Ethics and Internal Firm Communications Regarding Lawyer Malpractice Claims

During the past decade, a number of state and federal courts have addressed the application of the attorney-client privilege to internal law firm communications concerning a malpractice claim. While the majority of jurisdictions have concluded that such communications are privileged, particularly when they involve a firm’s general counsel, ethics counsel, or claims counsel, a few courts have determined that “fiduciary” or “current client” exceptions to the attorney-client privilege apply and that internal communications are discoverable. Typically, when courts apply the exceptions, they reason that a firm cannot withhold internal communications as to a currently represented client.

While most courts reject the fiduciary and current client exceptions, the proponent of the privilege must still establish its elements. Moreover, in determining whether the internal communications are discoverable, the courts may also scrutinize the formality associated with a firm’s general counsel or ethics counsel structure.

This article surveys the law on in-house communications concerning malpractice claims. It begins with an overview of malpractice disclosure requirements, then reviews the case law, and closes with some suggestions for protecting privilege when a firm communicates internally as to a malpractice claim.

Attorney Disclosure Obligations

All states have rules requiring disclosure of material facts to the client concerning the representation. They most often derive from the American Bar Association (ABA) Model Rules of Professional Conduct. Pursuant to Model Rule 1.4 (Communication), a lawyer is charged to “keep the client reasonably informed about the status of the matter” and “explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Similarly, California Rule of Professional Conduct 3-500 provides that a state bar member “shall keep a client reasonably informed about significant developments relating to the employment or representation.”

These disclosure rules have been interpreted to require that a lawyer inform his or her client when the client may have a malpractice claim, because the information is necessary to permit the client to make informed decisions regarding the representation.¹

A related issue concerns conflicts of interest. ABA Model Rule 1.7 prohibits a lawyer from representing a client in a variety of situations, including where there is a significant risk that the representation of one or more clients will be materially limited by a personal interest of the lawyer.² Does the existence of a potential malpractice claim create such a “personal interest” on the attorney’s part? One basis for a conflict could be the lawyer’s wishing to settle the litigation quickly to hide a mistake or to minimize the client’s damages in a subsequent malpractice case. Another could be the lawyer’s wishing to litigate the case to the end to vindicate his or her position as to a malpractice claim, contrary to the client’s best interests.³

In evaluating the reporting and conflict issues, an attorney aware of a potential error should first ask whether it is the type of material mistake that rises to a level where it needs to be reported. If the answer is in the affirmative, the next question is how the matter should be reported to the client. And finally, once the self-report takes place, is the attorney in a conflict of interest that prevents him or her from continuing the representation?

Material events for reporting purposes include missed statutes of limitations or other filing deadlines that clearly have the potential to prejudice a client’s rights. When these events occur, there is often an adverse and definable impact on the matter. On this issue, most jurisdictions adopt an objective standard, i.e., whether a disinterested lawyer would conclude that the error would likely result in prejudice to the client’s claims. If the answer is yes, the matter must be reported.

Materiality may also be tied to the issue of whether the client has sustained damage as the result of the act or omission. In California, a client’s malpractice claim accrues when actual injury occurs, defined as “impairment or diminution, as well as the total loss or extinction, of a right or remedy.”⁴ If there is potential the client has sustained appreciable damage as the result of the error, the safest practice is to report it to the client “promptly” or at least at the point where it becomes clear that the error cannot be rectified.

The following decisions reveal a divide between those courts reasoning that an attorney’s ethical duties to the client trump the assertion of the attorney-client privilege and courts concluding that there is no ethics exception to the privilege, which is typically a creature of statute.

Courts Denying Application of the Privilege to Intrafirm Communications

In Thelen Reid & Priest LLP v. Marland,⁵ the United States District Court for the Northern District of California addressed a motion to compel production of documents as to a whistleblower case. François Marland approached the New York law firm of Reid & Priest claiming to possess information about an undisclosed fronting agreement through which a French bank had illegally acquired the insurance assets of Executive Life Insurance Company, an insolvent California insurer. In 1998, Reid & Priest merged with Thelen, Marrin, Johnson & Bridges to form Thelen, Reid & Priest (Thelen).

After the California Department of Insurance (CDOI) and Marland failed to reach an agreement regarding prosecution of the case, Thelen recommended that Marland initiate his own qui tam lawsuit on behalf of the State of California and the CDOI. The parties signed a fee agreement whereby Thelen would sue the French bank on Marland’s behalf in exchange for a percentage of Marland’s recovery. Thelen helped Marland incorporate a limited liability company (LLC) to protect his anonymity through the process.⁶

On the day that Marland filed suit, the CDOI independently filed a complaint raising nearly identical claims against many of the same defendants. The CDOI requested that Thelen represent it in the lawsuit. Thelen contended it informed Marland and Marland’s European counsel of this proposal, but Marland claimed that Thelen never disclosed any potential conflicts arising from the dual representation.⁷

After the California attorney general intervened in the action and objected to Thelen’s continued representation of Marland’s LLC, Thelen withdrew and assisted Marland with retaining other counsel. Thelen continued to serve as general counsel for Marland’s LLC. Thelen had also determined that the lawsuit had become significantly more expensive to prosecute and, in June 1999, approached Marland to renegotiate the fee structure. Thelen also requested that Marland produce the fronting agreement that served as the basis for the suit, and Marland indicated it had been destroyed. The parties then negotiated a new fee agreement. Marland claimed that Thelen had used the litigation costs and fronting agreement issues as pretenses to induce Marland to reduce his share of recovery in the litigation. He filed an arbitration proceeding against the firm to which Thelen responded by filing its own federal district court action.

