cases provide that when a corporation’s

shareholders attempt to bring a derivative suit on behalf of the

corporation against its directors for breaching their fiduciary

duties, the shareholders can invade the corporation’s privilege

upon showing “good cause.” Garner v. Wolfinbarger, 430 F.2d

1093, 1103–04 (5th Cir. 1970). A more expansive view of the

rule is phrased thus: “where a corporation seeks advice from

legal counsel, and the information relates to the subject of a later

suit by a minority shareholder in the corporation, the corporation

is not entitled to claim the [lawyer-client] privilege as against its

own shareholder, absent some special cause.” Valente v.

PepsiCo, Inc., 68 F.R.D. 361, 367 (D. Del. 1975). As detailed

in Part VI.A, Delaware courts have followed Garner but

declined broadly to apply Valente.

14

The Debtors then expanded their argument by contending

that the scope of the joint representation was broader than BCE

admitted. Specifically, they claimed that various attorneys

represented all of the entities on the matters of BCE’s decision

to cease funding Teleglobe and Teleglobe’s resulting

restructuring. BCE, on the other hand, claimed that it retained

its own attorneys to advise it on those matters. The Special

Master found that the Debtors had not met their burden of

proving an exception to the attorney-client privilege. The

evidence, he concluded initially, merely showed that BCE’s in-

house counsel represented Teleglobe and the Debtors

occasionally; it did not show a broad joint representation as to

the abandonment of Teleglobe. Recognizing, however, that the

Debtors did not trust BCE’s representation that the documents

marked as privileged reflected advice provided solely to BCE,

the Special Master ordered a 50-document audit by his in

camera review to ensure the accuracy of BCE’s representations.

The Special Master also rejected the Debtors’ conflicted

fiduciary argument, noting that the Delaware Court of Chancery

has refused to adopt it in its broader form. Deutsch v. Cogan,

580 A.2d 100, 105 (Del. Ch. 1990) (“Although neither the

Garner nor Valente case is binding on this Court, Delaware

courts have consistently followed Garner and declined to

broadly apply Valente.”) (citations omitted). More importantly,

the Special Master forestalled any further “conflicted fiduciary”-

style argument by ruling that neither Teleglobe nor the Debtors’

boards were conflicted in any sense because all of their duties

15

flowed back up to BCE (and not, as the Debtors argued, to their

creditors). See Anadarko Petroleum Corp. v. Panhandle

Eastern Corp., 545 A.2d 1171, 1174 (Del. 1988) (“[I]n a parent

and wholly-owned subsidiary context, the directors of the

subsidiary are obligated only to manage the affairs of the

subsidiary in the best interests of the parent and its

shareholders.”). The Special Master, however, did not make an

express finding of fact on when the Debtors became insolvent

(or entered the amorphous9 “zone of insolvency”), reasoning

instead that there was no way to get from the Debtors’ directors

owing fiduciary duties to creditors of the Debtors on one hand

to BCE owing a duty to those creditors on the other.

According to the Special Master, “[s]hortly after the

Debtors made their selection of documents for in camera

review, the wheels started coming off [BCE’s] privilege

wagon.” App. at A0030. Before the review, BCE withdrew its

privilege assertion for six of the 50 documents that the Debtors

9

A footnote from the Delaware Supreme Court’s latest

opinion on a related issue explains that this “zone” is yet ill-

defined: “In light of its ultimate ruling, the Court of Chancery

did not attempt to set forth a precise definition of what

constitutes the ‘zone of insolvency.’ Our holding in this opinion

also makes it unnecessary to precisely define a ‘zone of

insolvency.’” N. Am. Catholic Educ. Programming Found., Inc.

v. Gheewalla, ___ A.2d ___, 2007 WL 1453705, at n.20 (Del.

2007).

16

selected. Then, the Special Master determined that three of the

documents did not involve the provision of legal advice at all,

and three lent credence to the Debtors’ argument that BCE

attorneys jointly represented BCE and Teleglobe on the issue of

BCE’s abandonment. After the initial in camera review, BCE

withdrew the privilege assertion for still more documents.

Having reviewed 44 documents in camera, the Special

Master issued a supplemental decision in which he concluded

that BCE’s revised privilege claims and his review of documents

in camera “raised serious questions about” the reliability of the

privilege log, whether BCE attorneys jointly represented BCE

and Teleglobe on the abandonment issue, whether the

documents withheld reflected legal advice provided solely to

BCE, and whether the documents withheld were in fact

privileged. App. at A0031. He ordered BCE to review and

revise the privilege log and to submit all purportedly privileged

documents to him for in camera review.

BCE culled its privilege log to just over 1,000

documents. Then, between the submission of the revised

privilege log and the submission of the actual documents, BCE

withdrew the assertion of privilege for over 100 additional

documents. BCE still wasn’t finished; while the in camera

review proceeded, it withdrew its assertion of privilege in four

separate letters to the Special Master, covering well over 100

more documents.

17

One of the issues raised by the Debtors in supplemental

briefing was BCE’s apparent over-designation of privileged

documents. According to the Debtors, this was substantial

enough to merit wholesale disclosure of the documents on

BCE’s privilege log as a discovery sanction. The Special

Master agreed that BCE “failed the audit in multiple

ways—withdrawing documents before in camera review,

claiming privilege over documents that did not reflect legal

advice, and claiming privilege over documents where it

appeared that BCE in-house attorneys and outside counsel

jointly represented BCE, Teleglobe, or the Debtors on matters

of common interest.”

In his final decision, the Special Master declined to

impose disclosure as a discovery sanction. But he nonetheless

reversed himself and ordered the production of all of the

documents on the privilege log. Having reviewed some 800

documents in camera, he found that they “revealed a broad legal

representation of both BCE and Teleglobe by BCE’s in-house

attorneys relating to Teleglobe’s restructuring alternatives.”

App. at A0047–48. He further found that all of the documents

on the privilege log were disclosed to BCE’s in-house counsel,

which made them discoverable because those attorneys were

jointly representing Teleglobe and could not, therefore, withhold

the documents from it. Id. at A0055. He applied this reasoning

even to documents produced by outside counsel hired only to

18

work for BCE.10

The District Court affirmed the Special Master’s decision

and ordered BCE to turn over to the Debtors all of the

documents. BCE argued that the Special Master’s finding of a

broad joint representation between it and Teleglobe was

irrelevant because he had not found a joint representation

between it and the Debtors. Unless the Debtors were a party to

the joint representation, BCE argued, they could not invade its

privilege. The Court rejected this argument on three grounds:

(1) BCE made a binding agreement to disclose all

communications generated as part of a BCE/Teleglobe joint

representation, and so finding a joint representation between the

two was all that was needed; (2) the Debtors, as wholly owned

subsidiaries of Teleglobe, were parties to the joint representation

as a matter of law, and (3) even the documents that fell outside

of the joint representation (i.e., were produced by outside

counsel) must be disclosed because they were shared with

BCE’s in-house attorneys, who jointly represented Teleglobe.

II. Jurisdiction

10

Specifically, the Special Master concluded that the law

firms Strikeman Elliot and Shearman & Sterling produced at

least some documents for the sole benefit of BCE, but he

ordered the production of those documents because they were

shared with BCE’s in-house attorneys, who were jointly

representing it and Teleglobe.

19

This is an appeal from an interlocutory order.

Nevertheless, we have jurisdiction under the collateral order

doctrine, which provides an exception to the finality requirement

of 28 U.S.C. § 1291. Under it, an immediate appeal lies if the

following elements are met: “(1) the order from which the

appellant appeals conclusively determines the disputed question;

(2) the order resolves an important issue that is completely

separate from the merits of the dispute; and (3) the order is

effectively unreviewable on appeal from a final judgment.” In

re Ford Motor Co., 110 F.3d 954, 958 (3d Cir. 1997) (citing

Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 32 F.3d 851,

860 (3d Cir. 1994)).

Here, the first and third prongs are clearly met, as the

District Court ordered the production of some 800 documents

currently in dispute. See In re Ford Motor Co., 110 F.3d at 958

(holding that the first prong is met when a district court orders

the production of documents). Once documents are disclosed,

any dispute over their privileged status is effectively moot and

unreviewable, as the very purpose of the privilege is frustrated

by compelled disclosure. Id. at 963 (“[T]he limited assurance

that the protected material will not be disclosed at trial ‘will not

suffice to ensure free and full communication by clients who do

not rate highly a privilege that is operative only at the time of

trial.’” (quoting Chase Manhattan Bank, N.A. v. Turner &

Newall, PLC, 964 F.2d 159, 165 (2d Cir. 1992))).

The only question, then, is whether the privilege issue is

20

sufficiently separate from the merits of the suit. It is, as we have

no occasion to consider the issues that lie at the heart of the

case: the existence, content, and alleged breach of any contract

between BCE, Teleglobe, and/or the Debtors; the content and

fraudulent or negligent nature of any representations made by

BCE; and the alleged breach by BCE of fiduciary duties it

purportedly owed to the Debtors. Rather, we concern ourselves

with the extent to which BCE, Teleglobe, and the Debtors were

jointly represented by counsel and the effect any joint

representation has on BCE’s ability to shield documents from

disclosure. In this context, we have little trouble concluding that

we have jurisdiction over this appeal.

III. Choice of Law

BCE argues that Canadian law should govern all aspects

of this appeal; the Debtors, on the other hand, argue for

Delaware law. As a federal court exercising jurisdiction over

state-law claims, we apply the choice-of-law rules of Delaware,

the forum state. Hammersmith v. TIG Ins. Co., 480 F.3d 220,

226 (3d Cir. 2007).

“Delaware courts look to the Restatement (Second) of

Conflict[s] of Laws for guidance in choice of law disputes.”

Gloucester Holding Corp. v. U.S. Tape & Sticky Prods., LLC,

832 A.2d 116, 124 (Del. Ch. 2003). Here, § 139 of the

Restatement applies:

21

(1) Evidence that is not privileged under the local law of

the state which has the most significant relationship with

the communication will be admitted, even though it

would be privileged under the local law of the forum,

unless the admission of such evidence would be contrary

to the strong public policy of the forum.

(2) Evidence that is privileged under the local law of the

state which has the most significant relationship with the

communication but which is not privileged under the

local law of the forum will be admitted unless there is

some special reason why the forum policy favoring

admission should not be given effect.

RESTATEMENT (SECOND) OF CONFLICTS OF LAWS § 139 (1971).

These provisions presuppose a conflict between the law

of the forum state and the law of the state with the most

significant relationship. This is because courts typically wade

into choice-of-law determinations when those laws truly

conflict. See Huber v. Taylor, 469 F.3d 67, 74 (3d Cir. 2006)

(citing On Air Entm’t Corp. v. Nat’l Indem. Co., 210 F.3d 146,

149 (3d Cir. 2000)). While there are no reported Delaware cases

on this point, we predict that Delaware would follow the

practice of the federal system and most states, and decide a

choice-of-law dispute only when the proffered legal regimes

actually conflict on a relevant point.

22

BCE argues for Canadian law here, but concedes that it

has found no relevant conflict of Canadian with Delaware law.11

This undercuts BCE’s argument, particularly given that the

Restatement favors the admission of evidence when the law of

the forum state so requires; thus, if applying Canadian law will

safeguard the privilege, it is BCE’s responsibility not only to

highlight the legal conflict, but also to point to “some special

reason” favoring protection. See RESTATEMENT (SECOND) OF

CONFLICTS OF LAWS § 139 cmts. c & d. As BCE has not

informed us of a conflict, cites Delaware law extensively (with

comparatively few Canadian decisions noted), and concedes that

the law in Canada is not materially different than Delaware, we

rely on Delaware authority in reaching our conclusions. See

Huber, 469 F.3d at 74.

We recognize that BCE has informed us of a true conflict

on an issue the Debtors raise as an alternate sustaining

ground—namely, whether the Debtors are entitled to the

disputed documents under the fiduciary exception to the

attorney-client privilege. Though that exception is well-

entrenched in Delaware law, it does not exist in Canada. We

deal with this issue more fully in Part VI.A.

11

In oral argument before our Court, BCE’s counsel stated

that BCE and he “don’t think there’s a difference” between

Delaware and Canadian law on the issues presented by this

appeal.

23

IV. Summary of the Law

This appeal raises core questions about the proper

operation of a corporate family’s centralized in-house legal

department. Because answering those questions requires

delving into a variety of concepts related to the co-client (or

joint-client) privilege, its exceptions, its scope, and a lawyer’s

ethical obligations, a summary of relevant law sets the backdrop.

