Imagine the following situation: A client calls your office and is upset with you and the attorneys in your firm who have been working on a project for the client. Sensing the disdain and frustration coming from the other end, you hang up and email your firm’s in-house counsel. You inform in-house counsel of what took place as well as your belief that the client may file a malpractice claim. After exchanging several emails, including emails with candid assessments of potential malpractice liability, you collectively articulate a strategy to handle the issue. Then the client files suit. In discovery, the client asks for the email exchanges with in-house counsel. These communications may be discoverable in certain jurisdictions; however, courts are increasingly finding that these critical communications are protected by the attorney-client privilege.
Early Cases: Fiduciary Duty and Attorney-Client Privilege
Early on, many courts ruled that a firm’s fiduciary and ethical duties trumped the attorney-client privilege. The rationale in key cases is referred to as the “fiduciary duty” exception to the attorney-client privilege.
In the first known case addressing this issue, In re Sunrise Securities Litigation, 130 F.R.D. 560 (E.D. Pa. 1989), the court specifically created a fiduciary duty exception to the attorney-client privilege. The court emphasized the conflict of interest that the firm created by simultaneously representing itself and the client. It further reasoned that this conflict of interest violated the state’s rules of professional conduct and put the interests of the firm above those of the client.
Similarly, in Koen Book Distributor v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283 (E.D. Pa. 2002), a Pennsylvania federal court denied a firm’s attempt to shield intrafirm communications with in-house counsel under the attorney-client privilege. As in In re Sunrise, the court ruled that the communications between the attorney and the in-house counsel created a conflict of interest for the attorney and the dissatisfied client.
The U.S. Court of Appeals for the Third Circuit further articulated the fiduciary duty exception in Wachtel v. Health Net, Inc., 482 F.3d 225 (2007), by stating that fiduciaries “who obtain legal advice in the execution of their fiduciary obligations are precluded from asserting the attorney-client privilege against their beneficiaries.” Id. at 226.
Likewise, in Bank Brussells Lambert v. Credit Lyonnais (Suisse), 220 F. Supp. 2d 283 (2002), the court refused to allow a firm to withhold intrafirm documents under the attorney-client privilege in a dispute between the firm and a current client. The court emphasized the state rules of professional responsibility as well as the firm’s violation of the fiduciary duties owed to the client.
Recent Cases: Fiduciary Duty and Attorney-Client Privilege
In the last few years, the growing trend has been toward protection of communications between attorneys and in-house counsel.
Federal courts are moving in the right direction. Recently, a number of federal court decisions have reconsidered the fiduciary duty exception.
In Stock v. Shnader Harrison Seagal & Lewis LLP, No. 05247, slip op. (N.Y. App. Div., 1st Dep’t 2016), a New York appellate court ruled that the fiduciary duty between the attorney and the client was not breached because the attorney became a client when it sought advice from in-house counsel. The court reasoned that an attorney seeking advice from in-house counsel about an ethical issue arising from representation of a current client does not trigger a conflict of interest. In other words, when attorneys seek advice from in-house counsel in such situations, they become the client. The Stock court also emphasized that in-house counsel never participated in the client’s representation and that the client was not billed for the consultation with in-house counsel, which were clear indicators that the lawyer was acting as a client.
Fortunately, the decision in Stock reflects a recent trend from jurisdictions across the country upholding the attorney-client privilege in such scenarios. For instance, in Tattletale Alarm Systems, Inc. v. Calfee, Halter & Griswold, No. 2:10-cv-226 (S.D. Ohio Feb. 3, 2011), an Ohio federal court declined to create a fiduciary exception to the attorney-client privilege. After emphasizing the lack of any state statutes or rules of procedure governing intrafirm communications, the court ruled that the attorney-client privilege protected sensitive communications between lawyers and in-house counsel. The firm reasonably argued that “loss prevention” strategies in anticipation of a malpractice suit were necessary to prevent business and economic losses. The court agreed, despite other jurisdictions finding loss prevention strategies to be in conflict with the fiduciary duties owed to the client.
As in Stock, the Tattletale court viewed the attorneys involved in the potential malpractice suit as clients of the in-house counsel rather than as fiduciaries of their clients. The court stated that “[t]he fact that the attorneys seeking advice also represent a client with potentially conflicting interests is logically irrelevant to whether those attorneys can retain counsel and become clients.” Id. at *9. The court further reasoned that law firms should have the same right as any other client to consult with counsel and enjoy the protection afforded by the attorney-client privilege. Stated differently, the societal values served by the attorney-client privilege do not change when members of a law firm seek advice from their own counsel.
The court in Tattletale applied a balancing test in analyzing whether the societal values of the attorney-client privilege were outweighed by the following competing considerations: (1) the extent to which the firm’s conduct was criminal or fraudulent, (2) whether the privilege was being asserted to protect past conduct or a future course of action, and (3) if there were other sources of proof on the same subject. Ultimately, all factors weighed in favor of upholding the attorney-client privilege.
