Appeals Court Rejects Application of Corporate Attorney-Client Privilege for ‘Functional Employees’

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Division II of the Washington Court of Appeals recently rejected the application of the corporate attorney-client privilege to “functional employees” in Hermanson v. Multi-Care Health Systems, Inc., ___ Wn. App.2d ___, ___ P.3d ___, 2019 WL 4021900 (Aug. 27, 2019). In the privilege context, “functional employees” are not directly employed by a corporation but are sufficiently integrated into a company’s operations that some federal courts—including the 9th Circuit and Washington’s federal district courts—have concluded that they fall within the corporation’s attorney-client privilege.

In Hermanson, the plaintiff had been treated in the emergency room of defendant, Tacoma General Hospital, following an automobile accident. The plaintiff was given a blood screen that showed the presence of alcohol, which the hospital disclosed to the police and that then led to criminal charges against him. The plaintiff later sued the hospital under a variety of theories arguing that the alcohol test result fell within the physician-patient privilege and should not have been disclosed.

The hospital, the doctor who treated him, and the doctor’s employer that provided trauma services for the hospital under a contract all retained the same law firm. The defense firm informed plaintiff’s counsel it also represented the emergency room nurses and a social worker who participated in the plaintiff’s treatment. At that point, the parties went to the Pierce County trial court to resolve questions over the intersection of the attorney-client and physician-patient privilege under the leading decision on that issue: Youngs v. PeaceHealth, 179 Wn.2d 645, 316 P.3d 1035 (2014), in which the Supreme Court held that an attorney for a defendant hospital in a medical malpractice case could discuss a claimant’s treatment at issue with an employee-physician involved, notwithstanding the physician-patient privilege.

The trial court held that because the doctor was not a direct employee of the hospital, he did not fall within the hospital’s attorney-client privilege. By contrast, because the nurses involved were direct employees of the hospital, they did fall within the hospital’s attorney-client privilege and, following Youngs, the hospital’s attorney-client privilege “trumped” the physician-patient privilege. The trial court, however, declined to apply that same reasoning to the social worker who was also a direct employee of the hospital. The trial court’s decision went up on discretionary review to Division II of the Court of Appeals.

The Court of Appeals affirmed in part and reversed in part on a 2-1 vote. The majority agreed that the doctor did not fall within the hospital’s attorney-client privilege, but concluded that both the nurses and the social worker did. The dissenting judge agreed on the nurses and the social worker, but would have also included the doctor. Both the majority and dissenting opinions have extended discussions of Youngs and the interplay between the attorney-client and physician-patient privileges. Hermanson, therefore, is a “must read” for lawyers who handle medical malpractice and related litigation.

For the rest of us, Hermanson is also a “must read” for its approach on whether the doctor fell within the hospital’s attorney-client privilege. 

As noted, the majority concluded that because the doctor was employed by an association that provided trauma services rather than the hospital itself, he was not included within the hospital’s attorney-client privilege. In doing so, the majority expressly rejected the notion that the doctor was a “functional employee” of the hospital—and the leading 9th Circuit decision applying that concept to corporate privilege: U.S. v. Graf, 610 F.3d 1148 (9th Cir. 2010). Graf itself cites federal decisions from Washington recognizing the “functional employee” concept (at 1158). The dissenter in Hermanson argued that the doctor should have been recognized as a “functional employee” of the hospital and that corporate privilege should extend to him under Graf.

Given the marked shift in many businesses today away from the traditional employer-employee model to alternatives ranging from consultants to contractors, the Hermanson majority’s refusal to include “functional employees” within corporate privilege may reverberate far beyond the narrow confines of medical malpractice. As of this writing, it is not clear whether Hermanson will be reviewed by the Washington Supreme Court.

Stay tuned.