We begin with a basic review of the attorney-client

privilege—and how it has been adapted to accommodate the

corporate client. We continue with a discussion of how

disclosing otherwise privileged communications to third parties

waives the privilege. Next, we explore two oft-confused

privileges: (1) the co-client (or joint-client) privilege, which

applies when multiple clients hire the same counsel to represent

them on a matter of common interest,12 and (2) the community-

of-interest (or common-interest) privilege, which comes into

play when clients with separate attorneys share otherwise

privileged information in order to coordinate their legal

activities. Neither the co-client nor community-of-interest

privilege is effective in adverse litigation between the former

clients, so we next discuss the contours of the adverse-litigation

12

Though the term “common interest” is used in describing

both the co-client and community-of-interest privileges, these

privileges are distinct. See Part IV.C.2, infra.

24

exception. Then, we explore how courts deal with joint

representations that go wrong because of impermissible attorney

conflicts of interest. Finally, we put all of these doctrines

together to address how they interact in the modern corporate in-

house counsel’s office.

A. The Attorney-Client Privilege

The attorney-client privilege protects communications

between attorneys and clients from compelled disclosure. It

applies to any communication that satisfies the following

elements: it must be “(1) a communication (2) made between

privileged persons (3) in confidence (4) for the purpose of

obtaining or providing legal assistance for the client.”

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 68

(2000). “Privileged persons” include the client, the attorney(s),

and any of their agents that help facilitate attorney-client

communications or the legal representation. Id. § 70.

The attorney-client privilege is the oldest of the common-

law privileges. Klitzman, Klitzman & Gallagher v. Krut, 744

F.2d 955, 960 (3d Cir. 1984). Like all privileges, it is an

exception to the common-law maxim that the public has a right

to “‘every man’s evidence.’” United States v. Bryan, 339 U.S.

323, 331 (1950) (quoting 8 J. WIGMORE, EVIDENCE § 2192 (3d

ed. 1940)). Though initially confined to communications made

in anticipation of litigation, American courts rejected that

limitation at the outset. PAUL R. RICE, ATTORNEY-CLIENT

25

PRIVILEGE IN THE UNITED STATES § 1:12 (2d ed. 1999)

(hereinafter “RICE”) (citing, e.g., Parker v. Carter, 4 Munf. 273,

1814 WL 667, at *9 (Va. 1814) (“The court is also of [the]

opinion[] that [the privilege] is not confined to facts disclosed,

in relation to suits actually depending at the time, but extends to

all cases in which a client applies . . . to his counsel or attorney

. . . for his aid in the line of his profession.”)). This is because

so confining the privilege would discourage clients from seeking

the advice of counsel before problems arise. Parker, 1814 WL

at *9.

As the Supreme Court has noted more recently, the

purpose of the attorney-client privilege

is to encourage full and frank communication

between attorneys and their clients and thereby

promote broader public interests in the

observance of law and administration of justice.

The privilege recognizes that sound legal advice

or advocacy serves public ends and that such

advice or advocacy depends upon the lawyer’s

being fully informed by the client.

Upjohn Co. v. United States, 449 U.S.383, 389 (1981); accord

The Queen v. McClure, [2001] 1 S.C.R. 445, at ¶¶ 32–33 (Can.

2001); Deutsch v. Cogan, 580 A.2d at 104. Because the

privilege carries through policy purposes—encouraging

attorney-client communication to enhance compliance with the

26

law and facilitating the administration of justice, the Supreme

Court has not applied it mechanically. Upjohn, 449 U.S. at 392.

It is essential that parties be able to determine in advance with

a high degree of certainty whether communications will be

protected by the privilege. Id. at 393; see also Deutsch, 580

A.2d at 106.

As common-law courts developed the privilege in an age

in which clients were almost exclusively natural persons, more

modern courts sought to adapt it to the now ubiquitous corporate

client. For more than a century, common-law courts have

recognized that communications between corporate clients and

their attorneys are indeed privileged. See Radiant Burners, Inc.

v. Am. Gas Ass’n, 320 F.2d 314, 319 & n.7 (7th Cir. 1963)

(citing English cases dated as early as 1833, and American cases

as early as 1885, for the proposition that corporations can assert

the attorney-client privilege).

Because corporations act through human agents, the

question of whose communications with the corporation’s

attorneys are entitled to protection comes up often. RICE § 4:11.

In Upjohn the Supreme Court rejected the so-called “control

group theory”—that only communications between high-level

managers and corporate attorneys merit protection. 449 U.S. at

392. Instead, it held that when a corporation’s managers require

its employees to give information to its attorneys in the course

of providing legal advice, those communications also are

protected. Id. at 396. This serves the policy goals of the

27

privilege—to enhance compliance with the law and facilitate the

administration of justice—by encouraging open communication

between attorneys and clients. Id. at 389, 394.

The lesson for us is that it is important not to confuse

these overarching policy goals with the means of achieving

them. Communication between counsel and client is not, in and

of itself, the purpose of the privilege; rather, it only protects the

free flow of information because it promotes compliance with

law and aids administration of the judicial system. Cf. United

States v. Zolin, 491 U.S. 554, 563 (1989) (explaining that

attorney-client communication facilitating fraud is not

privileged because that sort of communication impedes the

administration of justice). Thus, following Upjohn’s lead in not

applying the privilege mechanically does not counsel in favor of

applying the privilege anytime it might increase the flow of

information; rather, Upjohn counsels a more nuanced inquiry

into whether according a type of communication protection is

likely to encourage compliance-enhancing communication that

makes our system for resolving disputes more operable.

B. The Disclosure Rule

A communication is only privileged if it is made “in

confidence.” RESTATEMENT (THIRD) OF THE LAW GOVERNING

LAWYERS § 68. In other words, if persons other than the client,

its attorney, or their agents are present, the communication is not

made in confidence, and the privilege does not attach. The

28

disclosure rule operates as a corollary to this principle: if a client

subsequently shares a privileged communication with a third

party, then it is no longer confidential, and the privilege ceases

to protect it. See DEL. R. EVID. 510. This is because the act of

disclosing signals that the client does not intend to keep the

communication secret. RICE § 9:28. In addition, it prevents

clients from engaging in strategic selective disclosure. United

States v. Bernard, 877 F.2d 1463, 1465 (10th Cir. 1989). The

privilege does, after all, hinder the truth-seeking process, and so

we carefully police its use. United States v. Doe, 429 F.3d 450,

453 (3d Cir. 2005).13

Disclosing a communication to a third party

unquestionably waives the privilege. A harder question is

whether the waiver also ends the privilege as to any related but

not disclosed communications. In answering this question, our

touchstone is fairness. See Tackett v. State Farm Fire & Cas.

Ins. Co., 653 A.2d 254, 259 (Del. 1995); see also Westinghouse

Elec. Corp. v. Republic of the Philippines, 951 F.2d 1414, 1426

n.12 (3d Cir. 1991). When one party takes advantage of another

by selectively disclosing otherwise privileged communications,

courts broaden the waiver as necessary to eliminate the

13

In stating that we construe the privilege strictly, we do not

mean that it is disfavored. As Upjohn, McClure, and Deutsch

indicate, the attorney-client privilege is integral to the

functioning of our legal system. Recognizing, however, that it

limits the truth-seeking process, we carefully monitor it to

prevent its abuse.

29

advantage. Zirn v. VLI Corp., 621 A.2d 773, 781–82 (Del.

1993) (“The purpose underlying the rule of partial disclosure is

one of fairness to discourage the use of the privilege as a

litigation weapon.”); see also RICE § 9:31. Extending the

waiver, however, is not a punitive measure, so courts do not

imply a broader waiver than necessary to ensure that all parties

are treated fairly.14 See RICE 9:31. Moreover, when the

disclosure does not create an unfair advantage, courts typically

limit the waiver to the communications actually disclosed. See

In re Keeper of Records (Grand Jury Subpoena Addressed to

XYZ Corp.), 348 F.3d 16, 24–25 (1st Cir. 2003); cf.

Westinghouse, 951 F.2d at 1427 n.14.

C. Privileged Information Sharing

1. The Co-Client (or Joint-Client)

Privilege

It is often expedient for two or more people to consult a

single attorney. The rules of professional conduct allow a

lawyer to serve multiple clients on the same matter so long as all

clients consent, and there is no substantial risk of the lawyer

being unable to fulfill her duties to them all. RESTATEMENT

(THIRD) OF THE LAW GOVERNING LAWYERS §§ 128–31. Just as

14

This is not to say that district courts may not separately

impose disclosure as an sanction for improper behavior; it

merely means that the scope of the waiver is only as broad as

necessary to remedy any unfair advantage.

30

in single-client representation, the lawyer and co-clients15 begin

their relationship when the co-clients convey their desire for

representation, and the lawyer consents. Id. § 14. Like single-

client representation, nothing prevents joint representation from

arising by implication, but, as a District Court in Maryland

recently noted, courts must be careful not to imply joint

representations too readily:

What the Court takes exception to is [the

plaintiff’s] effort to . . . argue, in effect, that a

joint representation of Party A and Party B may

somehow arise through the expectations of Party

B alone, despite Party A’s views to the contrary.

This position is untenable, because it would . . .

allow the mistaken (albeit reasonable) belief by

one party that it was represented by an attorney

. . . to serve to infiltrate the protections and

privileges afforded to another client.

Neighborhood Dev. Collaborative v. Murphy, 233 F.R.D. 436,

441–42 (D. Md. 2005) (internal citations and quotation marks

deleted). Moreover, as the Restatement details, it is important

to remember that

15

We use the terms “co-clients” and “joint clients”

interchangeably. Both refer to multiple clients engaging one or

more common attorneys to represent them on a matter of interest

to all.

31

clients of the same lawyer who share a common

interest are not necessarily co-clients. Whether

individuals have jointly consulted a lawyer or

have merely entered concurrent but separate

representations is determined by the

understanding of the parties and the lawyer in

light of the circumstances.

Co-client representations must also be

distinguished from situations in which a lawyer

represents a single client, but another person with

allied interests cooperates with the client and the

client’s lawyer.

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 75

cmt. c (internal cross-references omitted).

Once begun, a co-client representation generally

continues until a client discharges the lawyer or the lawyer

withdraws. Id. § 31. In addition, numerous courts have

recognized that the relationship may terminate by implication.

Fed. Deposit Ins. Corp. v. Ogden Corp., 202 F.3d 454, 463 (1st

Cir. 2000) (“A joint attorney-client relationship remains intact

until it is expressly terminated or until circumstances arise that

readily imply to all the joint clients that the relationship is

over.”) (emphasis in original); see also Flynt v. Brownfield,

Bowen, & Bally, 882 F.2d 1048, 1051 (6th Cir. 1989) (holding

that terminating attorney-client relationship requires “conduct

32

dissolving the essential mutual confidence” between them); In

re Dow, 132 B.R. 853, 858 (Bankr. S. D. Ohio 1991) (same). In

particular, a joint representation terminates when it becomes

clear to all parties that the clients’ legal interests have diverged

too much to justify using common attorneys. RICE § 2:4 (citing

Mass. Eye & Ear Infirmary v. QLT Phototherapeutics, Inc., 167

F. Supp. 2d 128, 129 (D. Mass. 2001)).

While it is permissible for lawyers and clients to limit the

scope of representation in a single-client representation, see

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS

§ 19, it is particularly common in co-client situations because of

the limited congruence of the clients’ interests. As the

Restatement notes, a co-client relationship is limited by “the

extent of the legal matter of common interest.” Id. § 75 cmt. c.

While written agreements limiting the scope of a joint

representation might be preferable, nothing requires this so long

as the parties understand the limitations.

The District Court for the Northern District of California

noted in Sky Valley Ltd. P’ship v. ATX Sky Valley Ltd., 150

F.R.D. 648, 652–53 (N.D. Cal. 1993), that a wide variety of

circumstances are relevant to the determination of whether two

or more parties intend to create a joint-client relationship,

particularly how the parties interact with the joint attorneys and

with each other. These same circumstances are relevant to

33

determining the scope of any joint representation.16 The keys to

deciding the scope of a joint representation are the parties’ intent

and expectations, and so a district court should consider

carefully (in addition to the content of the communications

themselves) any testimony from the parties and their attorneys

on those areas. As explained in section D of this Part, finding

too broad the scope of a joint representation gives the parties

more control over each other’s ability to waive the privilege

than they intended, and it subjects them to losing it in litigation

with one another.

When co-clients and their common attorneys

communicate with one another, those communications are “in

confidence” for privilege purposes. Hence the privilege protects

those communications from compelled disclosure to persons

outside the joint representation. Moreover, waiving the joint-

client privilege requires the consent of all joint clients.

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS

§ 75(2). A wrinkle here is that a client may unilaterally waive

the privilege as to its own communications with a joint attorney,

so long as those communications concern only the waiving

client; it may not, however, unilaterally waive the privilege as

to any of the other joint clients’ communications or as to any of

16

The Sky Valley Court’s list of more than 20, often

overlapping, factors strikes us as excessive; thus we do not

repeat them here.

34

its communications that relate to other joint clients.17 Id. at cmt.

e.