In the federal court, Marland sought production of communications between the Thelen attorneys assigned to the CDOI case and the firm’s executive committee. The communications included contacts with the firm’s general counsel, Wynne Carvill. According to Thelen, Carvill had gathered facts, analyzed legal issues, advised management of the firm’s legal options, and represented the firm in its negotiations with Marland and the CDOI.⁸

Marland moved to compel production of a number of documents as to which Thelen had asserted the attorney-client privilege and/or the work product doctrine. The federal district court ruled that the requested information “implicated or affected the client’s interest” as well as Thelen’s fiduciary relationship with the client. As a result, the court considered the “lid” on the communications to have been “lifted.”⁹ Production was ordered of, among other things, Thelen’s intrafirm communications discussing (1) the client’s potential claims against the firm, (2) known errors in the firm’s representation, and (3) known conflicts in the representation.¹⁰

In another federal trial court case, In re SonicBlue, Inc., parties sought the production of internal firm communications as to bankruptcy proceedings.¹¹ The claimant moved to compel the production of documents by Pillsbury Winthrop Shaw Pittman (Pillsbury), former counsel for the debtors, including communications reflecting legal advice Pillsbury had sought and received on its own behalf from its own attorneys.¹² The court ordered production of the information, reasoning that when a law firm chooses to represent itself, it runs the risk of creating an impermissible conflict of interest with one or more of its current clients. The court concluded that the law firm’s claim of privilege under those circumstances must give way to the protection of current clients who may be harmed by the conflict.¹³

Courts Applying the Privilege to Intrafirm Communications

California. A 2014 California Court of Appeal decision, Palmer v. Superior Court,¹⁴ took a different tack, citing the statutory nature of California’s attorney-client privilege. The Palmer decision is notable for its express disagreement with Thelen and SonicBlue. The court’s opinion strongly validates both the attorney-client privilege in the intrafirm setting and the role of general counsel in providing legal advice as to client disputes.

Palmer arose out of the representation by Edwards Wildman Palmer LLP (Palmer) and its former partner, Dominique Shelton, of Shahrokh Mireskandari in an invasion of privacy suit against the United Kingdom’s Daily Mail. After the firm filed suit against the Daily Mail and others on April 4, 2012, its relationship with Mireskandari immediately began to deteriorate.

In June 2012, Mireskandari sent Shelton two e-mails complaining of the firm’s billings and the quality of the representation. He contended Palmer and Shelton had breached the firm’s client retainer agreement, in part by failing to develop an accurate litigation budget. After the Daily Mail defendants filed an anti-SLAPP motion in response to the suit, Mireskandari ultimately retained new counsel, the Greenberg Glusker firm.

While Palmer and Shelton still represented Mireskandari, Shelton consulted with Palmer attorneys Jeffrey Swope and James Christman concerning the billing dispute and the representation. Swope was the firm’s general counsel and Christman was its claims counsel.

Mireskandari thereafter sued Palmer and Shelton for malpractice and took Shelton’s deposition. Shelton invoked the attorney-client privilege and refused to answer questions that purportedly related to her privileged communications with Swope. Palmer also withheld documents on the basis of the attorney-client privilege, including internal law firm communications between Shelton and the lawyers who acted as counsel for the firm.

In opposition to Mireskandari’s motion to compel, the defendants submitted declarations from Swope and Christman. The declarants stated that they shared responsibility for claims handling and loss prevention issues, and that Shelton had sought, and Christman and Swope had provided, advice with respect to legal issues arising from the Mireskandari representation. Swope and Christman also indicated they had deputized another attorney, Mark Durbin, to advise Shelton regarding her response to Mireskandari’s complaints. The client was not billed for any of Swope’s, Christman’s, or Durbin’s time.

Characterizing the issues as novel, the trial court followed Thelen, and ruled that a firm’s fiduciary and ethical duties to the client trump the attorney-client privilege. The court reasoned that the client’s right to be informed takes precedence over a privilege claim and, if there were any discussions among the members of the firm regarding the client, his case, or his claims, those communications belonged to the client. Palmer and Shelton challenged the ruling in the court of appeal.

The Palmer court noted that an attorney-client relationship exists, for the purpose of determining the applicability of the privilege, whenever a person consults an attorney to obtain the attorney’s legal services or advice. The court then discussed the statutory basis for the privilege, noting that California recognizes eight specifically enumerated exceptions.¹⁵ When none of these exceptions apply, the privilege is “absolute” and “disclosure may not be ordered, without regard to relevance, necessity, or any particular circumstances peculiar to the case.”¹⁶

The court then discussed the role of in-house attorneys from whom ethics advice is sought. It observed that as law firms have grown both in size and organization, they frequently employ inernal ethics and claims attorneys. As a result, there is nothing exceptional about attorneys within a firm seeking confidential legal advice as to their own interests or as to a matter impacting the firm.¹⁷

Mireskandari argued that because of the attorneys’ ethical and fiduciary duties, the intrafirm communications made during and concerning the representation were not protected by the attorney-client privilege. He relied on the Thelen and SonicBlue decisions to support that argument.

