What is a Kovel Agreement?
A Kovel Agreement, named after the physician and attorney Morton Kovel, is a critical tool in the realm of legal advice, particularly in the context of shared client representation between a law firm and financial or forensic experts. The agreement defines the scope of work, the fees to be charged, and the basis of the expert’s testimony including the agreed professional fee for the services rendered. This contract is an essential aspect of risk management for lawyers who want to avoid liability issues while engaging expert services.
Although the concept of consulting with witnesses and experts is by no means new, it was not until the late 1950s that the idea of a Kovel Agreement first came to light. The initial case to discuss this topic was Kovel v . Kovel, 296 F.2d 873 (2d Cir. 1961), but early use of this agreement has been difficult to trace. Both the American Society of Certified Public Accountants and the American Bar Association publish confirmation forms that are similar to a Kovel Agreement. However, these confirmations do not have the same legal impact. The key difference is that the Kovel Agreement has been embraced by the courts. A 1993 opinion from the First Department noted: "the usefulness of a Kovel-type agreement, which should be employed whenever an understanding with a consultant is an essential step in the preparation of a prevailing defense." A Kovel Agreement is retained as documentation in the defense of discovery disputes.
Why Kovel Agreements Matter in Cases
The use of accountants in legal matters is increasingly common, especially when dealing with complex financial cases involving extensive accounting records. However, these records often contain proprietary and confidential information that can jeopardize the outcome of a case if disclosed to anyone outside the confines of the case itself. Kovel Agreements become critical for the protection of otherwise sensitive data and information.
According to Kovel, attorneys have been allowed to extend the attorney-client privilege to their clients, for the purpose of obtaining information from non-lawyers when that information is needed as part of the legal action.
Kovel Agreements are intended to help clients, attorneys, and experts speak freely and openly about the legal implications of the client’s case without being unduly concerned about the potential for collateral harm to the client.
The attorney-client privilege can be a extremely valuable tool when conducting an investigation. In the typical case, an attorney hires an accountant to analyze documents or provide other accounting services as needed by the attorney. If the accountant merely assists the attorney in assembling information to provide legal advice or to anticipate issues in a potential litigation, the attorney-client privilege can extend to some extent to communications between the accountant and client. The Kovel Agreement with the accountant will provide the privilege for communications between the attorney, the accountant, and the client.
When dealing with adverse parties, expert reports and depositions are often discoverable. Kovel Agreements will not apply, however, to the reports and deposition testimony of the accounting expert.
The Kovel Agreement is essentially a work-around to allow parties to keep accounting records confidential while still having access to them in order to facilitate a legal investigation.
How Does a Kovel Agreement Function?
A Kovel Agreement is essentially a contract between an attorney and a witness that ensures certain types of communications will be protected under the attorney-client and tax practitioner-client privileges. For example, when a client hires an attorney, the communications between the two are confidential. Thus, anything discussed with a lawyer is generally protected from disclosure to third parties. A Kovel Agreement takes this a step further and extends this communication protection to other professionals, such as a CPA (accounting professional), who is retained to assist the attorney with the case.
While the basic premise of a Kovel Agreement is straightforward, its mechanics can vary. The typical Kovel Agreement is between a client, an attorney, and a third-party professional hired to communicate information to the attorney that would not otherwise be subject to the attorney-client privilege. In essence, the third-party is "translating" the information to the attorney and, in turn, should not have to disclose such information to a third party. For example, consider a communication between a corporate client and its attorney in which the client requests legal advice, but communicates financial information in such a way that it is difficult to separate the two. Instead of separating the legal issues and the relevant facts, a Kovel agreement with a tax professional allows a tax professional’s insights and analysis regarding certain facts to be protected in addition to the attorney’s legal advise. Generally, a Kovel Agreement must be agreed to by the client, the attorney, and the third-party professional. In other words, the client must agree to keep this information confidential with the accountant while you still maintain the ability to waive that privilege if necessary.
Not all attorneys need a Kovel Agreement and not all clients are able to enter into a Kovel Agreement. For example, an attorney may not need a Kovel Agreement if the client provides all of the requested information in a way that allows the attorney to separate the wrong from the right – the legal issues from the facts. On the other hand, the client may not be able to enter into a Kovel Agreement where the client is not authorized to enter into such an agreement. A Kovel Agreement is also not available to parties in litigation since they do not have a pre-existing relationship with the witness, they may not have standing to enforce the legal privilege.
