The European Court of Justice delimits the scope of legal professional privilege under EU law

Background

The case concerns EU Directive 2011/16/EU known as DAC6 (the Directive)¹ that requires all intermediaries involved in potentially aggressive cross-border tax planning arrangements (that may lead to tax avoidance or evasion) to report them to the competent tax authorities.  This reporting obligation applies to all those who participate in the design, marketing, organisation or management of the implementation of such cross-border arrangements, including those who provide assistance or advice in relation to such activities (including lawyers).

However, the Directive allows Member States to grant intermediaries a waiver from the reporting obligation where exercising the obligation would breach legal professional privilege under the law of those Member States.  Such intermediaries must, however, notify the other intermediaries involved (or, if there are no such intermediaries, the relevant taxpayer) of their reporting obligations vis-à-vis the tax authorities.

In line with these provisions, the Flemish decree transposing the Directive (the Decree) imposed a requirement on intermediaries bound by legal professional privilege to notify other intermediaries (or, in the absence of such persons, the relevant taxpayer) in writing, giving reasons, of their inability to comply with the reporting obligation.  Two lawyers’ professional organisations brought an action for annulment before the Belgian Constitutional Court against the Decree, arguing that it is impossible for lawyer-intermediaries to comply with the obligation to inform the other intermediaries concerned without infringing the legal professional privilege by which they are bound. 

Noting that the contested notification obligation was required to satisfy the requirements of the Directive, the Belgian Constitutional Court decided to stay the proceedings and to request a preliminary ruling from the ECJ regarding the validity of the Directive.  The question before the ECJ was whether the relevant provision of the Directive infringes Article 7 (respect for private life) and Article 47 (right to a fair trial) of the Charter on Fundamental Rights of the European Union (the Charter), insofar as the Member States’ application of that provision has the effect of requiring lawyer-intermediaries subject to legal professional privilege to notify other non-client intermediaries of their reporting obligations.

ECJ judgment

In its preliminary ruling, the Grand Chamber² of the ECJ responded positively to the question with regard to the infringement of Article 7 of the Charter (but not Article 47), clarifying that the protection of legal professional privilege is not limited to activities relating to the defense of a client in legal proceedings, but extends to the relationship between a lawyer and their client outside of a judicial context.

As a preliminary remark, the ECJ recalled that Article 7 of the Charter protects the confidentiality of all correspondence between individuals and affords strengthened protection to exchanges between lawyers and their clients.  The Court further observed that the protection of this provision covers not only the activity of defense, but also legal advice, protecting the secrecy of such legal advice both with regard to its content and to its existence.  Therefore, other than in exceptional situations, individuals consulting a lawyer must have a legitimate expectation that the lawyer will not disclose to anyone, without their consent, that they are consulting him or her.

The ECJ went on to state that the obligation for a lawyer-intermediary subject to legal professional privilege to notify other intermediaries of their reporting obligations necessarily entails the consequence that those other intermediaries become aware of the identity of the lawyer-intermediary, of their assessment that the arrangement at issue is reportable to the tax authorities, and of their having been consulted in connection with the said arrangement.  In those circumstances, the ECJ concluded that the notification obligation imposed on lawyer-intermediaries interferes with the right to respect for communications between lawyers and their clients, guaranteed in Article 7 of the Charter.

The ECJ then examined whether this interference may be justified by the pursuit of an objective of general interest and is appropriate and necessary for the attainment of this objective.  While the Court acknowledged that the notification obligation established by the Directive is intended to contribute to the prevention of the risk of tax avoidance and evasion, which constitute objectives of general interest recognised by the EU, that obligation cannot, according to the Court, be regarded as being strictly necessary to attain those objectives.  This is because the reporting obligation imposed by the Directive already applies to all intermediaries involved in the same reportable cross-border arrangement, which is sufficient to ensure that the tax authorities are informed of potentially aggressive cross-border tax arrangements, without the need for a lawyer-intermediary to be involved.

The ECJ then examined whether the notification obligation imposed on lawyer-intermediaries interferes with the right to a fair trial, guaranteed in Article 47 of the Charter.  The Court found that this was not the case, because the requirements implied by the right to a fair trial presuppose, by definition, a link with judicial proceedings, while the notification obligation in question arises outside the framework of legal proceedings or their preparation.

Implications – including for competition law matters

While issued in the context of notification obligations imposed on lawyers advising on potentially aggressive cross-border tax arrangements, the ECJ’s judgment has practical implications for all areas of EU law, including competition law.  Under earlier case law, EU legal professional privilege only expressly covered advice provided by an external lawyer (qualified to practice in the EEA) for the purposes and in the interests of the client’s rights of defense.³ The Orde van Vlaamse Balies judgment marks a departure from this narrow interpretation, extending the protection afforded to lawyer-client communications to all legal advice, whether or not it was given in the context of the exercise of the client’s rights of defense.

For competition law matters, this means that companies will now need only to demonstrate that communications were sent with the aim of seeking legal advice from an EEA-qualified lawyer to qualify for privilege rather than needing legal assistance to defend litigation.  This could have important ramifications.  Imagine, for example, the European Commission is investigating whether a company deliberately or negligently supplied misleading/incorrect information during an EU merger control procedure.  The Orde van Vlaamse Balies judgment provides lawyers with additional ammunition to help clients resist requests by the European Commission for them to submit client-lawyer correspondence to the Commission in that context.

More generally, the principle that legal professional privilege covers both contentious matters and general legal advice will apply whenever EU law is being applied – whether it is an EU institution or a public body of a Member State applying the law. However, when a national authority is applying the relevant local (national) law, the national rules on legal professional privilege will be applicable and caution is required as there is significant variation between the different Member States’ laws on privilege.

Finally, it is worth recalling some tips to ensure companies maximise their chances of benefiting from EU legal privilege:

• When handling commercially sensitive matters or matters with an EU law element, consider whether external legal advice should be sought.
• Where this is the case, instruct external counsel (qualified to practice in the EEA) as soon as possible to maximise the protection afforded by privilege.
• Mark all draft documents or other materials to be reviewed by external counsel and all correspondence with external counsel as “privileged and confidential”, and be as clear as possible that the communication relates to legal advice.
• Store privileged materials separately from non-privileged documents, and avoid circulating privileged materials too widely, including beyond those who need to see them.
• Avoid annotating privileged documents prepared by external lawyers, as privilege may not extend to comments added by company personnel (including in-house counsel).
• Keep in mind that EU legal privilege does not attach to communications between a company and its in-house lawyers. If the in-house team provides EU legal advice, it is advisable to instruct or have communications signed off by external counsel qualified to practice within the EEA to attract privilege.