2. The Community-of-Interest (or

Common-Interest) Privilege18

17

As the Reporter’s Note in the Restatement laments, the

caselaw on this point is not as uniform as one would hope. Id.

§ 75 Reporter’s Note cmt. e. The divergence seems to rest on

difficulties in understanding the following statement from

Wigmore’s treatise: “Where the consultation was had by several

clients jointly, the waiver should be joint for joint statements,

and neither could waive for the disclosure of the other’s

statements; yet neither should be able to obstruct the other in the

disclosure of the latter’s own statements.” 8 J. WIGMORE,

EVIDENCE § 2328 (J. McNaughton rev. 1961) (second emphasis

added). Obtuse as this statement may seem, we believe that the

Restatement’s interpretation of it is sensible and, in any event,

correctly states the law in Delaware. Cf. Interfaith Hous. Del.,

Inc. v. Town of Georgetown, 841 F. Supp. 1393, 1402 (D. Del.

1994) (predicting that one common-interest client’s waiver of

the privilege does not waive it on behalf of all common-interest

clients).

18

Because the issues in our case involve clients of the same

attorneys, not clients with separate counsel, which would call for

a community-of-interest analysis, the rest of this section may

seem surplusage. But because the District Court (erroneously)

ruled that the Debtors and BCE were in a “community of

interest,” we examine the contours of that privilege. Indeed,

much of the caselaw confuses the community-of-interest

privilege (which is the same as the “common-interest privilege,”

35

Recognizing that it is often preferable for co-defendants

represented by different attorneys in criminal proceedings to

coordinate their defense, courts developed the joint-defense

privilege. In its original form, it allowed the attorneys of

criminal co-defendants to share confidential information about

defense strategies without waiving the privilege as against third

parties. Moreover, one co-defendant could not waive the

privilege that attached to the shared information without the

consent of all others.19 Later, courts replaced the joint-defense

privilege, which only applied to criminal co-defendants, with a

broader one that protects all communications shared within a

proper “community of interest.” whether the context be criminal

or civil.20 RICE § 4:35; see also Andrew R. Taggart, Parent-

Subsidiary Communications & the Attorney-Client Privilege, 65

see RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS

§ 76 Reporter’s Note cmt.b.) with the co-client privilege. Thus

it is important to detail the community-of-interest privilege for

the purpose of explaining how it and the co-client privilege

differ, and why only the latter applies in this case.

19

For a history of the joint-defense privilege, see generally

Craig S. Lerner, Conspirators’ Privilege & Innocents’ Refuge:

A New Approach to Joint Defense Agreements, 77 NOTRE DAME

L. REV. 1449, 1480–90 (2002).

20

According to the Restatement, the community-of-interest

privilege has completely replaced the old joint-defense privilege

for information sharing among clients with different attorneys.

Thus, courts should no longer purport to apply the joint-defense

privilege. RESTATEMENT (THIRD) OF THE LAW GOVERNING

LAWYERS § 76 Reporter’s Note cmt. b.

36

U. CHI. L. REV. 315 (1998). Thus, the community-of-interest

privilege allows attorneys representing different clients with

similar legal interests to share information without having to

disclose it to others. It applies in civil and criminal litigation,

and even in purely transactional contexts. RICE 4:35;

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS

§ 76.

Two aspects of the modern community-of-interest

privilege are noteworthy. First, to be eligible for continued

protection, the communication must be shared with the attorney

of the member of the community of interest. Cf. Ramada Inns,

Inc. v. Dow Jones & Co., 523 A.2d 968, 972 (Del. Super. Ct.

1986) (emphasizing that the relevant Delaware evidentiary rule

protects communications disclosed to an attorney). Sharing the

communication directly with a member of the community may

destroy the privilege.21 Second, all members of the community

must share a common legal interest in the shared

communication. RICE § 4:35. Delaware Rule of Evidence

502(b)(3), which sets out the State’s version of the community-

of-interest privilege, incorporates both requirements (that the

clients’ separate attorneys share information and that the clients

have a common legal interest):

21

Neither the Restatement nor Professor Rice emphasize this

requirement, though it appears in the plain text of the relevant

Delaware evidentiary rule, and Professor Rice acknowledges it.

See DEL R. EVID. 502(b)(3); RICE § 4:35 & n.44.1.

37

A client has a privilege to refuse to disclose and

to prevent any other person from disclosing

confidential communications[,] made for the

purpose of facilitating the rendition of

professional legal services to the client . . .[,] by

the client or the client’s representative or the

client’s lawyer or a representative of the lawyer to

a lawyer or a representative of a lawyer

representing another in a matter of common

interest.

DEL. R. EVID. 502(b)(3).

The requirement that the clients’ separate attorneys share

information (and not the clients themselves) derives from the

community-of-interest privilege’s roots in the old joint-defense

privilege, which (to repeat) was developed to allow attorneys to

coordinate their clients’ criminal defense strategies. See

Chahoon v. Commw., 21 Gratt. 822, 1871 WL 4931, at *11 (Va.

1871). Because the common-interest privilege is an exception

to the disclosure rule, which exists to prevent abuse, the

privilege should not be used as a post hoc justification for a

client’s impermissible disclosures. The attorney-sharing

requirement helps prevent abuse by ensuring that the common-

interest privilege only supplants the disclosure rule when

attorneys, not clients, decide to share information in order to

coordinate legal strategies.

38

Similarly, the congruence-of-legal-interests requirement

ensures that the privilege is not misused to permit unnecessary

information sharing. In a leading case, a District Court in South

Carolina explained the contours of the requirement:

A community of interest exists among different

persons or separate corporations where they have

an identical legal interest with respect to the

subject matter of a communication between an

attorney and a client concerning legal advice. The

third parties receiving copies of the

communication and claiming a community of

interest may be distinct legal entities from the

client receiving the legal advice and may be a

non-party to any anticipated or pending litigation.

The key consideration is that the nature of the

interest be identical, not similar, and be legal, not

solely commercial. The fact that there may be an

overlap of a commercial and a legal interest for a

third party does not negate the effect of the legal

interest in establishing a community of interest.

Duplan Corp. v. Deering Milliken, Inc., 397 F. Supp. 1146,

1172 (D.S.C. 1974).

The Restatement takes a more flexible approach than

Duplan toward the similarity and types of interests that qualify

as “common”: “[T]he common interest . . . may be either legal,

39

factual, or strategic in character. The interests of the separately

represented clients need not be entirely congruent.”

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 76

cmt. e. Professor Rice criticizes Duplan’s strictness and cites a

few cases announcing that the interest need not be identical

(though maintaining, contrary to the Restatement, that the

interest must be legal, rather than “factual or strategic”). RICE

§ 4:36 (citing, e.g., SCM Corp. v. Xerox Corp., 70 F.R.D. 508,

524–25 (D. Conn. 1976) (Newman, J.) (holding that legal

interests must be “demonstrably common” or the clients must

have a “substantial” risk of shared exposure to justify privileged

information-sharing)). Rice, however, still recognizes Duplan

as the leading approach. Id. (“This . . . standard . . . coined in

Duplan . . . has been widely followed.”). The Delaware courts

seem not to have taken a position on whether the common legal

interest must be identical, and we need not resolve the

congruence-of-legal-interests question here. For our purposes,

it is sufficient to recognize that members of the community of

interest must share at least a substantially similar legal interest.

We conclude with two points of caution. First, the

privilege only applies when clients are represented by separate

counsel. Thus, it is largely inapplicable to disputes like this one

that revolve around corporate family members’ use of common

attorneys (namely, centralized in-house counsel).22 Second,

22

This means that BCE’s invocation of the “common

interest” privilege in the Bankruptcy Court was out of place, as

BCE has never asserted that the parties were represented by

40

while the Restatement (confusingly) uses the term “common

interest” to describe the congruence of the parties’ interests in

both co-client and community-of-interest situations, the

concepts are not the same. Compare RESTATEMENT (THIRD) OF

THE LAW GOVERNING LAWYERS § 75(1) (“If two or more

persons are jointly represented by the same lawyer in a matter,

a communication of either co-client that . . . relates to matters of

common interest is privileged as against third persons.”), with

id. § 76(1) (“If two or more clients with a common interest in a

litigated or nonlitigated matter are represented by separate

lawyers and they agree to exchange information concerning the

matter, a communication of any such client . . . is privileged as

against third persons.”); cf. id. § 76 cmt. e & Reporter’s Note

cmt. b (explaining that co-client and community-of-interest

situations differ). In particular, because co-clients agree to share

all information related to the matter of common interest with

each other and to employ the same attorney, their legal interests

must be identical (or nearly so) in order that an attorney can

represent them all with the candor, vigor, and loyalty that our

ethics require. See Ogden, 202 F.3d at 461. In the community-

of-interest context, on the other hand, because the clients have

separate attorneys, courts can afford to relax the degree to which

clients’ interests must converge without worrying that their

separate counsel who properly shared information. Confusing

as this area of law is, parties asserting the privilege (who,

incidentally, bear the burden of proving it applies) are expected

to explain themselves with more precision than BCE has

throughout this litigation.

41

attorneys’ ability to represent them zealously and single-

mindedly will suffer.

D. The Exception for Adverse Litigation

The great caveat of the joint-client privilege is that it only

protects communications from compelled disclosure to parties

outside the joint representation. When former co-clients sue one

another, the default rule is that all communications made in the

course of the joint representation are discoverable. DEL. R.

EVID. § 502(d)(6); RESTATEMENT (THIRD) OF THE LAW

GOVERNING LAWYERS § 75(2). This rule has two bases: (1) the

presumed intent of the parties, and (2) the lawyer’s fiduciary

obligation of candor to both parties. Id. § 75 cmt. d. According

to the Restatement, it is permissible for co-clients to agree in

advance to shield information from one another in subsequent

adverse litigation, though the drafters concede finding no direct

authority for that proposition.23 Id. Reporter’s Note cmt d.

BCE argues that the default rule should be flipped when

the joint clients are a parent company and its wholly owned

subsidiary—i.e., courts should assume that communications

23

Indeed, the only case we have found dealing with such an

agreement is In re Mirant Corp., 326 B.R. 646, 652 (Bankr.

N.D. Tex. 2005) (applying Georgia law), in which the

Bankruptcy Court refused to give it effect. We have no

occasion here to predict whether Delaware courts would enforce

such agreements.

42

generated in the course of the joint representation are not

discoverable in adverse litigation. BCE’s rationale is that no

parent would want its subsidiary to be able to invade the

privilege in subsequent litigation, and so courts should not

presume that intent. Moreover, because parents and wholly

owned subsidiaries share the same interests, the parent’s intent

(to shield information) effectively controls.

Delaware courts have recognized that parents and their

wholly owned subsidiaries have the same interests because all

of the duties owed to the subsidiaries flow back up to the parent.

Cf. Anadarko, 545 A.2d at 1174 (“[I]n a parent and wholly-

owned subsidiary context, the directors of the subsidiary are

obligated only to manage the affairs of the subsidiary in the best

interests of the parent and its shareholders.”). While we

normally assume that a corporation’s primary interest is in

maximizing its economic value, the only interest of a wholly

owned subsidiary is in serving its parent. Id. at 1174. That

doing so may not always involve maximizing the subsidiary’s

economic value is of little concern. Trenwick Am. Litig. Trust

v. Ernst & Young LLP, 906 A.2d 168, 192 (Del. Ch. 2006).24 If

24

As Vice Chancellor Strine noted in that case, there is

nothing wrong (or even unusual) about a parent causing its

solvent wholly owned subsidiary to act in a way that benefits the

corporate family but harms the individual subsidiary. He

explained:

Assume for a moment that Trenwick [parent]

itself never went bankrupt. Imagine further that

it had bought another insurer and pledged a key

43

the subsidiary is not wholly owned, however, in the interest of

protecting minority shareholders we revert to requiring that

whoever controls the subsidiary seek to maximize its economic

value with requisite care and loyalty. See id. at 192 n.66.

Similarly, if the subsidiary is insolvent, we require the same in

the interest of protecting the subsidiary’s creditors. Id. at 204

n.96 (approving In re Scott Acquisition Corp., 244 B.R. 283,

286 (Bankr. D. Del. 2006) (holding that the fiduciary duties of

directors of an insolvent wholly owned subsidiary inure to the

benefit of the subsidiary’s creditors)); see also N. Am. Catholic

asset of Trenwick America [subsidiary] as

security for the purchase price. The purchase

goes wrong and causes Trenwick to become less

profitable, but not insolvent. To satisfy its

creditors, Trenwick causes Trenwick America to

sell the key pledged asset and uses the proceeds to

pay off the acquisition debt. As a result,

Trenwick America is less profitable and less

valuable. In this scenario, even though the course

of events posed no prospect of benefit for

Trenwick America when it is conceived solely as

an entity, there would be nothing troubling about

it from a fiduciary perspective. Rather, the

scenario would involve a garden-variety situation

when a parent corporation used the asset value of

one of its wholly-owned subsidiaries to help it

finance and absorb the down-side of the parent’s

larger business strategy.