While the Palmer court recognized that the courts in Thelen and SonicBlue had ordered production of internal communications, it observed that other state courts had rejected the application of “fiduciary” or “current client” exceptions to the attorney-client privilege.¹⁸ In one of these decisions, Crimson Trace Corp. v. Davis Wright Tremaine LLP, the Oregon Supreme Court noted that unlike the judge-made law on the attorney-client privilege in other jurisdictions, Oregon’s attorney-client privilege was established by statute and was a matter of legislative intent.¹⁹

The Palmer court observed that the California Supreme Court had also rejected the notion that a fiduciary exception to the attorney-client privilege exists, in a case involving a cotrustee.²⁰ There, the supreme court concluded that the privileges set forth in the Evidence Code are legislative creations which California courts have no power to expand or narrow, including through the application of newly created exceptions.²¹

In addressing the interplay between California’s Rules of Professional Conduct and the attorney-client privilege, the court confirmed that its intent was not to condone or minimize the significance of an attorney’s violation of ethics rules. However, nothing in the Evidence Code suggested that a potential or actual conflict of interest abrogated the attorney-client privilege.²²

Moreover, the court observed that in a practical sense it was not a foregone conclusion that an attorney’s consultation with counsel regarding a client dispute would always be adverse to a client. The legal advice might in fact find the way to best address the potential conflict without injury to the client. Nor did enforcing the attorney-client privilege undercut the firm’s duties to keep the client apprised of developments in the case or to alert the client of an incident of malpractice. The privilege protected confidential communications between the lawyer and the client but did not excuse the firm from reporting the fact that it committed malpractice.²³

The court concluded, however, that the firm had not established preliminary facts showing an attorney-client relationship existed between Durbin and Shelton. In its opposition, the firm did not include a declaration from Durbin and he was not mentioned in the deposition excerpts attached to the motion. It appeared that Durbin’s normal role was not as Palmer’s general counsel or ethics counsel; instead he was purportedly “deputized” by Swope and Christman to perform certain tasks after the dispute arose.²⁴

In contrast, the court concluded Mireskandari’s motion should be denied as to Shelton’s communications with Swope and Christman. Shelton had testified that she considered Swope to be her attorney. Swope also had numerous communications with Shelton in his general counsel capacity, and Christman had performed similar work as Palmer’s claims counsel. Therefore, this evidence could have led the trial court to conclude as a factual matter that the firm and Shelton had met their preliminary burden to establish the existence of an attorney-client relationship.²⁵

Georgia. In St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C.,²⁶ the Hunter Maclean firm represented St. Simons Waterfront, LLC as to a condominium project. After several purchasers sought rescission of real estate contracts that the firm had drafted, a dispute arose between Hunter Maclean and its client. The firm continued to represent St. Simons as to certain real estate closings and, during the period of its representation, the responsible attorneys communicated with the firm’s in-house counsel. The trial court ordered production of these communications, and the intermediate appellate court then established a framework designed to resolve the privilege issue. The Georgia Supreme Court accepted the case to “restructure” that framework consistent with the general requirements of state privilege law.²⁷

The supreme court acknowledged that some courts had concluded that intrafirm communications regarding a current client are not entitled to privilege under any circumstances due to the fiduciary relationship between a firm and its client.²⁸ However, other courts had held the privilege applies only in limited circumstances.²⁹ Still other courts had concluded that the privilege does apply or that it applies with narrow exceptions.³⁰

Having examined the courts’ various approaches and their underlying rationales, the supreme court concluded the best course was simply to analyze the privilege as the court would in any other lawsuit.³¹ That first required an analysis of the existence of an attorney-client relationship, with the level of formality associated with creating the in-house counsel position a relevant factor. The court observed, for instance, that “where the in-house counsel holds a full-time position as firm counsel to the exclusion of other work, it should be easier to establish the existence of attorney-client relationship between counsel and the firm with respect to a given matter.”³²

The St. Simons court concluded that the potential existence of an imputed conflict of interest between in-house counsel and the firm’s client was not a persuasive basis for abrogating the attorney-client privilege.³³ Instead, the privilege applies to communications between a law firm’s attorneys and its in-house counsel regarding a client’s potential claims against the firm where: (1) there is a genuine attorney-client relationship between the firm’s lawyers and in-house counsel; (2) the communications were intended to advance the firm’s interest in limiting exposure to liability rather than the client’s interest in obtaining sound legal representation; (3) the communications were conducted and maintained in confidence; and (4) no exception to the privilege applies.³⁴

The supreme court remanded the case to the trial court with the instruction that the law firm would bear the burden to prove that the privilege applied.³⁵ The court also concluded that once the relationship between attorney and client becomes adversarial, work product protection would attach under the same principles as discussed with respect to the attorney-client privilege.³⁶

Illinois. The Illinois courts addressed the application of the attorney-client privilege to internal firm communications in two intermediate appellate court decisions, MDA City Apartments LLC v. DLA Piper LLP³⁷ and Garvy v. Seyfarth Shaw LLP.³⁸ The facts and holding of the more recent of the two opinions, MDA City Apartments, are as follows.

