September 18, 2014

ETHICS CORNER: Intra-Law Firm Communications, Conflicts of Interest, and the “Fiduciary Exception” to the Attorney-Client Privilege

Yafit Cohn

You are an attorney at a law firm. In the course of your representation of ABC Corporation, you become concerned that a conflict of interest may be developing between you (and/or your firm) and your client. You’d like to consult with the law firm’s designated in-house counsel about how to proceed. Would your consultation with the firm’s in-house counsel create an impermissible conflict of interest between the firm and ABC, a current client of the firm? And would your communications with the firm’s in-house counsel be protected from disclosure by the attorney-client privilege in a subsequent lawsuit brought by ABC, assuming the requisite elements of the attorney-client privilege were satisfied, or would you be precluded from asserting the privilege due to a conflict of interest arising from your consultation with in-house counsel?

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Rule 1.7(a) of the ABA Model Rules of Professional Conduct, adopted by nearly every state, provides that “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists,” for example, if “the representation of one client will be directly adverse to another client.” In situations where a conflict of interest between a lawyer and client may be emerging – but has not yet ripened to the point requiring termination of the representation – it is natural for a lawyer practicing in a law firm to seek the advice of the firm’s in-house ethics counsel. Because, under Rule 1.10, lawyers associated with a firm may not (except under certain specified circumstances) “knowingly represent a client when any one of them practicing alone would be prohibited from doing so” by Rule 1.7, it seems at first blush that consultation with the firm’s in-house counsel regarding a matter involving a current client would violate Rule 1.7. In other words, by imputation, the in-house lawyer consulted in such a situation would be impermissibly representing both the law firm and the current outside client. In a 2005 ethics opinion, however, the New York State Bar Association’s Committee on Professional Ethics concluded that where a lawyer seeks the advice of the firm’s in-house counsel about ethical issues pertaining to a client representation, no conflict of interest arises. 

Because it is often assumed that engaging the firm’s in-house counsel creates a conflict of interest with the firm’s existing client in violation of Rule 1.7, another question that sometimes arises is whether the intra-firm communication would be ineligible for protection by the attorney-client privilege. In a recent decision, the Oregon Supreme Court held that regardless of whether intra-firm communications give rise to a conflict of interest, such communications are protected by the attorney-client privilege. 

The NYSBA’s View on the Application of the Conflicts Rules to Intra-Firm Consultations

In a 2005 opinion based on the then-applicable New York Code of Professional Responsibility, the New York State Bar Association’s Committee on Professional Ethics carved out an exception to the conflicts rules, opining that the conflicts rules were not “intended to prohibit ethics consultation when it is most helpful: during the client representation.” NY Eth. Op. 789, 2005 WL 3046319 (Oct. 26, 2005). According to the Committee, “[a] lawyer’s interest in carrying out the ethical obligations imposed by the Code is not an interest extraneous to the representation of the client. It is inherent in that representation and a required part of the work in carrying out the representation.” Moreover, in the Committee’s view, a law firm’s thoughtfulness regarding its own ethical obligations as they pertain to a client representation cannot be deemed to “implicate a ‘differing interest’ that will adversely affect the lawyer’s exercise of professional judgment nor the loyalty due a client within the meaning of the Code.” 

The Committee further explained that the Code requires law firms to adopt measures to ensure their lawyers’ compliance with the Code’s provisions. When ethics issues arise that could implicate the interests of one or more clients, a law firm must either “address these issues with one of its own lawyers, or else look to others for this advice.” The Committee reasoned that “[t]o hold that a law firm must always seek guidance outside its halls in order to preserve an attorney-client relationship – that is, to hire outside counsel (whose fiduciary duties may extend only to the firm) in every instance in which such an adversity arises – is simply impractical in the day-to-day life of many law firms, when issues of professional responsibility frequently require prompt responses most usefully provided by lawyers knowledgeable about the firm, its client relationships and its culture.” 

The Oregon Supreme Court’s View on the Availability of Privilege over Intra-Firm Communications

A question that has received more attention in recent years is whether an otherwise privileged communication between a law firm attorney and the firm’s in-house counsel loses its privilege status by virtue of the ostensible conflict of interest resulting from the firm’s self-representation. On May 30, 2014, the Supreme Court of Oregon concluded that it does not. Crimson Trace Corp. v. Davis Wright Tremaine LLP involved a legal malpractice action in which Crimson, a former client of Davis Wright Tremaine LLP (DWT), sought discovery of communications between DWT lawyers and the firm’s in-house counsel regarding the lawyers’ representation of the client and “regarding professional duties owed by [DWT] to [Crimson], possible or actual breach of those duties, and/or prevention of loss related to duties owed to [Crimson].” 355 Or. 476, 481 (Or. 2014). The trial court had concluded that while most of the internal DWT communications fell within the definition of privilege, a “fiduciary exception” to the privilege applied. According to the court, the firm’s self-representation created a conflict of interest with the firm’s current client, breaching “DWT’s duties of candor, disclosure, and loyalty to Crimson as its client” and thus precluding it “from asserting the attorney-client privilege as to its internal communications.” In a mandamus proceeding, however, Oregon’s high court disagreed. 

