August 12, 2014 Articles

In-House Attorney-Client Privilege in the Wake of Crimson Trace

When the relationship between inside and outside counsel sours, courts have struggled to define which law-firm communications are discoverable by clients.

Bruce Rubin and KC Harding – August 12, 2014

When the relationship between inside and outside counsel sours, courts have struggled to define which law-firm communications are discoverable by clients. Typically, attorney-client privilege is used to protect corporate clients. But increasingly, courts are applying the privilege to protect the internal communications of law firms in malpractice actions. Most recently, the Oregon Supreme Court in Crimson Trace Corp. v. Davis Wright Tremaine LLP, 355 Or. 476, (2014), applied attorney-client privilege to prevent disclosure of emails between law-firm attorneys and the firm’s in-house counsel.

Crimson Trace is a typical attorney-malpractice case dealing with client access to internal law-firm communications. The client, Crimson Trace,retained Davis Wright’s services to prosecute a patent and then later sued a competitor for infringing that patent. The competitor counterclaimed, alleging that the original patent application produced by Davis Wright was defective. Fearing that this counterclaim might create a conflict of interest, the Davis Wright lawyers consulted an internal firm committee that functioned as in-house counsel. Later, the relationship between Crimson Trace and Davis Wright deteriorated, culminating in a malpractice lawsuit.

During discovery in the malpractice action, Crimson Trace requested production of all communications between Davis Wright attorneys relating to possible conflicts of interest between the firm and Crimson Trace. Davis Wright refused to produce the documents, asserting that attorney-client privilege attached to communications with the firm’s in-house counsel. The trial court disagreed with Davis Wright and compelled disclosure. Although the documents were subject to attorney-client privilege, the court held that a fiduciary exception to privilege applied. The trial court emphasized that the duties of “candor, disclosure, and loyalty” prevented the firm from using attorney-client privilege to withhold documents from clients. 355 Or. at 483.

On appeal, the Oregon Supreme Court reversed. In a decision that focused more on statutory interpretation than policy, the court held that there is no fiduciary exception to attorney-client privilege in Oregon. The state high court refused to read an exception into the evidence code where one did not already exist. For its part, Crimson Trace argued that the firm’s in-house counsel could not possibly be in an attorney-client relationship with other Davis Wright attorneys because such a representation would be a conflict of interest banned by professional-conduct rules. Crimson Trace also argued that the fiduciary exception was necessary to preserve the duty of loyalty that attorneys owe their clients. The supreme court rejected these arguments and drew a sharp distinction between ethical rules and rules of evidence. In essence, the court said that just because the firm’s conduct may be subject to bar sanctions, that does not mean that the firm’s internal communications are admissible in court.

The Association of Corporate Counsel (ACC) filed an amicus brief in Crimson Trace, also arguing that ethical considerations should prevent law-firm lawyers from being designated as in-house counsel. The ACC reasoned that this application of attorney-client privilege would corrode trust between in-house corporate counsel and outside counsel. Ultimately, the ACC argued that a failure to recognize the fiduciary exception would “lead clients to hesitate to seek outside legal advice.” Brief of Amicus Curiae, 2013 WL 5958906, at *3 (Or. Aug. 8, 2013).

The American Bar Association (ABA) has officially adopted the opposite view of the ACC. See ABA Resolution 103 (Aug. 12, 2013). In that resolution, the ABA recommended that no state should apply the fiduciary exception to communications between firm attorneys and a firm’s in-house counsel. Supporters of the ABA’s position argue that internal ethical conversations should be privileged, to encourage lawyers to seek ethical advice. See, e.g., Elizabeth Chambliss, “The Scope of In-Firm Privilege,” 80 Notre Dame L. Rev. 1721, 1766 (2005).

