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You’re Not My Client … But the Attorney-Client Privilege Still Applies!

In Dialysis Clinic, Inc. v. Kevin Medley, 567 S.W.3d 314 (TN 2019), the Tennessee Supreme Court decided as a matter of first impression that attorney communications with a third party for the purpose of providing legal advice are considered confidential and privileged from disclosure. The Supreme Court affirmed the trial court’s determination that the person communicating with the attorney was the “functional equivalent” of a client’s employee for purposes of determining whether the attorney-client privilege protected communications with the corporate client’s counsel. The Supreme Court accepted the interlocutory appeal after it had been approved by the trial court, but denied by the Court of Appeals.

Dialysis Clinic engaged XMi Commercial Real Estate to manage several commercial properties. Thereafter, XMi served as Dialysis Clinic’s exclusive agent to negotiate leases and renewals; collect rents, dues and fees; terminate leases at Dialysis Clinic’s direction; and respond to actions brought against Dialysis Clinic involving its leases and properties. Dialysis Clinic initiated unlawful detainer actions against Kevin Medley.  Medley sought discovery of emails between XMi and in-house counsel for Dialysis Clinic.

After an evidentiary hearing, the trial court upheld Dialysis Clinic’s objection on the basis of claimed privilege, per the policy of encouraging candid communication between attorneys and clients by sheltering the communications from disclosure. This conclusion was upheld on appeal.

Noting that the privilege does not protect such communication between attorneys and clients in the presence of third parties, but that the privilege applies when the third party is the client’s agent, the Tennessee Supreme Court adopted the “functional equivalent” analysis to determine if XMi was the equivalent of an employee of the client, citing and discussing In re Bieter Co., 16 F.3d 929, 938 (8th Cir. 1994). The Supreme Court recounted the wide acceptance of the “functional equivalent” analysis by other courts, including federal district courts and lower state appellate courts in Tennessee.

Applying a “functional equivalent” analysis to the evidence before it, the Supreme Court concluded that Dialysis Clinic hired XMi because (1) XMi had property management experience that Dialysis Clinic lacked in-house; (2) Dialysis Clinic had stepped into unfamiliar territory in acquiring the properties; (3) there was a close working relationship between XMi and Dialysis Clinic; (4), XMi interacted frequently with the tenants; and (5) XMi had information that no one at Dialysis Clinic had.

Under these facts, XMi was deemed to be the “functional equivalent” of an employee of Dialysis Clinic. As such, Dialysis Clinic “could reasonably rely upon confidentiality in consultations [between XMi and] its own lawyer[s].”