This morning, a unanimous Illinois Supreme Court has held that the doctrine of subject matter waiver of attorney-client and work product privileges does not apply in the vast majority of cases to disclosures made outside the context of litigation. For our pre-argument preview of Center Partners, Ltd. v. Growth Head GP, LLC [pdf], see here. For our report on the oral argument, see here.

Defendants – a group of corporations, partnerships and trusts – purchased the assets of a Dutch company, Rodamco. Among those assets was Urban, an Illinois limited partnership which owned high-end retail shopping centers all over the United States. The same day they entered into the purchase agreement, the defendants entered into a side agreement among themselves, governing how much each would pay in the acquisition, and who would get what from Rodamco’s assets.

During the negotiations leading up to the Rodamco purchase, the various defendants disclosed to each other some of their attorneys’ advice on the transaction. They also shared certain documents with one another concerning the legal and financial terms of the transaction, and permitted their individual attorneys to discuss their legal concerns and conclusions with each another.

The plaintiffs – limited partners in Urban – sued the three defendant groups for breach of fiduciary and contractual duties in connection with the acquisition. The Circuit Court granted an initial motion to compel in 2008, requiring the defendants to produce certain privileged documents which had been shared among themselves. About eighteen months later, the plaintiffs moved to compel again, seeking over 1,500 documents – virtually all remaining privileged materials relating to the acquisition. The Circuit Court applied the subject matter waiver doctrine and granted the motion to compel, and the Appellate Court affirmed.

In an opinion by Justice Garman, the Supreme Court unanimously reversed. Writing that the question of whether subject matter waiver applied outside litigation was one of first impression in Illinois, the Court began by sketching the doctrinal basis both for the privilege and for waiver. Specifically, the Court pointed out that subject matter waiver has generally been justified as a matter of “sword and shield” – a party should not be permitted to gain a litigation advantage by disclosing carefully selected bits of legal advice, while hiding “the rest of the story” from his adversary (and the court). From there, the Court carefully reviewed the relatively limited number of cases from around the country considering the matter, contrasting two decisions which refused to apply subject matter waiver outside of litigation, In re Von Bulow and In re Keeper of Records [pdf], with various Federal decisions broadly applying waiverUltimately, the Court endorsed Von Bulow and Keeper of Records, providing a bright line rule: “subject matter waiver does not apply to disclosures made in an extrajudicial context when those disclosures are not thereafter used by the client to gain a tactical advantage in litigation.” This was so, the Court found, for three principal reasons: (1) the purpose of the subject matter waiver doctrine is more closely applicable to litigation; (2) the cases limiting waiver are “more thorough and persuasive” than the opposing line of authority; and (3) an opposite rule would provide perverse incentives by causing parties to leave attorneys out of commercial negotiations where their advice is badly needed for fear of later waiver.

In the concluding pages of the opinion, the Court addressed the plaintiffs’ argument that the defendants had, in fact, used partial disclosure for an unfair advantage in the litigation with the limited partners. The Court disagreed, pointing out that several of the instances cited by the plaintiffs had occurred after the Circuit Court had erroneously ruled that the privilege had been waived anyway, and in another deposition, the witness had not testified to the actual content and basis of the legal advice.

Center Partners is an important opinion for Illinois business. As both the amici and the Court itself pointed out, applying subject matter waiver to everyday business negotiations would have been a serious impediment to Illinois business and its lawyers, discouraging candor and free and open discussion. Through today’s opinion and yesterday’s adoption of Illinois Rule of Evidence 502, the Court has provided a significant measure of certainty: sweeping waivers should not be applied in Illinois unless disclosures are made before a court or governmental office or agency. But that certainty comes with an important caveat for those doing business in other states: as the Center Partners opinion shows, this is a matter on which the law varies around the country. So proceed cautiously.