Trenwick, 906 A.2d at 192 (emphasis added).

44

Programming Found., ___ A.2d at ___, 2007 WL 1453705, at

*7 (“[T]he creditors of an insolvent corporation have standing

to maintain derivative claims against directors on behalf of the

corporation for breaches of fiduciary duties. The corporation’s

insolvency makes the creditors the principal constituency

injured by any fiduciary breaches that diminish the firm’s value.

Therefore, equitable considerations give creditors standing to

pursue derivative claims against the directors of an insolvent

corporation. Individual creditors of an insolvent corporation

have the same incentive to pursue valid derivative claims on its

behalf that shareholders have when the corporation is solvent.”)

(emphasis in original) (internal citations and quotation marks

omitted).

In the context of a joint attorney representing a parent

and its solvent wholly owned subsidiary, BCE’s argument that

we should flip the normal default rule (that all information

shared in the course of a joint representation is not privileged in

subsequent adverse litigation between the former joint clients)

has some appeal, as it probably is more in line with the typical

parent company’s intent. But because parent-subsidiary

relationships often change, having opposite default rules for

wholly owned, solvent subsidiaries, and not-wholly owned or

insolvent subsidiaries, seems unwieldy. In the course of a joint

representation, a subsidiary could go from being wholly owned

and solvent to majority-owned or insolvent (or both). Under

those circumstances, it is not clear which default rule BCE

would have us apply. Because of the need for clarity and

45

certainty in privilege law, see Upjohn, 449 U.S. at 393, creating

multiple, ever-shifting default rules would be unwise. Simply

following the default rule against information shielding creates

simpler, and more predictable, ground rules.

Moreover, BCE’s argument overlooks the joint attorney’s

fiduciary obligations to both parties. In undertaking a joint

representation, the prospective joint attorney must always

consider whether she can fulfill her duties to each co-client. See

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS

§§ 128–31. When the co-clients desire to shield information

from one another, this inquiry becomes more difficult in light of

the prospective joint attorney’s duty of candor to each. See id.

§ 60 cmt. l. In situations in which the subsidiary may become

either partially owned or insolvent, a prospective joint attorney

would have to consider her ability not only to counsel both

clients, but to do so in the face of an information-shielding

agreement that could harm one of them. Thus applying the

default rule against information shielding, absent an affirmative

agreement to shield, makes good sense. The rule is widely

accepted and dovetails with the joint attorney’s duty of candor.

We predict that Delaware courts would apply the adverse

litigation exception in all situations, even those in which the

joint clients are wholly owned by the same person or entity.

E. When Joint Representation Goes Awry: The

Eureka Principle

46

The Restatement’s conflicts rules provide that when a

joint attorney sees the co-clients’ interests diverging to an

unacceptable degree, the proper course is to end the joint

representation. RESTATEMENT (THIRD) OF THE LAW GOVERNING

LAWYERS § 121 cmts. e(1)–(2). As the Court of Appeals for the

D.C. Circuit noted in Eureka Inv. Corp. v. Chicago Title Ins.

Co., 743 F.2d 932 (D.C. Cir. 1984) (per curiam), courts are

presented with a difficult problem when a joint attorney fails to

do that and instead continues representing both clients when

their interests become adverse. Id. at 937–38. In this situation,

the black-letter law is that when an attorney (improperly)

represents two clients whose interests are adverse, the

communications are privileged against each other

notwithstanding the lawyer’s misconduct. Id.; see also 8 J.

WIGMORE, EVIDENCE § 2312 (McNaughton rev. ed. 1961).

The context of the Eureka case was the joint

representation of an insured and insurer. Over the course of the

litigation, the parties began to disagree. The insured, a

developer trying to effect a condo conversion, wanted to settle

in order to get its conversion plans back on track. The title

insurer, on the other hand, wanted to continue opposing liability

and would not agree to within-policy-limits settlement terms.

Having decided that the insurer’s refusal to settle was tortious,

the insured entered into a unilateral settlement with its

adversaries and promptly sued the insurer for indemnification

and consequential damages. The trouble was that the insured

continued to use the joint attorneys throughout the process,

47

relying on their advice in deciding to enter into a unilateral

settlement and to sue the insurer. Thus, upon filing its action,

the insurer sought discovery of the insured’s communications

with the joint attorneys in the hope that those communications

would support the affirmative defense of non-cooperation. The

insurer argued that because those communications were

generated during the attorneys’ joint representation of the parties

on the claim against the insured, they were discoverable in an

action between the joint clients.

The Court rejected the insurer’s argument, holding

instead that “[t]he policy behind [the co-client privilege]—to

encourage openness and cooperation between joint

clients—does not apply to matters known at the time of

communication not to be in the common interest of the

attorney’s two clients.” Eureka, 743 F.2d at 937. It emphasized

that both the insured and the joint attorneys thought that they

had begun a separate, individual representation of the insured on

the insurance bad-faith claim that was distinct from the

underlying liability action, calling these understandings

“crucial.” Id. Noting the attorneys’ potential ethical violations,

the Court concluded that they were of no moment: “[C]ounsel’s

failure to avoid a conflict of interest should not deprive the

client of the privilege. The privilege, being the client’s, should

not be defeated solely because the attorney’s conduct was

ethically questionable.” Id. at 938. Though not yet explicitly

adopted by the Delaware courts, the Eureka principle is widely

accepted. See RESTATEMENT (THIRD) OF THE LAW GOVERNING

48

LAWYERS § 60 cmt. l.; RICE 4:33.

F. Putting It All Together: Parents, Subsidiaries,

and the Modern Corporate Counsel’s Office

“A striking development in the legal profession . . . has

been the rapid growth in both importance and size of in-house,

or corporate, counsel.” Abram Chayes & Antonia Chayes,

Corporate Counsel and the Elite Law Firm, 37 STAN. L. REV.

277, 277 (1985). The roles of in-house counsel are many, e.g.,

overseeing the corporation’s compliance with myriad regulatory

regimes. The primary advantages of in-house (rather than

outside) counsel are the breadth of their knowledge of the

corporation and their ability to begin advising senior

management on important transactions at the earliest possible

stage, often well before anyone would think to hire a law firm.

See id. at 280–81; Carl D. Liggio, The Changing Role of

Corporate Counsel, 46 EMORY L.J. 1201, 1208 (1997). While

there is much debate over how corporate counsel should go

about promoting compliance with law (e.g., the usefulness of

“noisy withdrawal” requirements versus going up the corporate

chain with concerns), both sides of the debate seem to see in-

house counsel as the “front lines” of the battle to ensure that

compliance while preserving confidential communications.

Compare William W. Horton, A Transactional Lawyer’s

Perspective on the Attorney-Client Privilege: A Jeremiad for

Upjohn, 61 BUS. LAW. 95 (2005), with Letter from Susan P.

Koniak, Roger C. Cramton & George M. Cohen (endorsed by

49

named academics) to Securities Exchange Commission (Dec.

1 7 , 2 0 0 2 ) , a v a i l a b l e a t

http://www.sec.gov/rules/proposed/s74502/skoniak1.htm.

Because in-house counsel are crucial and clear rules are needed

to sort out attorney-client privilege problems (particularly for

corporate groups), this section sets out how the various

principles we have discussed apply to a parent company’s in-

house counsel.

1. Intra-group Information Sharing:

Parents and Subsidiaries as Joint

Clients

Because parent companies often centralize the provision

of legal services to the entire corporate group in one in-house

legal department, it is important to consider how the disclosure

rule affects the sharing of information among corporate

affiliates. Recognizing that any other result would wreak havoc

on corporate counsel offices, courts almost universally hold that

intra-group information sharing does not implicate the

disclosure rule. This result is unquestionably correct. The

cases, however, vary in how they reach the result. The Glidden

case, which both parties cite, illustrates the conceptual muddle:

The universal rule of law, expressed in a variety

of contexts, is that the parent and subsidiary share

a community of interest, such that the parent (as

well as the subsidiary) is the “client” for purposes

50

of the attorney-client privilege. See Crabb v.

KFC Nat'l Management Co., No. 91-5474, 1992

WL 1321 (6th Cir. Jan.6, 1992) (“‘The cases

clearly hold that a corporate ‘client’ includes not

only the corporation by whom the attorney is

employed or retained, but also parent, subsidiary

and affiliate corporations.”’ (quoting United

States v. AT & T, 86 F.R.D. 603, 616 (D.D.C.

1979))). Consequently, disclosure of legal advice

to a parent or affiliated corporation does not work

a waiver of the confidentiality of the document,

because of the complete community of interest

between parent and subsidiary. Id. at * 2.

Numerous courts have recognized that, for

purposes of the attorney client privilege, the

subsidiary and the parent are joint clients, each of

whom has an interest in the privileged

communications. See, e.g., Polycast Tech. Corp.

v. Uniroyal, Inc., 125 F.R.D. 47, 49 (S.D.N.Y.

1989); Medcom Holding Co. v. Baxter Travenol

Lab., 689 F. Supp. 841, 842 (N.D. Ill. 1988).

Glidden Co. v. Jandernoa, 173 F.R.D. 459, 472–73 (W.D. Mich.

1997) (applying Delaware law). In the above-quoted paragraph,

the Court calls the members of the corporate family a single

client and joint clients—all in the same breath. Moreover, it

invokes the community-of-interest privilege, which we

explained in section C of this Part, supra, applies only when the

51

parties have separate counsel. In quoting Glidden, we do not

mean to single out that Court for criticism, for there are many

cases that reach the result of non-waiver of privilege without

persuasively explaining how.

Courts typically offer versions of three arguments for not

construing the sharing of communications within the corporate

family as a waiver: (1) the members of the corporate family

comprise one client, see, e.g., Glidden, 173 F.R.D. at 472;

United States v. Am. Tel. & Tel. Co., 86, F.R.D. 603, 616

(D.D.C. 1979); (2) the members of the corporate family are joint

clients, see, e.g., Glidden, 173 F.R.D. at 473; Polycast Tech.

Corp. v. Uniroyal, Inc., 125 F.R.D. 47, 49 (S.D.N.Y. 1989);

Medcom, 689 F. Supp. at 842; and (3) the members of the

corporate family are in a community of interest with one

another. See, e.g., Glidden, 173 F.R.D. at 472; see generally

JOHN K. VILLA, CORPORATE COUNSEL GUIDELINES § 1:22(C)

(2006) (discussing community-of-interest and joint-client

rationales); RICE § 4:24 & n.54 (discussing various rationales for

not applying the disclosure rule). Of these three rationales, we

believe only the second withstands scrutiny.

Within the wholly owned corporate family, it

superficially makes sense to hold, as BCE urges, that the family

is really one client for purposes of the privilege and that the

privilege is held exclusively by the parent because all fiduciary

duties flow to the parent. Indeed, in other contexts courts have

treated parents and their wholly owned subsidiaries as one

52

entity. For example, parents and their wholly owned

subsidiaries cannot constitute a “combination” or “conspiracy”

of two or more persons under the Sherman Act. Copperweld

Corp. v. Independence Tube Corp., 467 U.S. 752, 772 (1984).

The Supreme Court reasoned that parents and subsidiaries could

not effectively “agree” for Sherman Act purposes because

[a] parent and its wholly owned subsidiary have a

complete unity of interest. Their objectives are

common, not disparate; their general corporate

actions are guided or determined not by two

separate corporate consciousnesses, but one.

They are not unlike a multiple team of horses

drawing a vehicle under the control of a single

driver. With or without a formal “agreement,” the

subsidiary acts for the benefit of the parent, its

sole shareholder. . . . [I]n reality a parent and a

wholly owned subsidiary always have a unity of

purpose or a common design. They share a

common purpose whether or not the parent keeps

a tight rein over the subsidiary; the parent may

assert full control at any moment if the subsidiary

fails to act in the parent’s best interests.

Id. at 771–72 (internal citations and quotation marks omitted).

Applying similar logic, courts have held that a parent cannot

tortiously interfere with its subsidiary’s contracts merely by

directing the subsidiary to breach the agreements. Boulevard

53

Assocs. v. Sovereign Hotels, Inc., 72 F.3d 1029, 1036 (2d Cir.

1995) (applying Connecticut law).

BCE also points out that Congress has recently pushed

members of corporate families to act more in concert with one

another by requiring the officers of public companies to certify

each quarter that they “have designed such internal controls to

ensure that material information relating to the issuer and its

consolidated subsidiaries is made known to such officers by

others within those entities.” 15 U.S.C. § 7241(a)(4)(B).

According to SEC regulations, the general rule is that majority-

owned subsidiaries must be consolidated for purposes of

financial reporting. 17 C.F.R. § 210.3A–02(a). Thus our

regulatory structure also treats the corporate family as a unified

enterprise for at least some purposes.