Pros and Cons of Kovel Agreements
In comparison with other arrangements between lawyers and hired experts, a Kovel Agreement has distinct advantages and disadvantages. Advantages include the ability to protect communications through the attorney-client privilege and work-product immunity. Forensic experts are then able to work with the attorney directly, while maintaining the confidentiality of their work product from opposing litigants. The Kovel Agreement also assures the attorney that the expert will be non-adversarial.
There are several potential drawbacks to Kovel Agreements from an attorney’s perspective. The most critical, of course, is the danger that the Kovel Agreement could be terminated. If the expert terminates the Kovel Agreement and is thereafter compelled to testify at deposition or trial, he or she could be compelled to testify regarding his or her prior communications with the attorney, upon the motion of opposing counsel.
Another potential drawback is the Kovel Agreement’s vagueness. In the past, courts have stricken Kovel Agreements that did not explicitly state what services were being provided, or how the purpose of those services was to aid the attorney in representing the client. Accordingly, it is essential to characterize as narrowly as possible the scope and purpose of the services to be provided.
Kovel Agreements provide increased confidentiality and advantages for attorneys and their retained experts. At the same time, attorneys and experts should be aware of the potential pitfalls associated with these agreements. Ultimately, the decision to enter into Kovel Agreements and use retained experts will depend on case-specific considerations and the degree of risk aversion posed by the matter in question.
Creating a Robust Kovel Agreement
A well-drafted Kovel Agreement must meet several requirements to be effective and enforceable. First, it must be prospective. The primary benefit of a Kovel Agreement is the ability for the attorney to communicate and work with the accountant, and provide those services to the client. If the Kovel Agreement only addresses past communications or issues, the opportunity to work together was missed. If there is a potential for litigation, and the accountant has already been involved, it is still important to have a Kovel Agreement to fully protect the attorney’s communications with the accountant, and potentially the work product of the accountant. However, a Kovel Agreement should not include tax preparation services, or those work-product materials may be discoverable.
Second, the Kovel Agreement should be signed by the sender of the information, usually the accused or the policyholder . Often these agreements are signed by the attorney and the accountant. However, it is not effective when the Kovel Agreement is not signed by the person or entity claiming the privilege.
Third, the Kovel Agreement should describe the parties’ intention that the accountant will have a continuing role in the litigation. As a corollary, the parties should agree to keep all matters related to the claim confidential, as discussed above. The Kovel Agreement should include two basic types of information. The first part describes the services to be provided by the accountant. The second part describes how and when the services will be provided. As this section is drafted, the parties must ensure that the privilege will apply to all information provided to the attorney or accountant.
Pitfalls to Look Out For
Traditional legal practice and the services offered by litigation support professionals exist in a symbiotic relationship to support the needs of clients and the demands of the court. Nevertheless, when a law firm employs the expertise of a litigation support provider under a Kovel Agreement, confidentiality requirements are compounded. Confidentiality, as well as privilege, is a defense to discovery or evidence that protects some communications from examination by other parties to litigation. In the context of Kovel Agreements, these protections may be at-risk due to a lack of clear understanding about the criteria for their use.
One of the most common risks of violating the integrity of Kovel, which exposes clients to risk, is when a law firm seeks to protect documents subject to discovery by waiving the privilege applicable to confidential communications between a client and an expert who is not performing legal tasks. If any aspect of the challenged communication occurs in the context of the expert’s performance of non-legal tasks, the information is not protected by the attorney-client privilege. Unfortunately, the practical consequence of using Kovel is that many providers, even though they are lawyers, verbalize the information in the course of the discussion without review of specific documents, reducing the legal function of the information.
In addition, there are a number of common misconceptions about using Kovel. For example, the Kovel Agreement is not a means for a firm to share protected information with third-party suppliers, consultants, subcontractors, and other external service providers unbound by the Kovel Agreement and not nominated by the legal client. Commercial consultant agreements are not a substitute of Kovel Agreements. This is a critical distinction. To maintain privilege, documents must be transferred in the course of Kovel (as opposed to standard engagement), and reviewed and discussed by the expert in the course of his or her professional duties on behalf of the legal client. To achieve this goal, a legal client can mitigate risk by: While there are challenges to using Kovel, carefully crafting and executing one in harmony with your service provider will reduce risks that expose the client or firm, especially when it is necessary to preserve the privilege of documents transferred between a client, third party, and litigation support providers.