MDA retained DLA Piper LLP (DLA) to handle arbitration proceedings and a declaratory judgment action against Walsh Construction Company (Walsh) arising from a contract dispute. During the proceedings, Walsh’s attorneys indicated they would move to disqualify DLA as MDA’s counsel. Walsh contended that it was affiliated through a purported common ownership with an entity known as Walsh Investors, for which DLA had performed legal work.

DLA advised MDA of the claimed conflict of interest. After Walsh filed motions for disqualification of DLA, the attorneys handling the cases consulted with the firm’s in-house counsel, and DLA also hired outside counsel to represent DLA as to the motions. Thereafter, both the circuit court in the declaratory relief action and the arbitration panel granted the motions to disqualify. MDA filed a legal malpractice action against DLA.³⁹

MDA then sought discovery of DLA’s communications with in-house and outside counsel regarding the motions to disqualify. DLA produced a privilege log listing 57 e-mail communications between its attorneys and in-house counsel as well as communications between DLA attorneys and outside counsel. After DLA produced only two of the listed documents, MDA moved to compel production of the remaining communications. DLA challenged the production order and a related sanctions order in the appellate court.⁴⁰

The appellate court observed that the attorney-client privilege is designed to encourage clients to engage in a full and frank discussion with their attorneys without fear of a compelled disclosure of information. Illinois law also provides that the privilege “has limits” and must be narrowly construed.⁴¹ The court observed that the limitation that MDA was contending applied to the privileged nature of the documents—the fiduciary duty exception—arose in the context of trust law and was based on the principle that a beneficiary has the right to the production of legal advice rendered to the trustee relating to trust administration. Even in the trust context, however, the exception does not apply to legal advice concerning the fiduciary’s own personal liability or communications in anticipation of adversarial legal proceedings against the fiduciary.⁴²

The MDA City Apartments court noted it had recently addressed the fiduciary duty exception in Garvy. There, the appellate court noted that Illinois had not adopted the fiduciary exception to the privilege, holding that if adversarial proceedings were pending, the communications would be privileged if the fiduciary sought legal advice in connection with a client’s malpractice claim.⁴³

The same reasoning applied to the communications between DLA and both in-house and outside counsel relating to MDA’s threatened litigation. The communications related to the motions to disqualify in the two actions in which DLA represented MDA. The court observed that in both instances, DLA was the beneficiary of the legal advice it sought. Thus, even if Illinois were to adopt the fiduciary duty exception, it would still not apply to the internal communications at issue.⁴⁴

The court also observed that the fact that Illinois Rules of Professional Conduct 1.4 and 1.7, requiring that clients be kept reasonably informed regarding issues related to the representation and prohibiting the representation of concurrent conflicting interests, were irrelevant to whether an attorney can have an expectation of confidentiality. The ethics rules do not preclude the attorney from securing confidential legal advice about the lawyer’s personal responsibility as to compliance with such rules.⁴⁵

The court also rejected MDA’s argument that the doctrine of dual representation required production of the communications. Even if DLA’s self-representation was analogous to the representation of an external client, MDA had not explained what common interest was involved in the communications such that DLA would not have an expectation of confidentiality.⁴⁶

Finally, MDA argued that the crime/fraud exception to the attorney-client privilege required production of the documents. The appellate court rejected this contention, noting that this exception does not apply to good faith consultations with an attorney about the legal implications of a proposed course of action, even if it is later determined that the course of action was improper. The court concluded that MDA had not shown that any applicable exception to the privilege applied, and it therefore reversed the order directing DLA’s production of the 55 documents in question.⁴⁷

Massachusetts. In RFF Family Partnership, LP v. Burns & Levinson, LLP,⁴⁸ the Supreme Judicial Court of Massachusetts engaged in a detailed and thorough analysis of the policy reasons for applying the attorney-client privilege to internal firm communications. The decision arose from a law firm’s motion for a protective order to preserve the confidentiality of communications between attorneys and the law firm’s in-house counsel.

The client, RFF, had made a $1.4 million commercial loan to an entity known as Link Development, LLC, secured by what RFF understood to be a first mortgage on certain property owned by Link. RFF retained Burns & Levinson, LLP (B&L) to investigate title to the property, conduct due diligence, draft the necessary documents, and then foreclose on the mortgage when Link defaulted on a payment.⁴⁹

Shortly before a scheduled foreclosure sale, an assignee of a different mortgage on the property claimed its lien was senior to RFF’s lien and sued to enjoin the foreclosure. RFF’s title insurer retained a new law firm, Prince Lobel, to represent RFF in litigation with the assignee. One year later, on March 2, 2011, while B&L continued to represent RFF in active negotiations with a third party for the sale of the foreclosed property, Prince Lobel sent a notice of claim contending that B&L breached its obligations to RFF by, among other things, failing to identify and pay off another lender’s existing mortgage.