On the other hand, treating members of a corporate

family as one client fails to respect the corporate form. It is a

bedrock principle of corporate law in Delaware and elsewhere

that courts must respect entity separateness unless doing so

would work inordinate inequity. Pauley Petroleum, Inc. v.

Cont’l Oil Co., 239 A.2d 629, 633 (Del. 1968); see also In re

Owens Corning, 419 F.3d 195, 211 (3d Cir. 2005) (concluding

that courts must “respect entity separateness absent compelling

circumstances calling equity . . . into play”). By structuring its

various activities by forming separate corporations, a parent

company realizes numerous benefits, not the least of which are

the liability shields. With that structure comes the responsibility

54

to treat the various corporations as separate entities. In a tort

suit, for example, it is doubtful that we would treat the Debtors,

Teleglobe, and BCE as one entity.

We acknowledge that a core concept of Copperweld and

Boulevard Associates is that when a legislature seeks to attach

conspiracy-like liability,25 it rarely means to include the garden-

variety situation in which one who controls a corporation directs

that corporation to do something. After all, a corporation can

only act at the direction of whoever controls it, and we do not

think of every corporate action as a “conspiracy.” These

decisions, though, are tethered to the statutes (or common-law

causes of action) they interpret,26 and do not give us license to

disregard entity separateness in other contexts. Thus they are

inapplicable here.

Put simply, BCE wants to have it both ways: it wants us

to view the corporate group as a single client, and it wants the

controlling entity to own the privilege in perpetuity. But the

Supreme Court held in Commodity Futures Trading Comm’n v.

Weintraub, 471 U.S. 343, 350 (1985), that control of the

25

By this we mean statutes or common-law causes of action

that impose additional liability on bad behavior when two or

more entities act in concert, usually to account for the additional

danger that acting in concert engenders.

26

Indeed, there are conspiracy-type statutes that do attach

liability to parent-subsidiary actions. See, e.g., Ashland Oil, Inc.

v. Arnett, 875 F.2d 1271, 1281 (7th Cir. 1989) (holding that

RICO liability attaches to intracorporate conspiracies).

55

privilege passes with control of the corporation, so it is unclear

(even accepting BCE’s theory) that it is the initial corporate

parent who should control the privilege unilaterally once the

group breaks up. In any event, absent some compelling reason

to disregard entity separateness, in the typical case courts should

treat the various members of the corporate group as the separate

corporations they are and not as one client.

The community-of-interest rationale does not fit as a

matter of black-letter law because the community-of-interest

privilege only comes into play when parties are represented by

separate counsel, which often is not the case for parents and

subsidiaries. See Part IV.C.2, supra. Moreover, the

community-of-interest privilege only applies when those

separate attorneys disclose information to one another, not when

parties communicate directly. Id. Finally, it assumes too much

to think that members of a corporate family necessarily have a

substantially similar legal interest (as they must for the

community-of-interest privilege to apply, see id.) in all of each

other’s communications. Thus, holding that parents and

subsidiaries may freely share documents without implicating the

disclosure rule because of a deemed community of interest

stretches, we believe, the community-of-interest privilege too

far.

It makes the most sense, then, to rest not applying the

disclosure rule to many intra-group disclosures on the ground

that the members of the corporate family are joint clients. This

56

reflects both the separateness of each entity and the reality that

they are all represented by the same in-house counsel (whether

that counsel typically takes up office with the parent or with a

subsidiary).

2. Keeping Control of the Privilege

In its amicus brief, the Association of Corporate Counsel

(“ACC”) has as a theme a parent company’s desire to keep

control of the attorney-client privilege. One particular ACC

(and BCE) concern is that disclosures to parent/subsidiary cross-

directors risk creating broad joint representations that

subsidiaries can use to invade the parent’s privilege in

subsequent adverse litigation. Not so. In thinking about these

situations, courts should keep in mind the definition of

disclosure. For purposes of the disclosure rule, a disclosure

occurs when the parent shares an otherwise confidential

attorney-parent communication with an officer, director, or

agent of a subsidiary in that capacity. See DEL. R. EVID. 510.

Courts recognize corporate officers’ and directors’ ability to sit

on multiple boards by “‘chang[ing] hats.’” United States v.

Bestfoods, 524 U.S. 51, 69 (1998) (quoting Lusk v. Foxmeyer

Health Corp., 129 F.3d 773, 779 (5th Cir. 1997)). Thus it does

not break confidence to share an attorney-parent communication

with an officer of the parent in her capacity as officer of the

parent, even though she is also a director or officer of a

subsidiary. Because this sort of information sharing is not a

disclosure for purposes of the disclosure rule, courts need not

57

bother trying to apply a joint representation analysis to save the

privilege in these situations, nor should they use such

“disclosures” to find a joint representation with the relevant

subsidiary.

A similar concern is that courts may find too broad of a

joint representation, which in a spin-off situation ends up

allowing the subsidiary to invade the parent’s privilege. When,

for example, in-house counsel of the parent seek information

from various subsidiaries in order to complete the necessary

public filings, the scope of the joint representation is typically

limited to making those filings correctly. It does not usually

involve jointly representing the various corporations on the

substance of everything that underlies those filings.27 Contrary

to the Debtors’ argument, it is permissible (subject, of course, to

conflict rules) for attorneys and clients to limit the scope of a

joint representation in a sophisticated manner; nothing requires

construing the scope of a joint representation more broadly than

the parties to it intend.

27

Indeed, in some of these circumstances in-house counsel

may not need to represent the subsidiaries at all. When a parent

company directs its subsidiaries’ employees to provide

information to its in-house counsel that is critical to their

representation of the parent, the communication may be

privileged under Upjohn because of in-house counsel’s

representation of the parent alone, thus obviating any need for

these attorneys to represent the subsidiary as well. See Admiral

Ins. Co. v. U.S. Dist. Ct. for the Dist. of Ariz., 881 F.2d 1486,

1493 n.6 (9th Cir. 1989); see also Upjohn, 449 U.S. 394.

58

3. When Conflicts Arise

It is inevitable that on occasion parents and subsidiaries

will see their interests diverge, particularly in spin-off, sale, and

insolvency situations. When this happens, it is wise for the

parent to secure for the subsidiary outside representation.

Maintaining a joint representation for the spin-off transaction

too long risks the outcome of Polycast,28 125 F.R.D. at 49, and

Medcom,29 689 F. Supp. at 844—both cases in which parent

companies were forced to turn over documents to their former

28

The privilege dispute in Polycast followed the sale of a

wholly owned subsidiary. Before the sale, Uniroyal (the seller)

and its subsidiary were jointly represented by in-house counsel.

After the sale, Polycast (the buyer) sued Uniroyal for allegedly

misrepresenting the subsidiary’s financial condition. It sought

the production of notes taken by the subsidiary’s officer during

a phone conversation with in-house counsel. The District Court

ordered production because the subsidiary, now in Polycast’s

control, waived the joint privilege in its favor. 125 F.R.D. at 51.

As we explain in Part V.A.3, infra, we do not agree with much

of the Polycast Court’s reasoning.

29

The facts and result of Medcom are substantially similar to

those of Polycast. Essentially, the acquirer of a subsidiary sued

the seller/parent for misrepresentation related to the sale, and

sought production of documents produced while the subsidiary

and seller/parent were jointly represented by in-house counsel.

689 F. Supp. at 842. As with Polycast, we disagree with much

of the Medcom Court’s reasoning, which we explain in Part

V.A.3, infra.

59

subsidiaries in adverse litigation—not to mention the attorneys’

potential for running afoul of conflict rules. That the companies

should have separate counsel on the matter of the spin-off

transaction, however, does not mean that the parent’s in-house

counsel must cease representing the subsidiary on all other

matters. After all, spin-off transactions can be in the works for

months (or even years), and during that time it is proper (and

obviously efficient) for in-house counsel to continue to represent

the subsidiary (jointly or alone) on other matters.

Once conflicts begin coming to the surface, the question

of when to acquire separate counsel is often difficult. As

Medcom and Polycast demonstrate, from the perspective of

protecting the privilege the best answer is that once the parties’

interests become sufficiently adverse that the parent does not

want future controllers of the subsidiary to be able to invade the

parent’s privilege, it should end any joint representation on the

matter of the relevant transaction. Polycast, 125 F.R.D. at 49;

Medcom, 689 F. Supp. at 844. This standard is, of course, only

relevant if the parties have already begun a joint representation

on that transaction; if they have not, then the parent has nothing

to fear as far as the privilege goes (though other concerns, such

as their fiduciary duties to their subsidiaries, may argue in favor

of separating counsel).

In sum, in-house counsel have available numerous means

to protect a parent company’s privilege. By taking care not to

begin joint representations except when necessary, to limit the

60

scope of joint representations, and seasonably to separate

counsel on matters in which subsidiaries are adverse to the

parent, in-house counsel can maintain sufficient control over the

parent’s privileged communications.

V. Issues on Appeal

A. Whether the Debtors Are Entitled to

Documents Generated in the Course of a

BCE/Teleglobe Joint Representation

The District Court ruled that any documents generated

out of a BCE/Teleglobe joint representation are subject to

discovery by the Debtors. BCE argues that the Court erred

because the Debtors were not a party to any such joint

representation. (BCE admits that its attorneys jointly represented

it and Teleglobe on some matters; it denies that they jointly

represented it and the Debtors.) Indeed, the Court did not enter

a factual finding that any attorney jointly represented both BCE

and any of the Debtors.30 Rather, the Court ruled that the

30

We understand that the Debtors argue otherwise. We note,

however, that the Special Master wrote that “there was a joint

representation by BCE’s attorneys of BCE and Teleglobe

relating to a matter of common interest.” App. at A0047

(emphasis added). Similarly, in affirming the Special Master,

the District Court described his finding as a “joint representation

of BCE and Teleglobe by in-house counsel for BCE . . . .” App.

at A0013 (emphasis added). Because Teleglobe and the Debtors

are separate entities, we cannot read these statements as finding

61

Debtors were entitled to the product of any BCE/Teleglobe joint

representation because BCE had conceded this point.

Alternatively, it noted the Debtors, as Teleglobe’s wholly owned

subsidiaries, were entitled to the disputed documents as a matter

of law, and in any event Teleglobe waived the privilege for the

Debtors’ benefit in the Canadian insolvency proceedings. We

address all three grounds.

1. Whether BCE’s Concession in the

Bankruptcy Court Prevents it from

Arguing that the Debtors are not

Entitled to the Disputed Documents

a. Background

The District Court determined that BCE made a binding

concession that it would produce all documents arising out of

any BCE/Teleglobe joint representation and waived any

argument that the Debtors are not entitled to those documents.

Given the convoluted nature of the record, it is important to

understand what BCE argued at each stage of the litigation.

The first reference to joint representation came from BCE

itself; in a related proceeding before the Bankruptcy Court, BCE

opposed a motion to compel production of various documents to

the Creditors’ Committee in the course of a Rule 2004

investigation. In its opposition brief, BCE stated that “BCE

that the Debtors were also jointly represented.

62

attorneys consulted with attorneys, officers, or employees of

Teleglobe, Inc. or its subsidiaries to discuss or provide legal

advice in matters where BCE and Teleglobe Inc. (or its

subsidiaries) shared a common legal interest.” App. at A01110.

Furthermore, BCE declared that “such common interest

privilege31 will continue to exist until the Debtors file a litigation

against BCE.” App. at A01110. At the hearing, BCE stipulated

that its in-house counsel, Michel Lalande, held documents

relating to “two types of matters.” App. at A0172. The first

category of documents “was where the common interest was

involved.” App at A0172. The second category comprised

documents in which “Mr. Lalande was counseling . . . BCE

alone.” App. at A0172. The Bankruptcy Court ordered BCE to

produce to the Debtors and Creditors’ Committee “the common

interest documents.” App. at A0172. Indeed, BCE agreed to do

so. In the course of the hearing, however, the parties never

honed in on what the “common interest” was.

The issue came up again when the Debtors filed suit. In

front of the District Court (before it referred discovery matters

to the Special Master), BCE stated in its initial brief in

opposition to the motion to compel production that “documents

were produced pursuant to the Bankruptcy Court’s Order

because they were subject to the common interest privilege.

31

We reiterate that the term “common-interest privilege” is

inapt here, as that term typically refers to the community-of-

interest privilege. What BCE appears to have been asserting is

a co-client privilege. See supra Part IV.C.

63

Those documents were shared with [various attorneys and

accountants representing the Debtors].” App. at A0218. At the

first hearing before the District Court, BCE described the

situation thus: “[T]here were some places where BCE attorneys

clearly worked with what they conceived of as the common

interest of Teleglobe and BCE. And there were areas of

common interest. Judge Walrath said . . . produce them . . . .