The position of the ABA and the Oregon Supreme Court seems to be winning the day. Although courts in the past routinely applied the fiduciary exception to allow disclosure, the fiduciary exception is losing steam. As of this writing, state courts in California, Illinois, New York, Massachusetts, and Georgia have joined Oregon in rejecting the fiduciary exception as applied to law firms. St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C., 746 S.E.2d 98 (Ga. 2013); RFF Family P’ship, LP v. Burns & Levinson, LLP, 991 N.E.2d 1066 (Mass. 2013); Wells Fargo Bank v. Super. Ct., 990 P.2d 591 (Cal. 2000); Garvy v. Seyfarth Shaw LLP, 966 N.E.2d 523 (Ill. App. Ct. 2012); Estate of Barbano v. White, 800 N.Y.S.2d 345 (N.Y. Sup. Ct. 2004). Federal courts interpreting state privilege law in New Mexico and Ohio have also held that there is no fiduciary exception to attorney-client privilege in those states. TattleTale Alarm Sys., Inc. v. Calfee, Halter & Griswold, LLP, No. 2:10-cv-226, 2011 WL 382627 (S.D. Ohio Feb. 3, 2011); Murphy v. Gorman, 271 F.R.D. 296 (D.N.M. 2010). On the other side, Washington state and federal district courts have recognized some form of fiduciary exception to in-house law-firm attorney-client privilege. VersusLaw, Inc. v. Stoel Rives, LLP, 111 P.3d 866 (Wash. Ct. App. 2005); Koen Book Distribs. v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283 (E.D. Pa. 2002); Bank Brussels Lambert v. Credit Lyonnais (Suisse), S.A., 220 F. Supp. 2d 283 (S.D.N.Y. 2002); Asset Funding Grp., LLC v. Adams & Reese, LLP, No. 07-2965, 2008 WL 4948835 (E.D. La. Nov. 17, 2008); In re Sonicblue Inc., No. 07-5082, 2008 WL 170562 (Bankr. N.D. Cal. Jan. 18, 2008). Thus, a corporate in-house attorney faces a great deal of uncertainty. Whether client-related communications are discoverable depends on the venue of a potential malpractice action.

Despite this uncertainty, the debate about the scope of in-firm privilege is important. Now, 85 percent of the largest 200 law firms have designated in-house counsel, and an even greater number have committees or individuals who perform a similar function. Anthony E. Davis, “The Emergence of Law Firm General Counsel and the Challenges Ahead,” 20 Prof. Law., No. 2, 2010, at 1. Corporate in-house counsel need to develop a strategy for dealing with internal, undiscoverable law-firm communications. One possible solution is to specify in the initial engagement letter that the contracting law firm will waive any internal attorney-client privilege if your company brings a malpractice claim.

This is probably an ethically feasible solution. Although ethics rules prohibit a lawyer from asking a client to waive the right to bring a malpractice suit in an engagement letter, the rules certainly do not prohibit a lawyer from increasing a client’s right to sue in an engagement letter. See Model Rules of Prof’l Conduct R. 1.8(h)(1). Further, attorney-client privilege traditionally belongs to the client, and the privilege is waivable by the client with informed consent. See Model Rules of Prof’l Conduct R. 1.6(a). In this context, the law firm is the client and the firm’s in-house counsel is the attorney. Hence, the firm could give informed consent and waive privilege for the benefit of the client.

But this solution may not be economically feasible. Providers of attorney-malpractice insurance set industry standards for client relations and would likely be unhappy with a privilege waiver. See Elizabeth Chambliss & David B. Wilkins, “The Emerging Role of Ethics Advisors, General Counsel, and Other Compliance Specialists in Large Law Firms,” 44 Ariz. L. Rev. 559, 590 (2002). Malpractice insurers have a large financial incentive to ban privilege waivers. One survey showed that law firms with in-house counsel spent $1 million less on defense costs and payouts on malpractice claims in a five-year period. Davis, supra, at 1. These savings would undoubtedly decrease if lawyers stopped using the services of in-house counsel because of privilege concerns. Accordingly, some attorney-malpractice insurers actually suggest that advance consent to in-firm privilege, and not advance waiver of the privilege, is the best solution. See, e.g., Brian J. Redding & Kenneth R. Landis, “The Erosion of the In-Firm Privilege: Can Anything Be Done?,” ALAS Loss Prevention J., Fall 2005 [login required].

Unfortunately, corporate clients may have to get used to the uncomfortable reality that communications with their lawyer and their lawyer’s lawyer are inaccessible. One beacon of light is that lawyers are typically required to give corporate clients notice of a potential conflict of interest. Restatement (Third) of The Law Governing Lawyers § 20 cmt. c (2000). Although communications about the conflict are not discoverable, at least corporate clients will know that a problem exists and will have the opportunity to obtain other outside representation. But knowledge of a potential conflict may be little consolation to corporate clients who have no ability to further investigate the problem.

Keywords: litigation, corporate counsel, attorney-client privilege, in-house counsel, Oregon Supreme Court

Bruce Rubin is a partner at the Portland, Oregon, office of Miller Nash, LLP. He is cochair of the Legal Ethics Subcommittee of the Corporate Counsel Committee. KC Harding is a law student at the University of Idaho College of Law.