Why Chinese companies need to understand US attorney-client privilege

Figure 1: Five requirements for attorney-client privilege

1. The person asserting the privilege must be a client, or must have sought to become a client at the time of disclosure;
2. The person connected to the communication must be acting as a lawyer;
3. The communication must be between the lawyer and the client exclusively – no stranger may be included in the communication;
4. The communication must have occurred for the purpose of securing a legal opinion, legal services, or assistance in some legal proceeding and not for the purpose of committing a crime; and
5. The privilege has been claimed and not waived by the client

It has been well-established that the attorney-client privilege also applies to a corporate client. If a Chinese company seeks legal advice, not for committing a crime, from a US attorney, either related to a litigation in a US court or regarding a patent application before the US Patent and Trademark Office, the communication should be privileged, unless the privilege is waived or the communication is disclosed to a stranger. But it is not always this straightforward and for many Chinese companies, things can get very complicated.

Hypothetical case in point

Chinese company CoC is a successful consumer product manufacturer. Several years ago, CoC's founder and CEO decided to enter the US market. But he was worried that patent infringement lawsuits were big threats there and that US lawyers would be expensive. One day, he thought of an idea – asking his engineers to research US patents and figure out whether CoC's product Alpha (the first product line that CoC would export to the US) infringed on any US patents, and if so, change the design of product Alpha to circumvent the patent. He was pretty excited about this idea and ordered his R&D team to immediately act on it. Although not a patent attorney or agent, the head of the R&D department had some basic knowledge on how the patent system worked. So he and his team conducted a search, found several relevant US patents and analysed them. One month later, he reported back to the CEO on the result of his team's research – no risk of infringement. Half a year passed; while preparing for the first shipment of product Alpha to the US, CoC's engineers started the same patent evaluation on its product Beta. This time, CoC hired a Chinese in-house counsel with some patent experience to manage the evaluation process, and a minor change was made to product Beta to avoid an active US patent.

In the next couple of years, CoC's business in the US expanded. Both products Alpha and Beta sold very well. Unsurprisingly, CoC was sued in a US district court for patent infringement and both products were cited. Shortly after, discovery started. By then, CoC had engaged a US law firm to defend them. In preparing for an intensive document exchange during discovery, CoC's US counsel collected and reviewed tens of thousands relevant documents, including e-mails, from CoC's employees. But to the attorneys' surprise, they found hundreds of e-mail communications among CoC's engineers discussing the asserted patent and CoC's product Alpha. These were the communications that occurred during the patent evaluation process a couple of years earlier. Even worse, one of the engineers thought at one time that product Alpha infringed on the patent at issue and stated so in several e-mails to his colleagues. With no basis to withhold these e-mails, CoC's US counsel had to produce them to the plaintiff, knowing full well that this condemning evidence would do serious harm to CoC's case in front of a jury.

The US counsel also found hundreds of e-mail communications among CoC's engineers discussing the asserted patent and product Beta. But because of the involvement of CoC's in-house counsel, the US counsel withheld these communications on the basis of attorney-client privilege. The plaintiff objected to CoC's assertion that those communications were protected by attorney-client privilege, and filed a motion to compel CoC to produce these e-mails. Suppose the motion is now pending in the court, how will the court rule on it?

Location parameters

Up until now, there has been no published US court opinion on the issue of whether communications with a Chinese in-house counsel that occurred in China are attorney-client privileged. The same issue in the context of other foreign countries, however, has been litigated before in US courts. Under the basic principles established in those precedents, a court needs to first answer the choice-of-law question—which country's law it should apply in determining the privilege issue. Some district courts have followed the touching base rule – if a communication has nothing to do with the US or has only an incidental connection to this country, the privilege issue will be determined by the law of the foreign nation. But where the communication has more than an incidental connection to the US, the court will apply US privilege law (see Odone v Croda and Duplan Corp v Deering Milliken). Other district courts have applied the traditional balancing test rule, under which the court ascertains which country has the dominant interest in the communication by considering a list of factors including, but not limited to, the substance of the communication, the place where the communication occurred, and the parties to the communication (see VLT Corp v Unitrode Corp and Golden Trade v Lee Apparel).

There were very few cases where US privilege law was applied to communications involving foreign legal advisors. But in those cases, courts had not required that a legal advisor be a member of a US bar, like the California Bar, as a prerequisite to the application of the attorney-client privilege (see Keating v McCahill, holding that a lawyer admitted to practise in Canada was a lawyer for the purposes of the attorney-client privilege under Pennsylvania law). However, courts were split on whether a foreign legal advisor must be admitted to a bar and more recently at least two courts ruled that an in-house counsel who was not admitted to any bar (foreign or US) could not invoke the attorney-client privilege under US law (see Louis Vuitton Malletier v Dooney & Bourke, holding that a French in-house counsel who was not admitted to any bar could not invoke the attorney-client privilege).

In the hypothetical example, the Court would probably apply the US privilege law because the subject matter of the communications at issue concerned US patent law – whether CoC's products infringed on certain US patents. The critical question now is whether CoC's in-house counsel is admitted to the Chinese bar or any bar. According to Chinese law, Chinese in-house counsel are not required to have legal degrees or bar certificates. This means that if the CoC in-house counsel is not admitted to any bar, the Court may reject CoC's privilege claim, given US courts have differed on this issue and the more recent cases showed that courts would impose such a bar membership requirement.

Even if Chinese law is applied in the example, which is very unlikely, the communications at issue would not be privileged either because Chinese law does not recognise attorney-client privilege. In fact, various Chinese procedural laws clearly require a Chinese lawyer to cooperate with courts, procuratorates and public security organs to provide truthful testimony about their client, regardless of whether the relevant facts and information were originally obtained from the client and requested to be kept confidential.

At risk

The example is a vivid illustration of a critical risk Chinese companies are facing in US courts. This risk must be managed carefully and early so that potentially damaging information and documents may be protected later during litigation. The safest way for a Chinese company to avoid CoC's mistake is to engage a US counsel in handling issues that may come up in US litigation later. For example, if CoC had engaged a US counsel to manage the patent infringement analysis and design-around tasks, all those e-mail communications among the CoC engineers would be protected under the attorney-client privilege. In fact, it is highly recommended that a Chinese company engage a US patent attorney to do a freedom-to-operate (FTO) search and if deemed necessary, a non-infringement opinion letter before the company begins exporting products to the US. Such an FTO search provides a reliable and objective evaluation on the risk of being hit by a patent infringement lawsuit in the future. And the non-infringement opinion letter serves an important role in refuting a wilful infringement claim in litigation. Compared with the cost of litigation, the cost for an FTO search and opinion letter is minimal.

Of course, another approach a Chinese company could follow is not to engage in discussion, research, analysis, or evaluation on any issue related to a potential US litigation, including infringement, invalidity or enforceability of a US patent. Following this approach will avoid the kind of risk CoC had unintentionally inflicted on itself. But the flipside of the approach is the missing of an opportunity by the Chinese company to prepare for or even prevent a patent infringement lawsuit. For example, if a threatening US patent can be identified early, a Chinese company can initiate an inter partes or ex parte re-examination proceeding before the United States Patent and Trademark Office. Such a proceeding, which is less costly and narrower in scope than litigation, provides the Chinese company a chance, outside of a US court, to invalidate or narrow the claims of the patent at issue. The attorney-client privilege is an important aspect of US law and a US attorney should be consulted in order to understand how the privilege might apply.

By Jigang Jin, Skadden, Arps, Slate, Meagher & Flom, Palo Alto