It's not good to talk

Communications between business people and their in-house lawyers can, in competition law investigations, still be accessed and used by the European Commission (EC). In the Akzo case (Case C-550/07 P, Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v European Commission), the European Court of Justice (ECJ) on 14 September 2010 refused protection to such communications in EC competition investigations, despite strong opposing arguments from Akzo and various concerned governments and professional bodies.

The protection of communications between lawyer and client, generally known as legal privilege, is a feature common to most developed legal systems. It enables those seeking legal advice to do so without the fear that the communications themselves may be used against them by an opponent in litigation or a regulatory or enforcement authority.

Legal advice about the issues raised by a client could be particularly potent material in the hands of an opponent or authority. The question in Akzo was whether communications with an in-house lawyer should be protected.

Ever since the ECJ’s 1982 ruling in AM&S (Case 155/79 AM&S Europe v Commission [1982] ECR 1575), the EC has refused to treat in-house lawyers’ advice as privileged in the context of EC competition investigations. The ECJ considered only communications with external EU qualified lawyers merited the protection of privilege.

The AM&S ruling has received consistent criticism from many professional bodies and representatives of in-house lawyers’ interests. In the UK, among other countries, in-house lawyers are generally members of a bar or law society and subject to professional rules of ethics.

Under domestic rules, their advice would be protected from disclosure in just the same way as advice from external lawyers. The denial of protection to such communications where an EC competition investigation is concerned presents significant practical difficulties when implementing competition compliance programmes. The role of the in-house lawyer is often key, as he or she is the first port of call for advice about whether particular conduct is or is not compliant with competition law. Given the perverse effect of denying this protection to in-house lawyers’ advice, the judgment in Akzo was therefore eagerly anticipated.

No advance

The saga began in 2003, when the EC “dawn raided” the UK premises of chemical group Akzo Nobel and its subsidiary Akcros, as part of a competition investigation. An official demanded to see documents which Akzo claimed were privileged. The documents included information gathered in connection with a competition law compliance programme, jottings made by Akcros’s general manager, and emails between the manager and Akzo’s competition law compliance co-ordinator, an in-house lawyer.

The European Court of First Instance (now the General Court), decided to follow AM&S, and denied the protection of privilege to the communications with the in-house lawyer. Akzo appealed to the ECJ.

With its September 2010 judgment, the ECJ has dismissed the appeal in its entirety. The fact that many in-house lawyers in the EU are admitted to a professional body and subject to ethical rules did not change the ECJ’s view. Nor was it swayed by arguments that the position had changed since AM&S, or that legal privilege should be a matter for the courts of individual member states. According to the ECJ, the fundamental point is that in-house lawyers have too much “economic dependence” on their employers to benefit from privilege.

The judgment confirms there will be no change: it remains unsafe for business people to communicate with their in-house lawyer in the context of EC competition law investigations.

Where does this leave us?

Each legal system will have its own specific rules on privilege. The Three Rivers case in England & Wales ([2005] 1 AC 610) significantly developed the law in this area. While not all issues were addressed by the House of Lords, the position appears to be that legal privilege protects communications between a lawyer and his or her client where:

• the lawyer, including an in-house lawyer, is acting in a professional capacity. (While it is not an express condition that in-house lawyers hold a current practising certificate, it is strongly advised that one is obtained to guarantee protection);
• the communication is for the dominant purpose of giving or receiving legal advice, including advice as to what should prudently and sensibly be done in the relevant legal context;
• the communication is treated as confidential.

There are two types of privilege: legal advice privilege and litigation privilege. While legal advice privilege applies to any communications with a lawyer for the dominant purpose of giving or receiving legal advice, litigation privilege applies only where communications take place in the context of actual or contemplated litigation.

In contrast to legal advice privilege, litigation privilege is extremely wide and applies to communications between the client and a third party, even a non-lawyer, so more extensive protection is given in this narrower context. In the UK, communications with in-house lawyers enjoy parity of protection with external lawyers.

A recent Scottish case, BSA International SA v McClelland Irvine [2009] CSOH 77, considered some aspects of legal privilege in the context of a competition investigation. In 2004, BSA had purchased the shares of McClelland Irvine. The OFT subsequently alleged this had infringed competition law. BSA reached a settlement with the OFT involving payment of an agreed fine, and then sought to sue the vendors to recover damages for breach of warranty.

In that context, an issue arose whether privilege in relation to advice obtained by BSA had been waived where the pleadings referred to the advice. The final version of the advice was disclosed to the vendors, but it referred to earlier advice which was not. The vendors sought to obtain access to that advice. Lord Glennie held that privilege had not been waived.

In EC competition proceedings, the scope of privilege is subtly different. The test, which stems from AM&S, is twofold: communications must be made for the purposes and in the interests of the client’s rights of defence, and they must emanate from an EU qualified external lawyer. Although not specifically addressed by the ECJ in Akzo (which concerned only the second part of the test described above), the General Court has suggested that some internal communications would seem potentially to be within the scope of privilege, if drafted carefully to make it clear that they are made exclusively for the purpose of seeking legal advice from an external EU qualified lawyer. Internal communications may be afforded the protection of privilege where they “have a relationship to the subject matter of that procedure”. This means that a broader range of communications seem to be protected than in equivalent UK proceedings. This inconsistency in the rules can make it difficult to ensure that protection is maximised.

A related question is whether protection attaches to legal advice from an external EU qualified lawyer that falls outside the scope of the EC’s investigation. Such advice may in principle be withheld from EC officials as being irrelevant, but the EC’s investigative approach may make this difficult to achieve in practice. The ECJ did not make it clear in Akzo that all legal advice between an external EU qualified lawyer and his or her client is privileged, and this clarification would have been welcome.

In summary, if a company is investigated by the Office of Fair Trading (OFT) for an alleged breach of competition law, then UK rules on privilege apply, even if the OFT is applying EU competition law. However, if the EC investigates, then communications with in-house lawyers can generally be accessed and used as evidence.

Implications of Akzo

Communications between a client and an external EU qualified lawyer in the exercise of the rights of defence are privileged in EC competition investigations.

Communications between a client and his or her in-house lawyer will not be protected in EC competition investigations, though they will still be protected in OFT proceedings provided the relevant conditions are met.

It seems likely that the Akzo decision applies to all competition investigations, including those under the Merger Regulation and in state aid proceedings, in which the EC can compel the production of documents.

The other major issue arising from AM&S is that non-EU qualified (not admitted to a bar or law society in Europe) lawyers’ advice is not privileged as far as the EC is concerned. Although the ECJ did not specifically address this point, Advocate General Kokott explained the rationale behind this exclusion in her opinion, and it is likely that the position with respect to the treatment of communications with non-EU qualified lawyers remains the same as it was in AM&S.

The reasons behind this denial of the protection of privilege stem from the fact that some countries might not have ethical or professional standards in any way equivalent to those applicable in the EU.

It is natural (but not necessarily desirable) that enforcement authorities such as the European Commission will seek to maximise their ability to obtain documentation which may establish an infringement of the rules they seek to enforce. Indeed, Commission officials have compared the situation to that of the tobacco companies allegedly using privilege to conceal its carcinogenic effects.

Nevertheless, there are immense dangers in eroding the protection of legally privileged advice – a fundamental right of the defence and part and parcel of the principle that it is for the authority to prove its case. The ECJ has been given the chance to rethink its position and has refused to budge, and now looks unlikely to shift for some time to come.

Catriona Munro is a partner in the EU, Competition & Regulatory Team at Maclay Murray & Spens LLP