Then, in E.E.O.C. v. Kelley Drye & Warren LLP, 2011 U.S. Dist. LEXIS 6343 (S.D.N.Y. 2011), a New York federal court seemingly reversed its earlier decision in Credit Lyonnais (Suisse). The court looked at the nature and purpose of in-house counsel and ruled that the role of in-house counsel is, in part, to protect the firm from malpractice claims and to advise the firm in such scenarios. In other words, the role of in-house counsel is to look into the future and prevent the firm from making mistakes in the management of its business. Thus, the court held that the “pre-assigned role [of in-house counsel] as legal advisor to the law firm” motivates the conduct and should allow for the attorney-client privilege to be used. Id. at *5.
State courts are moving in the right direction. While some federal courts still disagree with these well-reasoned decisions, a growing list of state courts have allowed firms to assert the attorney-client privilege regarding communications between a lawyer and in-house counsel. California, Georgia, Illinois, Massachusetts, and Washington all allow a firm to protect its communications with in-house counsel.
For instance, an Illinois state appellate court in Garvy v. Syfarth Shaw LLP, 2012 IL App (1st) 110115 (2012), refused to apply the fiduciary duty exception based on the adversarial nature of the client’s actions against the firm. Moreover, it reasoned that a firm has a right to protect itself in malpractice suits regardless of any fiduciary duties owed to the client.
A Washington state appellate court also allowed a firm to assert the attorney-client privilege, but it stressed that the burden of proof was on the law firm to prove that the attorney-client privilege applied. In Versuslaw, Inc. v Stoel Rives, LLP, 127 Wash.App. 309 (Ct. App. Wash. Div. 2005), the firm was required to show a legitimate belief that a malpractice claim was imminent and that the timing of the communications related to the future handling of this situation. The court suggested that this type of issue should be handled on a case-by-case basis to determine if any conflict of interest with the client exists.
Similarly, the highest courts in Georgia and Massachusetts allow firms to assert the attorney-client privilege if the firm can satisfy four elements. In Georgia, the firm must show that (1) a genuine attorney-client relationship exists between the firm’s lawyers and in-house counsel, (2) the communications in question were intended to advance the firm’s interests in limiting exposure to liability rather than the client’s interests in obtaining sound legal representation, (3) the communications were conducted and maintained in confidence, and (4) no exception to the attorney-client privilege applies. St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C., 746 S.E.2d 98 (Ga. 2013). In Massachusetts, a law firm must show that (1) the law firm designated an attorney or attorneys within the firm to represent the firm as in-house counsel, (2) in-house counsel did not work on the client matter at issue, (3) clients were not billed for the communications between the attorney and the in-house counsel, and (4) the communications were kept confidential. The clearly defined parameters articulated by these courts in Georgia and Massachusetts provide attorneys with much-needed certainty in consulting with in-house counsel. 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).
ABA backs privilege for attorney–in-house counsel communications. In 2013, the American Bar Association (ABA) published a resolution supporting attorney-client privilege protection for communications between attorneys and in-house counsel. In the resolution, the ABA noted the importance of in-house counsel to both the attorney and the client:
[In-house counsel] can provide ready advice in response to client behavior or a lawyer’s mistakes that may avoid or alleviate harm to clients. As a result, the attorney-client privilege for consultations with in-house counsel is critical to ensuring that attorneys and other law firm personnel receive the best possible advice on complicated legal and ethical issues.
Given the state of the law on this important issue, here are some considerations to keep in mind when consulting with in-house counsel that will make it more likely that the communications will be protected by the attorney-client privilege:
- The law firm should have a designated attorney as in-house or ethics counsel.
- The in-house or ethics counsel should not have worked on any matter involving the client.
- The communications with in-house counsel should not be billed to the client.
- The communications should be made with the expectation that they are confidential.
- The communications should consider forward-looking strategy in limiting the firm’s exposure based on past conduct with the client.
In addition, if the attorney’s relationship with the client is terminated, it is more likely that the attorney’s communications with in-house counsel will be considered privileged.
Nonetheless, attorneys consulting with in-house counsel must do so with the expectation that they may at some point be reviewed by a judge during an in camera inspection.
The uncertainty regarding attorney communications with in-house counsel is problematic: if attorneys are unable to seek advice from in-house counsel or the applicability of the attorney-client privilege is unclear, attorneys will be discouraged from seeking legal and ethical guidance in difficult situations, and the ability of attorneys to properly protect themselves will be jeopardized. However, although there is a disquieting lack of unanimity among courts and other concerned players about the issue, the good news is that many federal and state courts as well as the ABA are moving in the right direction.
Keywords: litigation, young lawyer, communications, in-house counsel, attorney-client privilege, fiduciary duty