The Privilege Applied In-Firm

The Attorney-Client Privilege

The in-firm privilege is grounded in long-established attorney-client privilege jurisprudence, in particular as that doctrine has been extended to corporations. The attorney-client privilege traditionally applies to communications made in confidence by a client to a lawyer for the purpose of seeking legal advice. As the U.S. Supreme Court has recognized, the attorney-client privilege “is the oldest of the privileges for confidential communications known to the common law.” Upjohn Co. v. United States, 101 S. Ct. 677, 682 (1981). The purpose of the privilege is to foster candor and disclosure in lawyer-client communications. Such candor, in turn, is intended to foster “the observance of law and administration of justice.” Id. While the privilege has common-law origins, many states have codified the privilege, either by evidentiary rule or statute. As discussed below, the codification of the privilege has become an important consideration for courts evaluating whether an exception to the attorney-client privilege should be created for in-firm communications regarding current firm clients.

In Upjohn, the Supreme Court recognized for purposes of federal law that the attorney-client privilege applied to communications within a corporation where the lawyer (corporate in-house counsel) is an employee of the “client” (the corporation). In Upjohn, the issue was whether the attorney-client privilege applied only to communications with those employees who could direct the corporation’s response to in-house counsel’s advice (the so-called “control group” of the corporation) or whether the privilege applied to communications with a broader sphere of employees. Recognizing the policy benefit of encouraging corporations to have in-house counsel to facilitate a corporation’s compliance with the law, the Court held that the attorney-client privilege applied to communications with a corporation’s in-house counsel regardless of whether the communications originated with the corporation’s control group.

The Court analyzed the issue not from the perspective of who could direct corporate implementation of in-house counsel’s advice, but rather from whom in-house counsel might need to gather information to render such advice. A test that focused on who was or was not in the “control group” would erode confidence that communications with corporate in-house counsel would be protected, the Court found, because the “control group” is often not easily definable. The Court sought a rule that increased confidence in both lawyer and client that the attorney-client privilege would apply to their communications. “An uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all.” Id. at 684. Unfortunately, when it comes to the application of the in-firm privilege, firms and their lawyers have had to live with just such uncertainty.

The In-Firm Privilege

The concept of an “in-firm” privilege is an extension of the reasoning of Upjohn. Just as corporations should be encouraged to seek in-house legal advice to ensure compliance with the law, law firms should be encouraged to designate in-house counsel to help them comply with their unique legal responsibilities and ethical obligations. As with corporations, the attorney-client privilege helps facilitate a law firm’s compliance with its legal obligations. Assuming that the basics of the attorney-privilege are satisfied—a confidential communication for the purposes of seeking legal advice between an in-firm lawyer representing the firm’s interests and another employee or lawyer at the firm—the communication should be treated in the first instance as privileged, particularly as to third parties (i.e., non-clients). See United States v. Rowe, 96 F.3d 1294 (9th Cir. 1996) (communications between firm senior partner and associates assigned by senior partner to investigate actions of another firm partner are protected from grand jury subpoena by the attorney-client privilege). However, where the in-firm communication sought to be protected involves a then-current client and that same client seeks to learn the contents of the communication, things can get tricky. As noted above, recent cases have found such communications privileged and protected from discovery, but that has not always been the case.

The first series of decisions to consider the in-firm privilege were all decided by federal district courts between 1989 and 2011. See William Barker, May a Law Firm Have Privileged Communications with Its Own In-House Counsel Regarding a Current Client?, 51 Tort Trial & Ins. Prac. L.J. 777 (Spring/Summer 2016). Those cases routinely found that in-firm communications regarding a dispute with a then-current client were discoverable in subsequent litigation between that client and the firm. Those decisions typically acknowledged that, outside the law firm context, the communications at issue would be protected by the attorney-client privilege. Nevertheless, these courts found that clients were entitled to the substance of in-firm communications made during the client engagement because a firm’s fiduciary duties of loyalty and candor trumped any assertion of in-firm privilege. Koen Book Distribs. v. Powell, Tracktman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283 (E.D. Pa. 2002), is emblematic of the reasoning of these cases. In Koen Book, the firm was representing its client in a bankruptcy proceeding. In the midst of that proceeding, the client threatened the firm with a possible malpractice action. The client made that threat two weeks before a scheduled court hearing (at which the firm appeared) and a month before finally terminating the firm. Before the firm was terminated, the attorneys working on the matter consulted with their in-house general counsel regarding how to respond to the malpractice allegations. The Koen Book court acknowledged that these in-firm communications would typically be privileged under existing privilege doctrine and Upjohn. But the court found that the firm’s communications regarding its continued representation of the client after the malpractice threat, including the ethics of continued representation, were not “shielded” from discovery by the firm’s client. This was so because the firm had a fiduciary duty to its client even after the malpractice threat; the firm’s duty to its client “was paramount to [the firm’s] own interests.” Id. at 286. The firm thus had a conflict between its own interests and those of its client, and the court held that the conflict effectively vitiated the privilege that would otherwise apply. What could the firm have done given what the court itself recognized as an “unenviable situation”? The Koen Book court suggested that the firm could have promptly withdrawn from representing the client or sought the client’s consent to the firm’s continued representation, after “full disclosure and consultation” with the client regarding the conflict.

