According to the United States Court of Appeals for the Second Circuit, documents received from a foreign client and disclosed in one litigation are generally discoverable in a later proceeding to which the client is not a party. In Ratliff, et al. v. Davis, Polk & Wardwell, 354 F.3d 165 (2nd Cir. December 30, 2003), the Court held that “documents held in the United States on behalf of a foreign client, absent privilege, are as susceptible to subpoena as those stored in a warehouse within the district court’s jurisdiction.” In addition, a close reading of the case reveals that documents received from a foreign client for review but never disclosed are not explicitly protected, either.

In Ratliff, Ernst & Young (a Netherlands accounting company) provided documents to Davis Polk (its New York law firm) for review when it was investigated by the United States Securities and Exchange Commission (“SEC”). Some of the documents were subsequently provided to the SEC as part of the case. Later, Donald Ratliff and others commenced a securities fraud action in the United States District Court for the Northern District of Georgia. Ernst & Young was not a party to that case, but plaintiffs served a subpoena upon Davis Polk for copies of the documents it produced for Ernst & Young during the SEC investigation. Davis Polk objected to the subpoena in the Southern District of New York. It cited In Re. Sarrio S.A., 119 F.3d 143 (2nd Cir. 1997), for the proposition that documents cannot be obtained from a lawyer custodian, even absent an attorney-client privilege, if the court does not have jurisdiction over the client/document owner.

The district court agreed with Davis Polk, but the Second Circuit reversed. It found that Davis Polk’s reliance on Sarrio was misplaced. According to the Court, the fact that a client/document owner is outside the jurisdictional reach of a federal court subpoena is not the controlling issue. The crux of the matter is that documents sent into the jurisdiction by the client/owner are generally protected by the attorney-client privilege. Jurisdictionally unobtainable documents remain unobtainable if they are sent to attorneys within the jurisdiction for the purposes of securing legal advice. This rule protects the attorney-client privilege by encouraging the free and truthful exchange of information between clients and their lawyers.

Conversely, however, Sarrio protections do not apply if the production of a foreign client’s documents will not implicate the attorney-client privilege. That was the case in Ratliff, because Davis Polk had already disclosed the subpoenaed documents to the SEC on behalf of Ernst & Young. The disclosure waived any privilege and made the law firm a mere repository.

The holding in Ratliff demonstrates the need for American law firms to work with their foreign clients to develop a retention plan for documents disclosed to third-parties. The plan should account for hard copies of the documents as well as their electronic counterparts and should contemplate the return of the produced documents to their owner as soon as the firms’ need for them has passed. This issue may implicate the firms’ insurance policies, so cooperation with carriers is encouraged.

There is, however, one caveat: Sarrio protections have never been formally established. In fact, they may be nothing more than a judicially-sanctioned presumption in the Second Circuit.

In Sarrio, the Second Circuit never actually held that documents sent to an American law firm by a foreign client for review are protected by the attorney-client privilege. The foreign defendant in Sarrio waived any claim of privilege, making it unnecessary for the Court to consider the issue. Although the Court made its position clear, it only did so in dicta.

Ratliff, the only case that interprets Sarrio in the context of documents, also fails to formalize the privilege. The Court never had the opportunity to do so, because Davis Polk chose not to assert a privilege. As in Sarrio, though, the Court went out of its way to find a reason to discuss the issue.

The fact that the Sarrio privilege has never been formally established does not mean that documents sent to American law firms by foreign clients are not protected by the attorney-client privilege. It suggests, however, that the issue should be placed before a court at some point. The Second Circuit seems more than willing to hear the case.

In the interim, law firms and their foreign clients should strive to supplement the presumed privilege set forth in Sarrio and Ratliff. There are a number of ways to do this. For instance, companies often enter into protective orders and/or confidentiality agreements prior to disclosing documents. These arrangements usually reserve the companies’ rights to assert the attorney-client, trade-secret or other privileges.

It may not, however, be enough for the parties to “stipulate” to confidentiality. Some jurisdictions, including the Second Circuit, have taken an increasingly dim view of such dealings in the face of corporate governance scandals. Thus, foreign defendants that wish to enter into a protective order or confidentiality agreement prior to disclosing documents should obtain judicial approval of same.

For additional information on any of the issues raised in this alert, please feel free to contact Brian A. Bender at (212) 313-5405 (bbender@harrisbeach.com), Judi Abbott Curry at (212) 313-5404 (jcurry@harrisbeach.com), or the Harris Beach attorney with whom you usually consult.

This legal alert provides brief analysis or comments on litigated matters. This legal alert does not purport to be a substitute for advice of counsel on specific matters.