We did.” App. at A00264. Again, none of these statements sets

out a definition or clarified the perceived scope of the “common

interest.”

Another round of briefing followed the District Court’s

reference to the Special Master. At a hearing before the Special

Master, the Debtors’ attorney went through BCE’s Rule 2004

privilege log and summarized that BCE claimed a “common-

interest privilege” on documents covering the following

subjects: “Teleglobe financing, financial transaction between

Teleglobe and BCE, issuance and redemption of preferred

shares . . .[,] [r]efinancing of bank facilities . . ., developing

Teleglobe financial statements, . . . public disclosures, . . . .

[and] Teleglobe restructuring.” App. at A00496–97. He further

stated that “[BCE] claims a common interest on Project X, and

so on. . . . [H]aving claimed common interests and having

assigned lawyers to effectively represent both sides of the

common interest, it would seem to us to be inconsistent now to

say that we can’t have all documents relating to the common

interests[,] particularly when we’re talking about documents that

were reviewed and considered by our fiduciaries.” App. at

64

A00497.

BCE responded that its in-house counsel provided limited

legal services to Teleglobe on an ad hoc basis and that BCE’s

in-house counsel did not serve the Debtors at all because they

had their own counsel in Reston, Virginia. App. at A00497. As

to Project X, BCE responded that in-house counsel Michel

Lalande and Martine Turcotte provided very limited advice to

Teleglobe on its public filings, its management representation

letters, its board resolutions, and its engagement letter with an

investment bank. App. at A00498. Moreover, BCE argued that

this advice was limited in scope and all other Project X advice

was provided solely to and for the benefit of BCE. In sum, BCE

argued that “what [is reflected on the privilege log] is BCE-

privileged advice, not advice . . . where BCE has a common

interest with [Teleglobe], not advice given to [Teleglobe] or [the

Debtors,] if there is any.” App. at A00503.

Recognizing that there was a dispute whether the

documents on the privilege log reflected advice provided solely

to BCE (and thus outside of the scope of any joint

representation), the Special Master ordered an audit of 50

documents to “see if I can satisfy myself that they are what you

[BCE] term exclusively related to advice provided to BCE.”

App. at A00504. To clarify the issue, the Special Master asked:

“[Y]ou’ve [BCE] given them [the Debtors] the documents that

deal with advice provided [to Teleglobe], by lawyers who might

have been representing both BCE and [Teleglobe] at the same

65

time, but have not given them documents that may have

addressed [Teleglobe], but were only involved with advice given

to BCE?” App. at A00505. BCE counsel responded, “That’s

correct.” App. at A00505.

After the Special Master ordered production of all of the

documents, BCE clearly raised, in its brief in opposition to the

Debtors’ motion in the District Court to affirm and adopt the

Special Master’s decision, the issue of its obligation to turn over

documents arising from its and Teleglobe’s joint representation

by BCE in-house counsel. App. at A00826. This was probably

a reaction to the Special Master’s finding that the joint

representation was so broad in scope that it covered all advice

rendered on Project X. In other words, BCE had not objected to

producing the “common interest” documents so long as its

understanding of the narrow scope of the common interest

prevailed, but when the Special Master found a broad scope, it

asserted that it need not produce the common-interest documents

at all. The District Court rejected this argument out-of-hand,

finding that BCE was bound by its concession in the Bankruptcy

Court that it would produce to the Debtors and the Creditors’

Committee all of the documents of common interest to BCE and

Teleglobe.32

32

BCE also told the Bankruptcy Court that if its attorneys

jointly represented BCE and the Debtors on a matter related to

this case, it would produce any documents that arose out of that

representation. But BCE claims that its attorneys did not in fact

jointly represent those parties on any related matter, and the

66

b. Merits

BCE should not, the Debtors argue, be able to raise now

the issue of whether they and BCE were part of a joint

representation. They base this contention on issue waiver,

judicial admission, and judicial estoppel grounds. We address

each, as well as whether BCE’s waiver of the privilege in the

Bankruptcy Court prospectively waived it as to any documents

found to be within the scope of a BCE/Teleglobe joint

representation.

I. Issue Waiver

Our longstanding rule is that a party must raise an issue

before the District Court in order to press it on appeal.33 To

raise an issue, a party must present it with sufficient specificity

District Court did not find otherwise. Thus the issue is whether

the Court’s finding that BCE attorneys did jointly represent BCE

and Teleglobe is sufficient to support its production order in

favor of the Debtors.

33

As the Court of Appeals for the Fifth Circuit has noted,

when a district court employs a special master, it may be that the

parties must, to avoid waiver, raise all relevant issues before the

master. See Harris Corp. v. Ericsson, Inc., 417 F.3d 1241, 1263

(5th Cir. 2005). Because we conclude that BCE did properly

raise before the Special Master whether its attorneys jointly

represented the Debtors, we need not decide here whether a

party must raise all issues before a special master to preserve

them.

67

to allow the court to pass on it. See Keenan v. City of

Philadelphia, 983 F.2d 459, 471 (3d Cir. 1992); accord Shell

Petroleum, Inc. v. United States, 182 F.3d 212, 218 (3d Cir.

1999) (“A party . . . must unequivocally put its position before

the trial court at a point and in a manner that permits the court

to consider its merits.”). At oral argument before the Special

Master, BCE stated unequivocally that its in-house attorneys

never represented the Debtors on anything related to Teleglobe’s

restructuring. The Special Master was skeptical of this

assertion, and asked the Debtors to respond to it. They stated

that they were entitled to documents generated through a

BCE/Teleglobe joint representation because they, as third-level

wholly owned subsidiaries, were members of the same

community of interest (once again, an instance where someone

conflates the community-of-interest privilege with the co-client

privilege). This exchange properly put before the Special

Master the issue of whether the Debtors were (or needed to be)

parties to the BCE/Teleglobe joint representation for production

to be ordered. Moreover, BCE again raised the issue in its

objections to the Special Master’s decision. App. at A00826.

With this context, we cannot conclude BCE waived contending

that it and the Debtors were not jointly represented on any

matter relevant to this case.

ii. Judicial Admission

The Debtors argue, however, that BCE’s statement to the

Bankruptcy Court that it would turn over to the Debtors (and the

68

Creditors’ Committee) the “common interest” documents arising

out of the BCE/Teleglobe joint representation was a binding

judicial admission. To be binding, admissions must be

unequivocal. Glick v. White Motor Co., 458 F.2d 1287, 1291

(3d Cir. 1972). Similarly, they must be statements of fact that

require evidentiary proof, not statements of legal theories. Id.

Applying those principles, BCE’s statements on any joint

representation of BCE and the Debtors were never unequivocal.

All references to a joint representation of BCE and the

subsidiaries were couched in alternative language. See, e.g.,

app. A01110 (“BCE attorneys consulted with attorneys, officers,

or employees of Teleglobe, Inc. or its subsidiaries to discuss or

provide legal advice in matters where BCE and Teleglobe, Inc.

(or its subsidiaries) shared a common legal interest.”) (emphases

added). To the extent that BCE admitted that it was obligated

to turn over documents related to a joint representation on a

matter of common interest, such an admission appears more like

a statement of a legal theory or position than a statement about

an issue of fact. Thus the judicial admission doctrine is not

applicable.

iii. Judicial Estoppel

Judicial estoppel prevents a party from “playing fast and

loose with the courts” by adopting conflicting positions in

different legal proceedings (or different stages of the same

proceeding). Delgrosso v. Spang & Co., 903 F.2d 234, 241 (3d

69

Cir. 1990) (internal quotation marks and citations omitted).

Here, the Debtors claim that BCE’s position that its attorneys

never jointly represented it and the Debtors is impermissible

because BCE relied on the joint representation in the

Bankruptcy Court to assert a claim of privilege and because it

induced the Bankruptcy Court and Special Master to rely on its

concession that common-interest documents had been produced,

only changing its position when the Special Master found its

representations untrue. Judicial estoppel requires (1) a clear

inconsistency and (2) that the party estopped obtain an unfair

advantage from that inconsistency. In re Armstrong World

Indus., Inc., 432 F.3d 507, 517–18 (3d Cir. 2005). This case

looks more like a legitimate disagreement over the scope of any

joint representation (mixed with a dose of sloppiness) than it

does a bad faith attempt to mislead the courts. BCE’s position

throughout has been that it has turned over the documents that

arose out of a BCE/Teleglobe joint representation. It told the

Bankruptcy Court—in equivocal terms—that there may have

been a BCE/Debtors joint representation (and if so, it agreed to

turn over any such documents). In front of the Special Master,

BCE’s counsel specifically stated that its attorneys did not

jointly represent the Debtors, and it has maintained that position

since. In this limited context, that BCE was “playing fast and

loose” with the courts appears too strong a statement. Perhaps

it was being hyper-technical, and indeed up against the “too

close for cricket” line, but that is as far as we can conclude on

the record before us.

70

iv. Implied Prospective

Waiver of the Privilege

To repeat, in the Bankruptcy Court BCE agreed to

produce to the Debtors and the Creditors’ Committee what it

termed the “common interest” documents to resolve a discovery

dispute. It did not explain the scope of the common interest, but

it did agree to produce the documents. BCE views the Debtors’

contention that it may not now assert the privilege over other

documents alleged to arise from the same joint representation as

an implied prospective waiver argument. That analysis makes

some sense.

In discovery disputes, implied waivers are construed

narrowly, In re Lott, 424 F.3d 446, 453 (6th Cir. 2005), and a

party is only forced to produce documents under a prospective

waiver theory if it agrees to disclose only favorable privileged

documents while keeping for itself the unfavorable ones to gain

an advantage in litigation. See Westinghouse, 951 F.2d at 1426

n.12 (“When a party discloses a portion of otherwise privileged

materials while withholding the rest, the privilege is waived

only as to those communications actually disclosed, unless a

partial waiver would be unfair to the party’s adversary. If

partial waiver does disadvantage the disclosing party’s

adversary by, for example, allowing the disclosing party to

present a one-sided story to the court, the privilege will be

waived as to all communications on the same subject.”); accord

Tackett, 653 A.2d at 260 (holding that Delaware courts will only

71

find an prospective waiver when a party uses partial disclosure

as a weapon).

On the record here, it appears that BCE agreed to produce

documents that fell within its understanding of the

BCE/Teleglobe joint representation, not the masses of

documents that the Special Master eventually found to fall

within that category. Moreover, the Debtors have not argued

that BCE is seeking an improper benefit by selectively

disclosing documents. Thus we find no implied prospective

waiver in favor of the Debtors as to whatever documents a court

might conclude were part of a BCE/Teleglobe joint

representation.

2. Whether the Community-of-Interest

Privilege Entitles the Debtors to the

Documents as a Matter of Law

The District Court also ruled that the Debtors were

entitled to the documents as a member of BCE’s community of

interest. But as explained in Part IV.F.1, supra, it is not the case

that parents and subsidiaries are in a community of interest as a

matter of law. Moreover, the community-of-interest privilege

only applies to parties represented by separate counsel, see Part

IV.C.2, supra. Even some of the cases that the Debtors cite

suggest more nuance than they admit. See, e.g., In re S. Air

Transp., Inc., 255 B.R. 706, 711 (Bankr. S.D. Ohio 2000)

(“Parent and subsidiary corporations generally share a common

72

interest, and may, in appropriate circumstances, be considered

a single client for purposes of the attorney-client privilege.”

(emphases added)). The majority—and more sensible—view is

that even in the parent-subsidiary context a joint representation

only arises when common attorneys are affirmatively doing

legal work for both entities on a matter of common interest. See,

e.g., Polycast, 125 F.R.D. at 49 (finding a joint representation

when a parent’s officer and general counsel affirmatively

advised subsidiary on how to comply with merger agreement to

which parent and subsidiary were both parties). A broader rule

would wreak havoc because it would essentially mean that in

adverse litigation a former subsidiary could access all of its

former parent’s privileged communications because the

subsidiary was, as a matter of law, within the parent entity’s

community of interest.

3. Whether Teleglobe’s Waiver of the

Privilege for the Debtors’ Benefit in the

Canadian Insolvency Proceedings

Entitles them to the Documents

The Debtors argue that they are entitled to any documents

generated in the course of the BCE/Teleglobe joint

representation because Teleglobe, through its Plan

73

Administrator in the Canadian insolvency proceedings, has

waived the attorney-client privilege in their favor.34 The

question before us is whether one party to a joint representation

(Teleglobe) may unilaterally waive the privilege and thereby

force the other (BCE) to turn over documents generated in the

course of the joint representation to third parties (the Debtors).

