Squib Notes: Venerable “Kovel Rule” May Be Under New Attack

By Phil Karter

For almost 50 years, lawyers have relied on the “Kovel Rule” to extend the attorney-client privilege to non-testifying accountants or other business experts.   The philosophy behind the rule, so named after the landmark case, United States v. Kovel, 296 F. 2d 918 (2nd. Cir. 1961), is to recognize “the complexities of modern existence [which] prevent attorneys from effectively handling clients’ affairs without the help of others . . . .”  Id. at 921.  Without such a rule, disclosure to a third party would constitute a waiver of the attorney-client privilege.

In practice, the Kovel Rule has been ubiquitously employed by lawyers who engage other professionals to assist them in rendering render legal advice.  Most typically, the lawyer engages the third-party professional by means of a written engagement, known as “Kovel Agreement.”  Where the third-party is first contacted directly by the client rather than through the lawyer, a greater level of scrutiny about whether the privilege attaches typically ensues because of concern over whether the professional’s advice is really necessary for the lawyer to render legal advice.  For example, a previous relationship between a client and the third-party consultant, or a direct relationship, can be viewed as evidence the third-party is merely performing consulting work rather than facilitating the lawyer’s ability to render legal advice.  See e.g., In re G-I Holdings Inc. 218 F.R.D. 428 (D. N.J. 2003).

Kovel is not without its detractors, and courts have nibbled at its edges for years.  However, a recent comment by a senior IRS Chief Counsel attorney at last week’s ABA Tax Section meeting suggests a full frontal assault may be in the cards.  The official, Janet Johnson, Deputy Division Counsel for Criminal Tax, stated, “We will take the position that the accountant is independently working and not covered by privilege.” How the government intends to argue in favor of a blanket reversal of Kovel remains to be seen, but a word to the wise is that such arrangements should be carefully crafted and contemporaneously documented.  Once in place, due care should be taken to ensure that the formalities of the lawyer-consultant relationship are meticulously observed.  Clients, in turn, should have a clear understanding about the nature and purpose of Kovel relationships particularly in the event there is direct interaction with the third-party professional.  Lastly, when the third-party professional is an accountant, it is unclear how, if at all, the privilege for accountant-client communications, established in 1998 under Section 7525 of the Internal Revenue Code, would be implicated by the frontal assault contemplated by Ms. Johnson.   At this point, all we can say with certainty is stay tuned.

3 thoughts on “Squib Notes: Venerable “Kovel Rule” May Be Under New Attack

  1. Mr. Karter,

    In your view is the so-called “Kovel Agreement” discoverable insofar as it establishes an indispensable element of the privilege claim under the Kovel Rule, a claim the proponent has the burden of proving?


  2. There is no uniform answer to your question. Just as in the case of engagement letters directly between a client and an attorney (or a client and a tax practitioner covered by sec. 7525), it depends on the content of the agreement. Kovel agreements can be generically written, containing no advice, client communication or discussion of the subject matter, in which case a claim of privilege against disclosure would have questionable merit. On the other hand, the content of the agreement may include privileged material, in which case nondisclosure or partial redaction may be appropriate.

    As far as establishing the requisite elements to claim the privilege, that need not necessarily come from the Kovel agreement itself, but can also be established by the facts and circumstances of the relationship. (Indeed, although recommended, the existence of a written Kovel engagement with the third-party consultant is not an absolute prerequisite to extend the zone of privilege under Kovel if the facts and circumstances warrant it.) Moreover, courts make determinations all the time by in camera inspection, as to whether the privilege attaches. Lastly, even assuming the Kovel letter itself is not privileged, it may be protected from disclosure, in whole or in part, under the work product doctrine depending on its contents and the reasons why it was prepared.

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