After receipt of the notice of claim, three of B&L’s lawyers sought advice as to how the firm should respond from David Rosenblatt, the B&L partner designated to respond to ethical questions and risk management issues. Rosenblatt had never worked on any RFF matters and did not bill the client for any of the time devoted to these internal communications. B&L then communicated to the client that, in light of the notice of claim, it could not continue to represent RFF. RFF responded that Prince Lobel had not been authorized to file or threaten any litigation and that RFF wanted B&L to continue to represent it in efforts to sell the property.⁵⁰

RFF nonetheless sued B&L on June 13, 2012, and noticed the depositions of the responsible attorneys. B&L moved for a protective order to preserve the confidentiality of its privileged communications with Rosenblatt regarding B&L’s response to the notice of claim. The trial court granted the motion for a protective order and the client thereafter sought leave for an interlocutory appeal. After that request was granted, the supreme judicial court transferred the appeal to itself.⁵¹

RFF argued that when an attorney in a law firm seeks legal advice from in-house counsel regarding how the attorney or the firm should respond to a malpractice claim, such communications are not protected from disclosure to the client unless: (1) the law firm before seeking the advice has withdrawn from the representation, or (2) the firm has fully disclosed to the client that the firm and the client have a conflict of interest. RFF also contended that the client’s informed consent would have to be obtained for the law firm to seek legal advice. RFF conceded that the communications were privileged and not subject to disclosure to any party other than the client. However, the law firm’s fiduciary duty to its client required it to disclose all communications relevant to the representation.⁵²

The supreme judicial court observed that neither it nor any other court of last resort in the United States appeared to have addressed the applicability of the attorney-client privilege to a law firm’s in-house communications concerning a current client. In fact the Georgia Supreme Court had observed that, on this privilege issue, it was “in unchartered jurisprudential waters.”⁵³

The RFF court noted that when a law firm designates one or more of its attorneys to serve as its in-house counsel on ethical, regulatory, and risk management issues that are crucial to the firm’s reputation and financial success, the attorney-client privilege serves the same purpose as it does for corporations or governmental entities: guaranteeing the confidentiality necessary to ensure that the firm’s partners, associates, and employees provide the information needed to obtain sound legal advice.⁵⁴ The court also discussed the problems associated with each of the following arguments raised by RFF.

First, RFF contended that to preserve privilege the firm could simply withdraw from the representation before seeking legal advice. The court noted that this alternative posed a risk that the firm, without the benefit of expert advice, could unnecessarily withdraw from a representation where the apparent conflict was illusory or reparable, or withdraw without adequately protecting the client’s interest.⁵⁵

Second, RFF argued that the client could be fully advised about the conflict and asked to provide consent before the firm sought legal advice. The court observed that this alternative could involve the firm advising the client about the conflict before itself obtaining the advice that would enable it to better understand the conflict.⁵⁶

Third, RFF argued that the responsible attorney could simply obtain the advice from in-house counsel while recognizing that the communications would not be protected from disclosure to the client. The court criticized this alternative on the grounds that the information provided to in-house counsel might be either withheld or “sugar-coated” as the result of risk of disclosure. Thus, the advice received could suffer from a lack of candor.⁵⁷

Finally, RFF suggested that counsel could simply retain an attorney in another law firm to determine how best to proceed. The court noted that this alternative could pose additional costs to the law firm and delay the receipt of the ethical advice because the new firm would need to be retained and clear conflicts. The court concluded that all of RFF’s suggested alternatives failed to serve the client’s best interest. The court characterized the suggestions as “dysfunctional, both to the client and the law firm.”⁵⁸

RFF also contended that Massachusetts should join other jurisdictions and adopt the “fiduciary” and “current client” exceptions to the attorney-client privilege. The court noted that the fiduciary exception would be the most dysfunctional rule of all in denying a law firm and its attorneys any privilege protection even if the firm seeks the advice of outside counsel, unless the firm first withdraws from the representation or obtains the client’s consent.⁵⁹ The court noted that such a “draconian rule” was unnecessary to protect client interests. Preserving the privileged nature of these communications did not affect the law firm’s duty to provide a client with “full and fair disclosure of facts material to the client’s interests.”⁶⁰ Nor did the privileged nature of communications with in-house or outside counsel affect a law firm’s obligation to provide the client with appropriate legal advice, even if that advice was informed by the law firm’s confidential consultation with in-house or outside counsel.⁶¹

As to the current client exception, the court observed that the rationale for this rule appeared to be that where a current client threatens legal action and the attorneys seek legal advice from in-house counsel, the law firm is both attorney for the outside client and itself as a client and these two “clients” have conflicting interests.⁶² The supreme judicial court found two fundamental flaws with the current client rule.