The cases holding that a firm’s fiduciary obligations to its client trump any applicable in-firm privilege routinely suggest that in order to preserve the in-firm privilege, firms should do any one of three things. First, a firm can retain outside counsel to consult on the current client conflict. Some courts have suggested that the privileged nature of such communications would be respected so long as the communications are between a firm and outside counsel retained by the firm to address a current client conflict. Second, as in Koen Book, courts have indicated that firms could preserve the privilege by withdrawing once a conflict between the firm and the client emerges. Following withdrawal, in-firm communications regarding the client dispute are considered privileged. Finally, a firm can ask the client to waive the conflict between the firm and the client or seek the client’s agreement that in-firm communications about the firm/client conflict will remain privileged even though the firm continues to represent the client.

From an overall ethics point of view, piercing the attorney-client privilege as punishment for an alleged ethics violation makes little sense. In cases in which a law firm’s representation of Client A comes into conflict with its representation of Client B, the solution is not to give Client A access to the firm’s discussions with Client B. Likewise, there are obvious problems—logical, practical, and policy-based—with the courses of action suggested in Koen Book and other cases. In terms of logic, it should not matter whether a firm is communicating about a current client conflict with its in-house general counsel or outside counsel. If the argument is that a firm’s fiduciary duty to a client trumps the assertion of privilege, that fiduciary obligation remains the same whether the firm is communicating with in-house counsel or outside counsel. In terms of practicality, the “just get a waiver” approach seems unrealistic: Clients are apt to be in an uncooperative mood once they have asserted a potential malpractice claim against a firm. And, in terms of policy, there are good reasons not to have firms rush to resign from a client representation at the first hint of a conflict. For example, in Koen Book, a hearing was scheduled two weeks from when the malpractice threat was made. It would have likely been in the client’s best interest to have the firm continue the representation at least through the hearing rather than resigning on the spot and leaving the client in the lurch. Indeed, the rule applied in the pre-2012 cases would not even protect in-firm communications regarding whether to resign or how to best protect the client’s interest if the firm resigned. Such a rule serves neither the client’s nor the firm’s interests.

For these reasons and others, the tide has turned in the past decade. Beginning in 2011, courts (including the supreme courts of three states) applying the law of California, Georgia, Illinois, Massachusetts, New York, Ohio, and Oregon have all found in-firm communications regarding disputes with current clients privileged and protected from discovery, provided certain criteria are met. See Palmer v. Superior Court, 231 Cal. App. 4th 1214 (2014); St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C., 293 Ga. 419 (2013); Garvy v. Seyfarth Shaw LLP, 2012 IL App (1st) 110115; RFF Family P’ship, LP v. Burns & Levinson, LLP, 465 Mass. 702 (2013); Stock v. Schnader Harrison Segal & Lewis LLP, 35 N.Y.S.3d 31 (First Dept. 2016); TattleTale Alarm Sys. v. Calfee, Halter & Griswold, LLP, No. 2:10-cv-226, 2011 U.S. Dist. LEXIS 10412 (S.D. Ohio Feb. 3, 2011); Crimson Trace Corp. v. Davis Wright Tremaine, LLP, 355 Or. 476 (2014).

Criteria for Privilege

What are those criteria? How can you ensure that your in-firm communications have the best chance of being protected from discovery in a later malpractice litigation with a client?

