Guidelines and tips that can help specialty pharmacies keep communications related to day-to-day operations, contract negotiation, and mergers and acquisitions privileged.
You see it emblazed on e-mails, memos, and documents, but how do you know if the information really is privileged? Creating and maintaining attorney—client privilege is fact-dependent, and you should always consult with legal counsel when in doubt. However, there are some general guidelines and practice tips that can help specialty pharmacies keep communications related to day-to-day operations, contract negotiation, and mergers and acquisitions privileged.
The attorney—client privilege is intended to foster frank conversations between attorneys and their clients. The privilege protects written and oral communications, and generally applies if a communication (1) is between the client and attorney, (2) concerns a legal matter of interest to the client (not a business matter), and (3) is disclosed only to “privileged persons” and other agents of the client who reasonably need to know of the communication in order to act for the entity.
Any employee or agent of the client/company can make privileged communications, depending on the circumstances. The key is whether that employee or agent has been designated by the company to make legal communications on the issue. However, if the communications are broadly shared beyond those who “need to know” the information, the privilege will likely be waived. Both outside legal counsel and in-house legal counsel can have privileged communications.
The privilege only applies to legal analysis and not facts. You cannot protect bad facts by channeling them through your attorney. Also, a business cannot insulate itself from discovery simply by CC’ing an attorney on its communications. Instead, the communication with the attorney must be made for the purpose of soliciting or providing legal advice—whether it is applying the law to a set of facts, reviewing client conduct based on statutes and regulations, or advising clients about trends in the law.
Even with these general guideposts, it can be difficult to determine when the attorney is offering a mixture of business and legal advice, which is often the case when an attorney provides input concerning specialty pharmacy operations, contract assistance, and mergers and acquisitions. We will consider privilege in these 3 areas and review scenarios for each.
Operations questions are often fact-dependent and may involve representatives from multiple business units. The factual nature and the breadth of involved parties often results in a lack of privilege surrounding operations questions.
Scenario: A specialty pharmacy’s chief compliance officer (CCO) learns that Sally Salesrep is giving nurses expensive purses to gain referrals. CCO and Alice Ace-Attorney, the specialty pharmacy’s legal counsel, interview several employees and take notes, which are marked “privileged.” The CCO and Alice Ace-Attorney discuss the legal implications of the action in private. The specialty pharmacy asks Alice to provide training for the pharmacy sales staff, which the CCO also attends.
During the group training, an employee announces that he knows Sally used to give purses out regularly and asks whether that is a problem. The CCO responds, “Sally’s actions are absolutely a problem. Alice Ace-Attorney and I have met on this, and I know Sally was operating outside of the law. That is why we are having this training, so the rest of you will act in compliance with the law.”
The interviews are not privileged because they are fact-finding exercises. The CCO’s notes are likely not privileged; the attorney’s notes from the interviews may be privileged, but she should limit her notes to analysis and rely on the CCO to keep track of the facts. The conversation between CCO and Alice Ace-Attorney is privileged, but the CCO’s statement during the training waives privilege on the legal analysis that Sally was not in compliance with the anti-kickback laws.
Attorneys are well suited to help specialty pharmacies parse long and complicated contract terms and interpret their meaning and effect; however, this type of guidance is not likely privileged. Conversely, guidance on how the contract terms intersect with regulations likely is privileged.
Scenario: A specialty pharmacy director of sales consults with an attorney on a data sale contract. The contract contains complicated language regarding the pharmacy’s obligations to provide certain data in an accurate and timely manner. The attorney explains to the specialty pharmacy employee that the provision requires that 100% of the data elements be provided each month. Additionally, the pharmacy is informed that some of those elements are protected health information under HIPAA and cannot be shared without violating the regulation.
The attorney’s explanation of the page of legalese—that it requires 100% of the data to be provided—is not legal advice and did not require legal interpretation. However, the attorney’s guidance that some of the data elements are considered protected health information is likely privileged, as is the guidance that sharing the data required by the contract is a HIPAA violation.
Add to this scenario that the pharmacy’s attorney speaks with the other party in the data sale contract, and explains her interpretation of the law and how it should be applied to the contract. That conversation likely waives the otherwise privileged nature of the advice.
Mergers and Acquisitions
Buyers need to understand a seller’s legal exposure to potential litigation or government enforcement actions. The seller may need to disclose privileged legal analyses to the buyer’s executive team and attorneys, which would normally terminate the privileged nature of the analyses. However, these communications may remain privileged under the “common interest” exception. This exception protects privilege in situations where it would otherwise be waived if the communication is to promote a shared legal interest between the parties.
Such shared legal interest may arise during a transaction. Determinations of whether the parties share a common legal interest are often highly contextual. Specialty pharmacies should always consult with their attorneys on how best to maintain privilege in these circumstances. Generally, information shared early in negotiations—particularly when the parties are not engaged in exclusive negotiations and there are multiple suitors—are not likely to be privileged.
Some courts have even required a signed purchase agreement for privilege to apply. Specialty pharmacies should also consider how the acquired company’s privileged information will be handled post-acquisition. States apply the law on this issue differently. Some courts find that the seller retains control of pre-merger privileged communications that relate to the merger and its negotiations.
Scenario: After several months of financial diligence led 2 parties to enter into a contract generally outlining the terms of a deal and requiring exclusivity, a seller specialty pharmacy’s attorney and CEO meet with a buyer specialty pharmacy’s attorney and CEO to discuss a prior arrangement with a pharmaceutical manufacturer. The seller’s attorney advises that she worked with the seller to implement the arrangement and determine if it is defensible under the anti-kickback statute.
She further states that she could envision a regulator misunderstanding the relationship and finding a kickback. The acquisition occurs, and months later, the government files an action against the buyer specialty pharmacy, claiming that the arrangement was a kickback. The buyer would like to use an “advice of counsel” defense and rely on the seller specialty pharmacy attorney’s advice as a defense. Unless the seller agrees to this strategy, or the parties negotiated which party “owns” the privilege in the acquisition agreement, the court will likely get involved.
In that event, a court may find (1) that seller specialty pharmacy waived privilege by sharing the information with the buyer, (2) that the seller did not waive privilege but that the privilege transferred to the buyer in the acquisition, or (3) the seller did not waive privilege and still maintains the privilege after the transaction.
Determining whether attorney—client privilege can be invoked depends greatly on the details of the situation. It is not a way to shield “bad facts” from scrutiny. Taking advice from counsel on how to preserve attorney–client privilege can ensure that your specialty pharmacy is protected appropriately, if a government investigation or private litigation puts you under the microscope.
About the Authors
MICHAEL R. HESS is a member of Bass, Berry & Sims PLC and leads its Specialty Pharmacy, Pharma Services, and Distribution Practice, and is based in the firm’s Memphis, Tennessee, office. He is the former chief counsel and vice president of Strategic Development at Accredo Health Group and assistant general counsel for Accredo’s parent, Medco Health Solutions. Bass, Berry & Sims PLC has more than 220 attorneys representing numerous publicly traded companies and Fortune 500 businesses. The firm has 3 offices in Tennessee (Nashville, Memphis, Knoxville) and 1 in Washington, DC. SHANNON L. WILEY is is an associate of Bass, Berry & Sims PLC in its Specialty Pharmacy, Pharma Services, and Distribution Practice and is based in the firm’s Memphis office. COURTNEY H. GINN is is an associate of Bass, Berry & Sims PLC in its Healthcare Practice and is based in the firm’s Nashville office.