First, the rule of imputation embodied in Rule 1.10(a) of both the Massachusetts Rules of Professional Conduct and the ABA Model Rules of Professional Conduct generally prohibits attorneys in the same law firm from representing outside clients that are adverse to each other. There was nothing in the language of, or commentary to, these rules to suggest that imputation was meant to prohibit in-house counsel from providing legal advice to his or her own law firm in response to a threatened claim by an outside client. The court noted that a law firm can avoid conflicting loyalties by refusing to represent an adverse outside client. But where a law firm is already representing a client and the client threatens to bring a claim against the law firm, the potential conflict between the firm’s loyalty to the client and its loyalty to itself cannot be avoided and “must instead be addressed, either by resolving the conflict satisfactorily to the client or by withdrawing from the representation.”⁶³

Thus, a firm is not disloyal to a client in seeking legal advice to determine how best to address a potential conflict, regardless of whether the legal advice is provided by in-house counsel or outside counsel. Applying the rule of imputation under such circumstances would not avoid conflicting loyalties or prevent disloyalty; it would simply prevent or delay a law firm from seeking the expertise and advice of in-house counsel in deciding what to do where there is a potential conflict.⁶⁴

Second, the court noted that even where a law firm actually violates Massachusetts Rule of Professional Conduct 1.7(a) by representing two clients with adverse interests without each client’s consent, counsel’s failure to avoid that conflict should not deprive the clients of the privilege. Under those circumstances, the communications are still privileged against each of the clients notwithstanding the lawyer’s misconduct.⁶⁵

The court concluded that in law, as in architecture, form should follow function. Thus, the court’s preference was for a formulation of the attorney-client privilege that encourages attorneys faced with the client’s threat of legal action to seek the legal advice of an in-house ethics counsel before deciding whether they must withdraw from the representation, over a formulation that would encourage attorneys to withdraw or disclose a poorly understood potential conflict before seeking such advice.⁶⁶ The court affirmed the trial judge’s partial allowance of the B&L defendants’ motion for a protective order to enable the attorneys to preserve the confidentiality of privileged attorney-client communications between the law firm and its in-house counsel.⁶⁷

Oregon. Finally, in Crimson Trace Corp. v. Davis Wright Tremaine LLP,⁶⁸ the Oregon Supreme Court also rejected a fiduciary exception to the attorney-client privilege. Crimson Trace was a manufacturer and seller of laser grips for firearms. It retained William Birdwell, a Davis Wright Tremaine (DWT) attorney, to prosecute certain product patents before the U.S. Patent and Trademark Office (USPTO). The client later retained DWT to represent it in a dispute with a competitor, LaserMax, over possible patent infringements. A different DWT attorney, Frederick Ross Boundy, acted as lead trial counsel in that litigation.⁶⁹

LaserMax aggressively litigated its case and asserted a counterclaim that challenged the validity of Crimson Trace’s patents. It claimed that Crimson Trace had deceptively omitted material information when it submitted a patent application. Birdwell and Boundy became concerned that the patent counterclaim could create a conflict of interest between Crimson Trace and DWT in part because LaserMax had named Birdwell as the attorney who had prosecuted the patent.⁷⁰ The two attorneys therefore consulted with DWT’s quality assurance committee (QAC), a small group of lawyers that the firm had designated as its in-house counsel. After consultation with one of the QAC members, Johnson, Boundy disclosed the potential conflict in an e-mail to Crimson Trace’s CEO.

Although Crimson Trace offered to dismiss its claims related to the patent, LaserMax refused to drop its counterclaim. Moreover, LaserMax sought attorney fees for defending the claim, arguing that Crimson Trace had both procured the patent and litigated the infringement claim in bad faith. The district court allowed LaserMax to conduct discovery to determine whether Crimson Trace had acted in bad faith and, in the course of that discovery, LaserMax subpoenaed Birdwell’s patent files. Birdwell and Boundy again consulted with the firm’s QAC to determine how to respond.⁷¹

Crimson Trace and LaserMax thereafter negotiated a settlement of the case. However, Boundy’s motion to file the settlement under seal publicly disclosed certain details of the agreement, giving the impression that LaserMax had conceded liability. The court determined that the disclosures were intentional and damaging to LaserMax, required disclosure of the entire agreement, and imposed monetary sanctions on Crimson Trace for having acted in bad faith.

Crimson Trace thereafter stopped paying DWT. Birdwell and Boundy consulted extensively with Johnson and another QAC member on how to proceed and also communicated with the QAC about the LaserMax claim for sanctions. Crimson Trace filed a legal malpractice action contending that DWT breached its duty in failing to advise Crimson Trace about problems with the patent and that Birdwell would likely be a witness in the dispute, failing to advise against suing LaserMax for patent infringement, and failing to advise Crimson Trace when conflicts arose in connection with LaserMax’s request for attorney fees.