First, the communication must be with an in-firm lawyer who is acting on behalf of the firm and representing the firm’s interests. Ideally, that person should be formally designated as the firm’s general counsel, ethics counsel, or loss prevention counsel (we refer to these roles generically as “general counsel”). There is no rule that the firm’s general counsel needs to be a full-time position, though the more time he or she spends on those duties, the likelier it is that those in-firm communications will be regarded as privileged. If your firm does not have a designated general counsel, whether full-time or part-time, there is a greater risk that in-firm communications about a current client dispute will not be protected from discovery. If your firm has no designated general counsel, designate one. At a minimum, once a client dispute arises and you seek advice from another attorney at the firm, you will want to make clear—in writing—that the attorney represents the firm in that dispute. While there is no guarantee that a court will respect the assertion of privilege in such a circumstance, in order to argue that an in-firm communication is subject to the attorney-client privilege, one of the lawyers in the conversation must be acting on behalf of the firm and seeking to protect the firm’s interests.

Second, ensure that the lawyer acting as general counsel has not billed any time to the client or client matter that is the subject of the dispute. Where a firm has a full-time general counsel, this is typically not an issue. However, where the firm has a part time or ad hoc general counsel, it is important to ensure that the acting general counsel is not also working on matters for the client in question.

Third, while it may go without saying, no one—neither the lawyers involved in the underlying matter nor the general counsel—should bill time spent addressing the client conflict to the client. Where a lawyer is both working on an underlying case and simultaneously consulting with the firm’s general counsel regarding that matter, the time spent with the general counsel should not be billed to the client. Ideally, the firm would open a firm matter number for the firm’s consultations regarding the problematic client or representation or, alternatively, bill the time to the firm’s general counsel number. Observing such formalities further helps establish that the general counsel is acting on behalf of the firm, not the client.

Finally, as with any attorney-client communication, the communications should be made in confidence and kept confidential. To be on the safe side, once these sorts of problems erupt in a representation, communications regarding those problems should be limited to the general counsel and those lawyers working on the matter on an as-needed basis. The more people who receive that information, the greater the potential that a court may find that the communications were not sufficiently confidential.

A recent California Court of Appeal decision illustrates several of these points. In Edwards Wildman Palmer LLP v. Superior Court, 231 Cal. App. 4th 1214 (2014), the firm represented an individual client for two months after the client had made serious complaints about the firm’s handling of his case. The primary partner on the case consulted regularly with the firm’s general counsel and “claims counsel” regarding the complaining client. The general counsel and claims counsel also claimed to have “deputized” another partner specifically to oversee the matter and advise on communications with the complaining client. Among other things, the deputized partner supervised the preparation of pleadings. Neither the general counsel, claims counsel, nor the “deputized” partner billed any of their time spent on the case to the complaining client. The California Court of Appeal found that the communications between the responsible partner and the firm’s general counsel and claims counsel were privileged, given that the general counsel and claims counsel were providing legal advice to the primary partner on managing the client relationship. But the court of appeal rejected the privilege claim as to communications involving the partner “deputized” by the general counsel to help manage the matter. The court allowed discovery of those communications because the “deputized” partner’s normal role at the firm was not general or ethics counsel and because, in the court’s eyes, the deputized partner actually did work for the client (albeit unbilled) because he supervised the preparation of pleadings.

Remember Your Ethical Obligations

Even though the strong trend among courts now is to protect in-firm privileged communications from discovery by disgruntled clients, remember that the attorney-client privilege is an evidentiary and not an ethical doctrine. Regardless of whether a court would refuse to use a firm’s ethical obligations to a client as a basis to pierce an assertion of in-firm privilege, those ethical obligations remain. Failure to honor them could exacerbate an already fraught client relationship. For example, under ABA Model Rule 1.4, lawyers have a duty to keep their clients informed about their matters and may not withhold information from a client “to serve the lawyer’s own interests.” Model Rule of Prof’l Conduct 1.4 cmt. 7. Where a lawyer discovers an error that warrants consultation with the firm’s general counsel, the firm in some cases may also have an obligation to disclose the issue to the client and advise the client accordingly. See generally ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 481 (Apr. 17, 2018) (lawyers are obligated to disclose material errors to current clients). As the California Court of Appeal noted, “recognition of [the in-firm privilege] does not undercut a firm’s duty to keep a client apprised of developments in the case or alert the client to an incident of malpractice.” Edwards Wildman Palmer LLP, 231 Cal. App. 4th at 1234. “Preserving the privileged nature of [in-firm communications] does not affect a law firm’s duty to provide a client with full and fair disclosure of facts material to the client’s interests.” Id. q

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