Supreme Court Applies Corporate Attorney-Client Privilege to ‘Functional Employees’

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The Washington Supreme Court recently applied the corporate attorney-client privilege to “functional employees” in Hermanson v. Multicare Health Systems, Inc., ___ Wn.2d ___, ___ P.3d ___, 2020 WL 6603473 (2020). 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—had 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 privileges 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. On a 6-3 vote, a Supreme Court majority on further review applied the hospital’s privilege to both the independent-contractor doctor and the employee nurses and social worker.

Both the majority and dissenting opinions at the Supreme Court 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.

The majority looked beyond employment status and instead focused on whether there was a principal-agent relationship between the hospital and the doctor. The majority concluded the contractual relationship involved met this standard for the treatment involved and swept the doctor under the hospital’s corporate privilege. In doing so, the majority relied primarily on the Restatement (Third) of the Law Governing Lawyers (2000) and the leading 9th Circuit decision applying the “functional employee” concept to corporate privilege, U.S. v. Graf, 610 F.3d 1148 (9th Cir. 2010). Graf, in turn, cites federal decisions from Washington recognizing the “functional employee” concept (at 1158). 

Given the marked shift in many businesses today away from the traditional employer-employee model to alternatives ranging from consultants to contractors, Hermanson reverberates far beyond the narrow confines of medical malpractice.