Put differently, the question is whether the co-client privilege is

subject to a unilateral control rule (either co-client may waive

the privilege unilaterally and thus force the other to turn over

documents produced during the course of the joint

representation to third parties) or a bilateral control rule (both

clients must agree to waive the privilege in order for the waiver

to take effect). The general answer is bilateral control. As

explained in Part IV.D, supra, this rule is in the Restatement:

[I]n the absence of an agreement with co-clients

to the contrary, each co-client may waive the

privilege with respect to that co-client’s own

communications with the lawyer, so long as the

communication relates only to the communicating

and waiving client. One co-client does not have

34

That Teleglobe’s Plan Administrator purported to waive

the privilege in the Debtors’ favor is not disputed. What is

disputed is whether she had the authority under the Arrangement

Act to do so. Because we hold that, under both Delaware and

Canadian law, Teleglobe cannot waive the privilege without

BCE’s consent in any event, we need not pass on the legal

validity of Teleglobe’s purported waiver.

74

authority to waive the privilege with respect to

another co-client’s communications to their

common lawyer. If a document or other

recording embodies communications from two or

more co-clients, all those co-clients must join in

a waiver, unless a nonwaiving co-client’s

communication can be redacted from the

document.”

RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 75

cmt. e. The Delaware District Court has predicted that

Delaware law accords with this principle. Interfaith Hous. of

Del., 841 F. Supp. at 1402, and the Delaware Court of Chancery

(albeit in an unpublished decision) has agreed. Tenneco Auto.,

Inc. v. El Paso Corp., 2001 WL 1456487, at *2 (Del. Ch. 2001).

Canadian law on this point is the same. Ashburton Oil Ltd. v.

Sharp, 67 B.C.L.R.2d 64, ¶ 24 (B.C. 1992).

The cases the Debtors cite are not explicitly

contradictory. In re Grand Jury Subpoenas, 902 F.2d 244, 248

(4th Cir. 1990), for instance, deals with the transfer of the

subsidiary’s own privilege from old to new management, not

with joint representation. Three other cases the Debtors

cite—Bass Public Co. v Promus Cos., 868 F. Supp. 615

(S.D.N.Y. 1994), Polycast, and Medcom—are muddier, as there

are statements in all three that seem to disagree with the

Restatement. See Bass, 868 F. Supp. at 621 (stating that the

bilateral control rule only applies if the two clients are actual or

75

potential co-defendants); Polycast, 125 F.R.D. at 50 (same);

Medcom, 689 F. Supp. at 844–45 (same).35 At the same time,

none of the three decisions actually violated the Restatement.

In Bass, one of the plaintiffs was the subsidiary (i.e., the joint

client); it therefore was entitled to everything generated in the

course of the joint representation as a matter of right. Bass, 868

F. Supp. at 617. In Polycast and Medcom, the disputed

communications were between the subsidiary and the joint

attorneys; thus the subsidiary could waive the privilege by itself.

Medcom, 689 F. Supp. at 844; Polycast, 125 F.R.D. at 48. Here,

however, we have third parties seeking documents produced for

35

The problem is that Bass, Polycast, and Medcom all treat

the old joint-defense privilege (which applied only to actual co-

defendants in criminal litigation), see Part IV.C, supra, as a

doctrine separate from the co-client and community-of-interest

privileges. Those cases accord only joint-defense clients (again,

actual co-defendants) the protection of the bilateral control rule

(that neither co-client may unilaterally waive the privilege). See

also Taggart, 65 U. CHI. L. REV. at 320 (arguing against the

bilateral control rule). The Restatement has rejected this

approach; it now treats the joint-defense privilege as obsolete

and applies the bilateral control rule to the broader community-

of-interest privilege. RESTATEMENT (THIRD) OF THE LAW

GOVERNING LAWYERS § 76 cmts. b. & g. Moreover, the Bass,

Polycast, and Medcom approach is inconsistent with even

relatively old understandings of the co-client privilege. See,

e.g., 8 J. WIGMORE, EVIDENCE § 2328 (J. McNaughton rev.

1961) (explaining that co-clients are always subject to the

bilateral control rule). To the extent that Bass, Polycast, and

Medcom are at odds with the Restatement, we apply the latter.

76

BCE as (allegedly) part of a BCE/Teleglobe joint representation.

Under these circumstances, we predict that the Delaware

Supreme Court would follow the Restatement rule (as accepted

by both the Delaware Court of Chancery and the federal District

of Delaware Court) that Teleglobe alone cannot waive the

privilege as to communications involving BCE.

4. Conclusion and Remand

Ordering the production of documents on the privilege

log must be predicated on a factual finding that BCE and the

Debtors were parties to a joint representation. Because there is

no such finding on record, we remand for further factfinding on

this issue. On remand, that factfinding should consider § 14 of

the Restatement, which details how a lawyer/client relationship

arises, and our discussion in Part IV.C, supra, on the existence

and scope of a co-client relationship.

B. The Effect of Funneling Documents Through

BCE’s In-House Counsel

The District Court held that because BCE funneled all of

the contested documents through in-house counsel who were

jointly representing Teleglobe, all of those documents are

discoverable to the Debtors as part of the BCE/Teleglobe joint

representation. This ruling applied even to documents produced

77

by outside counsel that did not represent Teleglobe (or the

Debtors). As an initial matter, the District Court’s reasoning

cannot survive our determination in section A of this Part that

whether BCE and Teleglobe were jointly represented does not

matter without an additional finding that the Debtors were also

parties to that representation. Still, we examine the Special

Master and District Court’s reasoning because it may be relevant

on remand.

In reaching his decision on this issue, the Special Master

relied primarily on In re Mirant Corp., 326 B.R. 646, 651

(Bankr. N.D. Tex. 2005). In that case, a parent company and its

wholly owned subsidiary formally engaged the Troutman

Sanders law firm to represent them jointly with regard to the

sale of 20% of the subsidiary’s stock. Id. at 648. The Court

held that the subsidiary/debtor could obtain documents arising

out of the joint representation despite the fact that the

engagement letter stipulated that the parties agreed that their

individual communications with the joint attorneys would be

privileged against one another. Id. at 652. That holding is off

point here because it did not speak to whether documents

outside of the scope of the joint representation and provided by

outside attorneys are brought within that scope merely because

they pass through in-house counsel who are jointly representing

the subsidiary as well as the parent; rather, it dealt only with

documents produced within the scope of the joint representation

by the joint attorneys.

78

Here, the Eureka principle seems most apt: when BCE

took the trouble of hiring outside counsel to provide advice only

to it on divestiture issues, it reasonably expected that those

communications would be privileged. Whether BCE in-house

counsel should have refused to look at the documents because

of their own conflicts is, under Eureka, beside the point, as is

whether its in-house counsel had a fiduciary duty to share

information with Teleglobe. 743 F.2d at 937–38. (Not to be

forgotten is that BCE’s in-house counsel also had a duty to keep

its communications confidential.)

The guiding principle of Eureka is that when an attorney

errs by continuing to represent two clients despite their conflicts,

the clients—who reasonably expect their communications to be

secret—are not penalized by losing their privilege. Id. Indeed,

Eureka is merely one in a line of cases that hold that

communications outside the scope of the joint representation or

common interest remain privileged. See, e.g., CSX Transp., Inc.

v. Lexington Ins. Co., 187 F.R.D. 555, 560 (N.D. Ill. 1999)

(holding that documents outside the scope of the common

interest need not be disclosed); Strategem, 153 F.R.D. at 543

(same); Pittston Co. v. Allianz Ins. Co., 143 F.R.D. 66, 69–71

(D.N.J. 1992) (same); Carey-Canada Inc. v. Aetna Cas. & Sur.

Co., 118 F.R.D. 250, 2501 (D.D.C. 1987) (same).

The District Court relied primarily on policy analysis: it

noted that forcing BCE to choose between (1) allowing in-house

counsel to filter the information from outside counsel while

79

losing the privilege, and (2) maintaining the privilege by not

working directly with outside counsel, is “harsh.” App. at

A0015. It stated, however, that the result was required by the

law of the adverse-litigation exception to the joint-client

privilege, and that BCE could have protected itself by clearly

terminating any representation of Teleglobe by its in-house

lawyers when it began reconsidering its funding of Teleglobe.

The Mirant Court also engaged in policy analysis that the

Debtors endorse:

Even were there merit in the arguments of

Troutman and [the parent company] TSC, the

court would be most reluctant to deny Debtors the

requested discovery for reasons of public policy.

It is black-letter law that the attorney-client

privilege is meant to foster open communications

between attorney and client. . . . In a bankruptcy

case, the need for investigation is far more acute

than is any concern for attorney-client

communications. . . . Debtors, acting as

fiduciaries for the benefit of their creditors, are

pursuing an investigation which is important not

only to those who may have lost money as a result

of Debtors’ demise. It is critical that both those

who purchased Mirant’s (and its subsidiaries’)

securities and the public have confidence that

potential liability of TSC (and Troutman) has

80

been thoroughly explored. That Debtors sought

chapter 11 relief less than two and one half years

after TSC completed their divestiture is reason

enough to raise concern that all might not have

been right in the transactions between TSC and

Mirant. . . . Given the short time between

divestiture and commencement of these chapter

11 cases and given the pre-divestiture history of

Debtors’ problems, it is essential to the integrity

of the chapter 11 process that no stone be left

unturned in ensuring satisfactory completion of

Debtors’ investigation.

326 B.R. at 654–55 (citations omitted).

In a similar vein, the Debtors argue that BCE created and

controlled this situation, i.e., it tried to have it both ways by

having in-house counsel work primarily for BCE while still

jointly representing Teleglobe. Because of its control over the

situation, the Debtors argue, BCE should not be heard to

complain about the legal ramification of losing its privilege

against producing documents. They further contend that BCE

could have obtained outside counsel for Teleglobe at any time

and ceased its joint representation, and because it did not do so,

it must relinquish its documents.

As noted, the District Court here conceded that this result

was harsh, as did the Mirant Court. Both, however, seemed to

81

believe that allowing the privilege to stand would make it too

easy for parent companies to hide their wrongdoing. This truth-

seeking rationale, however, is a problem because the privilege

is admittedly not truth-seeking. United States v. Liebman, 742

F.2d 807, 810 (3d Cir. 1984) (“It does not advance resolution of

the issue to argue . . . that the attorney-client privilege is an

obstacle to the search for the truth.” (internal citations and

quotations marks omitted)). Moreover, Delaware abrogates the

privilege in the face of serious wrongdoing facilitated by the

attorney through the crime/fraud exception. DEL. R. EVID.

§ 502(d)(1) (“There is no privilege under this rule . . . [i]f the

services of the lawyer were sought or obtained to enable or aid

anyone to commit or plan to commit what the client knew or

reasonably should have known to be a crime or fraud.”). This

reflects a policy choice that, absent well-founded allegations not

only of serious wrongdoing but of serious wrongdoing

facilitated by the attorney, the privilege should stand. Here, the

Debtors do not appear to have alleged that BCE’s attorneys

aided any wrongdoing. Moreover, invoking the crime-fraud

exception requires that the plaintiff make a prima facie showing

of evidence supporting the elements of the exception. In re

Grand Jury Investigation, 445 F.3d 266, 274 (3d Cir. 2006).

While that showing is not onerous, it is necessary, for “a mere

charge of wrongdoing will [not] . . . put the privilege to flight.”

Clark v. United States, 289 U.S. 1, 14 (1933) (Cardozo, J.). The

adverse-litigation exception to the joint-client privilege should

not be a back-door means of destroying the attorney-client

privilege on the basis of alleged wrongdoing; if the Debtors had

82

wanted to lay to rest the privilege on those grounds, they should

have asserted the crime-fraud exception directly and allowed the

District Court to pass on whether they could make the required

prima facie showing.

In addition, Eureka counsels that it is the scope of the

joint representation—not whether communications were shared

with joint attorneys—that is dispositive. 743 F.2d at 937–38.

If the communications were outside the scope of the joint

representation, then sharing them with a conflicted joint attorney

is of no moment, even if the conflicted attorney acted

improperly in accepting the communications. Id. If the

communications were within the scope, then they are

discoverable. Id. at 937. Either way, the fact that documents

prepared by outside counsel were shared with in-house counsel

does not have the significance that the District Court and Special

Master attached to it. What we believe is significant is that, on

remand, the District Court needs to determine whether any

attorneys jointly represented BCE and the Debtors on a matter

of common interest. If they did, then any documents within the

scope of that joint representation are discoverable.

Amicus curiae ACC fears that invoking Eureka implies

that in-house counsel act improperly when they review

documents from outside counsel. Not so. Here we have a

finding of fact that BCE’s in-house counsel jointly represented

BCE and Teleglobe on all issues relating to Teleglobe’s ultimate

spin-off. If that finding is correct, then it was bad judgment for

83

BCE’s in-house attorneys to take part in outside counsel’s

separate representation of BCE on the same issues if it still

wanted the shield of the attorney-client privilege. We note,

however, that the factual finding gives us pause. As we detailed

in Part IV.F, supra, parent-subsidiary joint representations are

typically quite narrow in scope. Still, we have not reviewed all

of the documents that the Special Master and District Court did,

so we can neither affirm nor vacate that finding on the record

before us—and we need not because the Debtors’ status as third

parties to any BCE/Teleglobe joint representation makes its

scope irrelevant as a matter of law.