In discovery, Crimson Trace requested production of communications that took place during the representation between or among DWT’s attorneys about conflict of interest issues. DWT resisted production, arguing that the communications were privileged because they involved legal services by DWT’s in-house counsel. The trial court partially granted the client’s motion to compel, requiring first that DWT supply a privilege log and the documents for in camera review. The trial court then determined that three of the documents were not privileged but the remaining documents were subject to privilege. The court nevertheless concluded that there was a conflict of interest that precluded DWT from asserting the privilege.⁷²

On review, the supreme court first observed that a privilege claim may generally be asserted if three requirements are satisfied. The communication must be: (1) between a client and the client’s lawyer as defined by the Oregon statutes, (2) confidential, and (3) for the purposes of facilitating the rendition of professional legal services to the client.⁷³

Crimson Trace argued, however, that a fourth requirement must also be satisfied: the existence of an attorney-client “relationship” depends on the parties’ “reasonable expectations.” It claimed that under this fourth requirement, Birdwell and Boundy could not reasonably have believed that their conversations with the QAC were privileged because no lawyer could expect another member of his or her firm to represent the lawyer as to a conflict with a current client. Crimson Trace cited the Oregon Rules of Professional Conduct’s prohibition on a lawyer representing a client when the representation might be adverse to another client.⁷⁴

The supreme court rejected the client’s reasonable expectations argument. First, it had no support in the wording of the applicable privilege statute, Oregon Evidence Code (OEC) Rule 503. Nothing in that rule mentioned that an attorney-client relationship sufficient to trigger the privilege depended on the reasonableness of the parties’ expectations. Instead, the only references to reasonableness were to a client’s belief that an individual is authorized (1) to practice law, and (2) to be that client’s lawyer.⁷⁵

Second, the court found that Crimson Trace had misconstrued the attorney discipline cases it cited. They stood for the proposition that the attorney-client relationship may be found to exist based upon the would-be client’s reasonable expectations of representation. However, the decisions did not stand for the entirely different proposition that an attorney-client relationship can exist only if the putative client reasonably believes that he or she can look to the lawyer for advice or representation.⁷⁶

The supreme court observed that, in fact, no one had contested that Birdwell and Boundy could have consulted with lawyers outside their firm and that such consultations would be privileged. There was nothing in the wording of OEC 503 or its supporting case law that suggested that a law firm or one or more of its individual lawyers could not be the client of the firm’s in-house counsel. To the contrary, the court had recognized that an organization can be the client of its own in-house counsel within the meaning of the statute.⁷⁷

The supreme court then addressed an amicus curiae argument by the Oregon Trial Lawyers Association: that DWT and its individual lawyers should not be deemed the QAC’s clients 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.”⁷⁸ The court was not persuaded by this argument, noting that its task was one of statutory interpretation rather than policy determination.

As to Crimson Trace’s argument that the fiduciary exception to the privilege applied, the court noted that several courts had declined to adopt the fiduciary exception to the attorney-client privilege, including St. Simons, RFF, and Garvy. The court observed that California had refused to adopt the attorney-client privilege fiduciary exception on the basis that the attorney-client privilege is a legislatively adopted evidence provision and the courts lack authority to create ad hoc exceptions to it.⁷⁹

In fact, Oregon had set forth in OEC 503(4) a complete enumeration of the exceptions to the attorney-client privilege. Because that list did not include a fiduciary exception, no such exception existed in Oregon. The trial court therefore erred in relying on it to compel production of communications that otherwise fell within the general scope of the attorney-client privilege.⁸⁰

Suggestions for Protecting Privilege as to Internal Firm Communications

A few principles can be derived from the above decisions as to the protection of in-house communications. The first is that in virtually all instances, the firm as proponent of the privilege will need to establish its elements. That means a sufficient showing in opposition to a motion to compel or in support of a motion for a protective order to establish: (1) an attorney-client relationship, (2) legal advice sought and received, and (3) confidentiality of the advice rendered.

Second, even in the decisions that have upheld the privilege, courts often consider it important that there be some formality associated with the general counsel or ethics counsel position. If a firm has a titled general or ethics counsel position and a routine practice of directing particular issues to that attorney for consideration and advice, that can go a long way toward demonstrating an attorney-client relationship exists.

Third, general or ethics counsel should not work on the client’s matter or bill for their services. If the attorneys from whom the ethics or professional responsibility advice is sought do not work on the client’s matters, it is easier to dispel the conflicts of interest arguments that arise in these cases.

Finally, the firm and its attorneys should always be mindful of their professional obligations as to disclosure to the client. The privilege may become more difficult to defend where a long period of time passes with internal communications being exchanged, and no disclosure to the client. The cases discussed above make clear that while the courts will typically treat the privilege and ethical disclosure issues as separate, the timely disclosure of a material error to the client is nonetheless very important.

Conclusion

State appellate decisions, including from the highest courts in Georgia, Massachusetts, and Oregon, have upheld privilege as to internal law firm communications. However, because other decisions, including from the federal trial courts, have found such communications to be discoverable, attorneys should exercise care in how, and with whom, they communicate once a malpractice claim has arisen. n

Notes

1. See Benjamin P. Cooper, The Lawyer’s Duty to Inform His Client of His Own Malpractice, 61 Baylor L. Rev. 174, 184 (2009).

2. See alsoCal. Rules of Prof’l Conduct R. 3-310(C).

3. Cooper, supra note 1, at 185.

4. Jordache Enters., Inc. v. Brobeck, Phleger & Harrison, 958 P.2d 1062, 1070 (Cal. 1998).

5. No. C 06-2071, 2007 WL 578989 (N.D. Cal. Feb. 21, 2007).

6. Id. at *1.

7. Id. at *2.

8. Id. at *3.

9. Id. at *7.

10. Id. at *8.

11. No. 07-5082, 2008 WL 170562 (Bankr. N.D. Cal. Jan. 18, 2008).

12. Id. at *1.

13. Id. at *9; see also VersusLaw, Inc. v. Stoel Rives, LLP, 111 P.3d 866 (Wash. Ct. App. 2005) (reversing a summary judgment order and remanding the case for a determination of whether certain internal communications were privileged).