At the outset, the Oregon Supreme Court rejected Crimson’s argument that the internal communications were not covered by the attorney-client privilege at all. Interpreting Oregon’s statutory provision that codifies the attorney-client privilege, the court found that the internal communications satisfied all three elements of the privilege – specifically, they were (1) made between a “client” and the client’s “lawyer,” (2) intended to be confidential, and (3) “made for the purpose [of] facilitating the rendition of professional legal services to the client.” Notably, with regard to the first element – whether the DWT attorneys were “clients” of the firm’s in-house counsel – the court observed that “nothing in the wording” of Oregon’s statute “or the case law construing it suggests that a law firm, or one or more of its individual lawyers, cannot be the ‘client’ of the firm’s in-house counsel.” The court further rejected the argument that DWT and its lawyers should not be considered “clients” of the firm’s in-house counsel within the meaning of the statute “because doing so would essentially condone DWT’s violation of its duty of loyalty to its current client and undermine a client’s sense of security in frankly communicating with his or her own lawyers.” The court found this argument to be “essentially one of policy,” with no relation to the statutory provision being interpreted. 

The court also refuted Crimson’s claim that the existence of an attorney-client relationship depends on the “reasonable expectations” of the parties. According to Crimson’s failed argument, the DWT lawyers could not have reasonably believed that their conversations with the firm’s in-house counsel created an attorney-client relationship, “because no lawyer could reasonably expect another member of his or her firm to represent the lawyer in his or her conflict with a current client” in violation of the applicable rules of professional conduct. The court found that this argument was not supported by the text of Oregon’s statute or by the court’s “prior cases concerning the Oregon Rules of Professional Conduct to the effect that the existence of an attorney-client relationship is determined by the reasonable expectations of the client.” The court found that the court’s “lawyer-discipline cases” are not necessarily relevant to the applicability of the statutory provision regarding privilege; according to the court, “there is no reason to believe” that the existence of an attorney-client relationship for purposes of determining privilege “would be determined by the same analysis that applies in the disciplinary context.” 

Having found the internal communications at issue to be privileged, the court disagreed with Crimson that the communications were nonetheless discoverable because “the fiduciary obligations that a law firm owes its clients” preclude the firm from relying on the attorney-client privilege to protect intra-firm communications. Crimson had argued that failing to recognize a fiduciary exception in the circumstances at hand “would be ‘absurd’ because it would allow a lawyer to breach his or her duty of loyalty to the client and then ‘compound the conflicts of interest by communicating with other lawyers in his firm . . .’” and later “shield those internal communications from disclosure to the client.” The court rejected this argument as a conflation of “ethical considerations with the separate issue of the scope of the privilege” and concluded that there is no fiduciary exception in Oregon that would require the production of the privileged communications between the DWT lawyers and the firm’s in-house counsel. 

Implications of Crimson 

The position advanced by Crimson was not novel and has, in fact, been adopted by several courts. In rejecting Crimson’s view, however, the Oregon Supreme Court followed two decisions issued last year by the high courts of Massachusetts and Georgia, respectively, which declined to adopt a fiduciary exception to the privilege (albeit under the common law) for intra-law firm communications. The Oregon Supreme Court reiterated that the rules of professional responsibility do not create an exception to the attorney-client privilege. As the Supreme Court of Georgia appreciated, “the potential existence of an imputed conflict of interest between in-house counsel and the firm client is not a persuasive basis for abrogating the attorney-client privilege between in-house counsel and the firm’s attorneys”; “the breach of an attorney’s duty of loyalty is an issue of legal ethics and professional responsibility collateral to, and not directly bearing on, privilege law.” St. Simons Waterfront, LLC v. Hunter, MacLean, Exley & Dunn, P.C., 293 Ga. 419, 425-26, 429 (Ga. 2013). 

A conclusion contrary to that reached by the Oregon, Georgia, and Massachusetts courts could be dangerous. “[I]t would deny a law firm and its attorneys any protection provided by the attorney-client privilege . . . unless the law firm first withdrew from the representation or obtained the consent of the client.” RFF Family Partnership, LP v. Burns & Levinson, LLP, 465 Mass. 702, 715 (Mass. 2013). Thus, recognizing the “fiduciary exception” for intra-law firm communications would likely result in the premature termination of attorney-client relationships, to the detriment of clients. At least implicitly, Crimson – like the decisions issued by the Georgia and Massachusetts courts – recognized the value in adopting “a formulation of the attorney-client privilege that encourages attorneys faced with the threat of legal action by a client to seek the legal advice of in-house ethics counsel before deciding whether they must withdraw from the representation,” rather than a formulation “that would encourage attorneys to withdraw or disclose a poorly understood potential conflict before seeking such advice.”

Yafit Cohn

Associate at Simpson Thacher & Bartlett LLP

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP in New York. “Ethics Corner” is sponsored by the Professional Responsibility Committee, and is edited by Robert Evans III, a partner at Shearman & Sterling LLP.