Kovel Agreement in Action: Real-Life Examples
The ultimate citation of a Kovel Agreement, by the law firm representing Jackie Mason, required federal appeals court approval.
In a 2003 ruling in United States v. Kerr, 180 F. App’x 486 (6th Cir. 2006), a former First American Bank employee signed a document with the title "KOVEL LETTER-KERR." It read in part:
I acknowledge today that I am a client of the law firm of Kahn Kleinman & Begum. That I have been informed on this date that I may be called to testify before the grand jury on April 26, 2001 and may be required to give testimony and evidence concerning any matter relating to First American Bank’s employee Frank Kerr. . . .
I also acknowledge that it has been explained to me that I am being represented by the law firm of Kahn Kleinman & Begum. I also understand that I will be required to pay the firm for their services, in this matter, their usual and customary fees and expenses. I have been further advised that as counsel for Kahn Kleinman & Begum, I am to listen to no one concerning the case, including any supervisor, manager or any other bank employee, unless counsel for Kahn Kleinman & Begun are present. I further acknowledge and agree to the above.
The appeal court accepted the trial court’s finding that Kerr had signed this Kovel Agreement "freely and voluntarily," after he "was advised that he would be required to pay the firm’s ‘usual and customary fees and expenses.’"
And it ruled that the trial court did not err when it admitted deposition testimony from Kerr’s accountant and a consulting firm’s CPA, even though they were attempting to establish a Kovel relationship with Kerr. The appellate court noted that even though the accountant’s firm never collected fees from Kerr, his "deceptive actions" failed to conclude the Kovel Agreement he had signed, which he later denied entering into in his testimony at trial.
Court rulings have indirectly recognized Kovel Agreements in other opinions. For example, in United States v. El-Hage, 213 F.3d 74 (2d Cir. 2000) the court in rejecting a criminal defendant’s claim of attorney-client privilege implied that purportedly incriminating statements to a consultant "may come under the Kovel doctrine," depending on the consultant’s function. As the examples illustrate, "Kovel Agreements" are practical tools as much as they are legal documents. People and the circumstances surrounding them can vary significantly.
Final Thoughts: The Kovel Agreement’s Place in the Industry
The Kovel Agreement today has become a way to maintain and protect the attorney-client privilege even in the face of government inquiry. In fact, as evidenced by the number of lawyers and clients signing Kovel Agreements today, a growing undercurrent of thought seems to be that it is a concession to permit the accountant (or another consultant) to have access to the information, thereby giving the prosecutor an easier shot at piercing the attorney-client privilege.
Nevertheless, Kovel Agreements are probably here to stay. As long as the government or other investigative bodies continue to look past attorneys looking at a client’s financial information, there will be a tension with applying fundamental rules of privilege to the creation of that information.
As one defense attorney put it, "I haven’t seen the Kovel Agreements decrease, and I think they’ll probably be more commonplace given the government’s use of accountants and other non-lawyers in investigations. As used more often as an investigatory tool, Kovel Agreements are going to become more important moving forward."
Of more concern than whether Kovel Agreements will become prevalent, is how often they are misapplied when there is a significant basis for a determination that the client is acting in bad faith or otherwise abrogating the Kovel agreement .
For example, clients and auditors should think twice about dual-role engagements whereby the Kovel accountant is both giving tax advice as well as serving as an expert hired to assist in an audit. Courts have been unwilling to allow Kovel Agreements that would have called for the agreement to be defined as "federal tax services," in part because of the concerns over the potential release of the accountant’s work product or attorney-client privilege by inadvertence or design.
Kovel Agreements also have had issues in situations where the Kovel accountant was already working for the client, or would be working for the client after a Kovel accountant became involved in a matter, regardless of whether such client activities were with generally the same subject matter. For instance, courts have rejected the notion that Kovel accountants were covering work done for other clients or preparation of work product prepared in connection with other federal or state matters.
In jurisdictions where Kovel Agreements are more commonplace, such as California, the litigation is evolving. How the government will respond to the increase in Kovel Agreements in the face of changing court rulings in favor of the attorney-client privilege remains to be seen.