14. 180 Cal. Rptr. 3d 620 (Ct. App. 2014).

15. Id. at 629 (citing Cal. Evid. Code §§ 956–62).

16. Id. (quoting Costco Wholesale Corp. v. Superior Court, 219 P.3d 736, 741 (Cal. 2009)).

17. Id. at 629–30 (noting that the court had previously found that an attorney-client relationship could exist between attorneys within the same firm in Kerner v. Superior Court, 141 Cal. Rptr. 3d 504 (Ct. App. 2012)).

18. See 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); Crimson Trace Corp. v. Davis Wright Tremaine LLP, 326 P.3d 1181, 1183 (Or. 2014).

19. 326 P.3d at 1192–93, 1195.

20. Wells Fargo Bank, N.A. v. Superior Court, 990 P.2d 591 (Cal. 2000).

21. Palmer, 180 Cal. Rptr. 3d at 633–34.

22. Id. at 635.

23. Id.

24. Id. at 637. The court observed that Durbin had actually worked on the Daily Mail case supervising the preparation of pleadings. Therefore, under the circumstances, the firm had failed to establish that Shelton’s communications with Durbin were confidential communications made in the course of the attorney-client relationship between them.

25. Id. at 638.

26. 746 S.E.2d 98 (Ga. 2013).

27. Id. at 103.

28. Id. at 104 (citing Koen Book Distribs. v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283, 285–86 (E.D. Pa. 2002); Bank Brussels Lambert v. Credit Lyonnais (Suisse), S.A., 220 F. Supp. 2d 283, 287 (S.D.N.Y. 2002); In re SonicBlue, Inc., No. 07-5082, 2008 WL 170562 (Bankr. N.D. Cal. Jan. 18, 2008)).

29. Id. (citing Thelen Reid & Priest, LLP v. Marland, No. C 06-2071, 2007 WL 578989 (N.D. Cal. Feb. 21, 2007)).

30. Id. (citing Tattletale Alarm Sys., Inc. v. Calfee, Halter & Griswold, LLP, No. 2:10-cv-226, 2011 WL 382627 (S.D. Ohio Feb. 3, 2011); Garvy v. Seyfarth Shaw LLP, 966 N.E.2d 523, 538 (Ill. 2012)).

31. Id.

32. Id. at 105 (citing Elizabeth Chambliss, The Scope of In-Firm Privilege, 80 Notre Dame L. Rev. 1721, 1748–49 (2005)).

33. Id. at 106.

34. Id. at 104–08.

35. Id. at 108.

36. Id. at 109.

37. 967 N.E.2d 424 (Ill. App. Ct. 2012).

38. 966 N.E.2d 523 (Ill. App. Ct. 2012).

39. MDA City Apartments, 967 N.E.2d at 428.

40. Id. at 429.

41. Id.

42. Id. (citing Mueller Indus., Inc. v. Berkman, 927 N.E.2d 794 (Ill. App. Ct. 2010)).

43. Garvy, 966 N.E.2d at 536.

44. MDA City Apartments, 967 N.E.2d at 430–31.

45. Id. at 431 (citing Garvy, 966 N.E.2d at 538).

46. Id.

47. Id. at 432–33.

48. 991 N.E.2d 1066 (Mass. 2013).

49. Id. at 1068.

50. Id. at 1068–69.

51. Id. at 1069.

52. Id. at 1070. RFF cited Massachusetts Rule of Professional Conduct 1.7, as amended, 430 Mass. 1301 (1999), in support of this argument.

53. Id. (quoting Hunter, Maclean, Exley & Dunn, P.C. v. St. Simons Waterfront, LLC, 730 S.E.2d 608, 619 (Ga. 2012)).

54. RFF, 991 N.E.2d at 1072.

55. Id. at 1074.

56. Id.

57. Id.

58. Id.

59. Id. at 1074–76.

60. Id. at 1076.

61. Id. (citing ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 08-453, at 2 (2008) (finding that a lawyer is required to explain matters sufficiently to permit the client to make an informed decision about the representation)).

62. Id. at 1076–77.

63. Id. at 1078.

64. Id. at 1078–79.

65. Id. at 1079.

66. Id. at 1080.

67. Id. at 1081.

68. 326 P.3d 1181 (Or. 2014).

69. Id. at 1183.

70. Id. at 1183–84.

71. Id. at 1184.

72. Id. at 1185.

73. Id. at 1187.

74. Id.

75. Id. at 1188.

76. Id. at 1189.

77. Id. (citing State ex rel. Or. Health Sci. Univ. v. Haas, 942 P.2d 261 (Or. 1997)).

78. Id.

79. Id. at 1192 (citing Wells Fargo Bank, N.A. v. Superior Court, 990 P.2d 591, 594 (Cal. 2000)).

80. Id. at 1195.