We agree with ACC that a rule forcing parent companies

to choose between relinquishing the privilege on one hand and

relinquishing any control over their subsidiaries makes little

sense. If the parent chooses to forgo the use of its in-house

counsel on an important transaction, then it loses the advisors

that know the most about its legal health. If it chooses to cut off

its subsidiary, then it risks liability when the subsidiary and

parent do not operate in tandem. Putting that choice in the

context of this case, it appears that BCE spent some four months

deciding what to do with Teleglobe. Over the course of Project

X, it considered a variety of options that did not involve

abandoning Teleglobe. Moreover, during this time it was still

responsible for reviewing Teleglobe’s public filings. Thus for

BCE’s in-house counsel to cut Teleglobe off would have been

an expensive and risky proposition. Similarly, given that BCE

was in the process of making a very serious business decision

84

with important legal implications, to deprive it of its in-house

counsel simply so that those attorneys could continue to advise

Teleglobe on other matters seems overly harsh.

To prevent this outcome, it is important for in-house

counsel in the first instance to be clear about the scope of

parent-subsidiary joint representations. By properly defining the

scope, they can leave themselves free to counsel the parent

alone on the substance and ramifications of important

transactions without risking giving up the privilege in

subsequent adverse litigation.

VI. Potential Alternate Sustaining Grounds

A. The Fiduciary Exception to the Attorney-

Client Privilege

Before the Special Master and in supplemental briefing,

the Debtors argue that they should be allowed access to the

disputed documents under the fiduciary exception to the

attorney-client privilege as articulated in Garner v.

Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970). The core holding

of Garner is as follows:

The attorney-client privilege still has

viability for the corporate client. The corporation

is not barred from asserting it merely because

those demanding information enjoy the status of

85

stockholders. But where the corporation is in suit

against its stockholders on charges of acting

inimically to stockholder interests, protection of

those interests as well as those of the corporation

and of the public require that the availability of

the privilege be subject to the right of the

stockholders to show cause why it should not be

invoked in the particular instance.

Garner, 430 F.2d at 1103–04. Garner thus allows shareholders

of a corporation to invade the corporation’s privilege in order to

prove fiduciary breaches by those in control of the corporation

upon showing good cause.

As the Debtors note, while the Delaware Supreme Court

has never adopted Garner, the Court of Chancery has adopted

and applied it in numerous decisions. Indeed, Vice Chancellor

Lamb wrote that “Delaware courts follow the approach outlined

in Garner.” Grimes v. DSC Comm. Corp., 724 A.2d 561, 568

(Del. Ch. 1998) (citing Deutsch v. Cogan, 580 A.2d 100, 105

(Del. Ch. 1990) (“Delaware courts have consistently followed

Garner.”)).

In Deutsch, the Court of Chancery extended Garner to a

situation in which cashed-out minority shareholders of a

subsidiary sought to abrogate the attorney-client privilege of the

parent company’s controlling shareholder in a dispute over a

merger transaction that the minority shareholders contended was

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not fundamentally fair. 580 A.2d at 102–03. The Court held

that Garner applied by analogy because the parent’s controlling

shareholder, as the entity in fact controlling the subsidiary, owed

the minority shareholders fiduciary duties. Id. at 107.

Therefore, in a dispute over compliance with those duties, the

minority shareholders could—upon showing good

cause—overcome the privilege with regard to documents related

to the challenged transaction. Id. at 108.

The Debtors’ argument here is similar: because BCE

controlled the Debtors while they were insolvent, it owed

fiduciary duties to the Debtors of which their creditors (not

BCE) were the primary beneficiaries. See generally N. Am.

Catholic Programming Found., __ A.2d at ___, 2007 WL

1453705, at *7. Thus, in this dispute, in which the Debtors are

asserting a breach of those duties for the benefit of their

creditors, the Debtors should be able to put aside the privilege

upon showing good cause. It is possible that Delaware courts

would extend the Garner fiduciary exception to a situation like

this one. The key, however, is insolvency. If the Debtors were

not insolvent (or in that hazy “zone of insolvency,” see supra

note 9) at the time of the otherwise privileged communications,

then BCE was the only beneficiary of the Debtors’ success, and

it could not, therefore, breach its fiduciary duty to itself.

Whether a corporation is insolvent, and when it becomes

so, are an issues of fact. Trenwick, 906 A.2d at 195. Under

Delaware law, a corporation is insolvent if it has: “1) a

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deficiency of assets below liabilities with no reasonable prospect

that the business can be successfully continued in the face

thereof, or 2) an inability to meet maturing obligations as they

fall due in the ordinary course of business.” Prod. Res. Group,

LLC v. NCT Group, Inc., 863 A.2d 772, 782 (Del. Ch. 2004)

(Strine, V.C.) (internal citations and quotation marks omitted).

Here, both parties seem to agree that the Debtors were all deeply

in debt with no significant revenue stream other than BCE’s

funding. The dates on which each Debtor became insolvent,

however, are issues of fact that we cannot resolve here.

In addition, the Debtors’ argument appears to have a

significant deficiency: they must have a colorable claim of

breach of fiduciary duty to show “good cause.” Garner, 430

F.2d at 1104. Even if BCE owed the Debtors and their creditors

fiduciary duties, it seems a stretch to argue that BCE’s decision

not to fund Teleglobe implicated those duties. A fiduciary

ordinarily has the obligation (protected by the business

judgment rule) to manage the affairs of a corporation in such a

way as to maximize its economic value; it does not have a duty

to guarantee or bail out a corporate family member when it loses

money. Trenwick, 906 A.2d at 205. As Vice Chancellor Strine

noted in Trenwick, insolvency does not render a corporation’s

fiduciaries guarantors of that corporation’s success; rather, it

merely expands the universe of people with standing to assert a

beneficial interest in the fiduciaries’ obligation to maximize the

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value of the corporation.36 Id. Whether BCE would continue to

infuse Teleglobe and the Debtors with funding seems, at least at

first glance, entirely BCE’s decision. Still, we do not have the

entire record before us, and so we leave this issue for the District

Court to resolve in the first instance.

Mopping up, BCE advances seven arguments against

applying Garner in this situation, most of which are unavailing.

First, it argues that Garner does not apply to work product. This

is correct, but as we do not know how many of the 800 different

documents currently in dispute contain work product, we must

leave this issue for the District Court to resolve on remand.

Second, BCE (the appellant) argues that the Debtors (the

appellees) have abandoned the Garner argument. The cases it

cites, however, are off the mark because they address the

appellant’s obligation to raise all grounds for reversal. See

Simmons v. City of Philadelphia, 947 F.2d 1042, 1066 (3d Cir.

1991) (Opinion of Becker, J., announcing the judgment of the

Court); Inst. for Scientific Info., Inc. v. Gordon & Breach, Sci.

Publishers, Inc., 931 F.2d 1002, 1011 (3d Cir. 1991). It is

36

In Trenwick, the Vice Chancellor put to rest the notion that

there is such a thing as a cause of action for so-called

“deepening insolvency” in Delaware law. 906 A.2d at 205.

This effectively prevents extending our holding in Official

Comm. of Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d

340, 347 (3d Cir. 2001), in which we decided that the cause of

action exists in Pennsylvania, to Delaware cases (and supersedes

those few Delaware District and Bankruptcy Court cases that

have done so).

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firmly established that we may affirm on any ground supported

by the record, so the Debtors’ failure to raise the issue does not

waive it. Azubuko v. Royal, 443 F.3d 302, 303 (3d Cir. 2006).

Moreover, the issue has yet to be addressed by the District

Court, and it remains open on remand.

Third and fourth, BCE argues that Garner has been

rejected by Canadian courts and never adopted by our Court. As

a matter of federal common law, it is correct that we have not

always applied Garner, see Wachtel v. Health Net, Inc., 482

F.3d 225, 233 (3d Cir. 2007), but neither party argues that

federal common law governs this dispute.37 As to the Canadian

law argument, we doubt that Canadian law would apply to this

issue, as the Debtors are Delaware corporations.38 Under the

internal affairs doctrine, anyone controlling a Delaware

corporation is subject to Delaware law on fiduciary obligations

to the corporation and other relevant stakeholders. See In re

Topps Co. S’holders Litig., ___ A.2d ___, 2007 WL 1491451,

at *7 (Del. Ch. 2007) (Strine, V.C.) (explaining that the law of

fiduciary obligations is one of the most important ways a state

regulates a corporation’s internal affairs); RESTATEMENT

37

Federal common law does not apply to disputes about

corporations’ internal affairs. VantagePoint Venture Partners

1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005) (“It is

now well established that only the law of the state of

incorporation governs and determines issues relating to a

corporation’s internal affairs.”).

38

This is the only issue on which BCE argues that there is a

true conflict of law, see Part III, supra.

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(SECOND) OF CONFLICTS OF LAWS § 306. Moreover, if

Delaware law favors admission of the evidence, then BCE must

show some “special reason” why that should not be given effect.

Id. § 139(2); see also Carlton Invs., Inc. v. TLC Beatrice Int’l

Holdings, Inc., No. C.A. 13950, 1996 WL 33167792, at *2 (Del.

Ch. Sept. 27, 1996). Still, because we ultimately conclude that

we cannot apply Garner here without knowing when the

Debtors became insolvent, we will not conduct a full-scale

choice-of-law analysis.

Fifth and sixth, BCE argues that Garner cannot be

extended to this situation because (1) BCE owed the Debtors no

fiduciary duties, and (2) Garner does not permit subsidiaries to

invade the privilege of indirect corporate parents. The answer

to both arguments is that BCE, as the ultimate owner of more

than half (and, indeed, all) of the Debtors’ voting power, owed

them the duties of care and loyalty. See Weinstein Enters. v.

Orloff, 870 A.2d 499, 507 (Del. 2005). If the Debtors were

solvent, then all duties flowed back up to BCE as the only party

with a legitimate interest in the Debtors’ success. If that were

the case, then BCE is correct that it effectively owed the Debtors

no duties. However, if the Debtors were insolvent, then their

creditors also had a legitimate interest in their success. See N.

Am. Catholic Programming Found., ___ A.2d at ___, 2007 WL

1453705, at *7. With multiple stakeholders, BCE’s duties of

care and loyalty would come into play in the same way that the

directors’ duties did in Garner, and its attorney-client privilege

could be set aside by showing good cause.

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Finally, BCE argues that the Debtors cannot show good

cause. As BCE concedes in the next breath, however, it is not

for us to determine whether they can show good cause in the

first instance; so we leave the issue open on remand.

B. Affirming as a Discovery Sanction

The Debtors urge us to affirm the District Court’s order

as a sanction for BCE’s penchant for designating too many

documents as privileged. We cannot do so at this time for the

simple reason that the District Court did not impose such a

sanction. To be sure, both the Special Master and District Court

expressed displeasure with BCE’s litigation conduct, but neither

expressly penalized that behavior, and so we have no sanction

order to review. We do note that preventing a party from

asserting the attorney-client privilege is a legitimate sanction for

abusing the discovery process, and we do not foreclose that

remedy on remand. Disclosure is a serious sanction, but one

that may be imposed only if the District Court finds bad faith,

wilfulness, or fault. See Am. Nat’l Bank & Trust Co. of Chicago

v. Equitable Life Assur. Soc’y of U.S., 406 F.3d 867, 877–80

(7th Cir. 2005).

VII. Conclusion

We hold that the District Court may only compel BCE to

produce disputed documents because of the adverse-litigation

exception to the co-client privilege, see Part IV.D, supra, if it

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finds that BCE and the Debtors were jointly represented by the

same attorneys on a matter of common interest that is the

subject-matter of those documents. Finding that BCE and

Teleglobe were jointly represented is not enough, as Teleglobe

cannot unilaterally waive the co-client privilege that attaches to

documents that involve BCE and were created in the course of

the joint representation. Moreover, BCE has not waived the

argument, and it is not in some “community of interest” with the

Debtors as a matter of law. In addition, that documents prepared

by outside counsel were funneled through in-house counsel for

both BCE and Teleglobe is of no moment. Following Eureka,

what matters is the scope of any joint representation: documents

within the scope are discoverable; documents outside it are not,

irrespective of whether they were improperly funneled through

joint attorneys.

On remand, then, the primary issue is whether any

attorneys jointly represented BCE and the Debtors on a matter

of common interest. Also open on remand are the issues of

discovery sanctions and whether the Garner fiduciary

exception—currently extant in Delaware— applies in this case.

Because of the need to resolve this privilege dispute

efficiently so that the underlying litigation can proceed, this

panel of our Court will continue to review any additional

privilege-related appeals.

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