Andy Associate knew he was in trouble. Prominent Partner had let him handle a significant breach of contract case for Important Client. Prominent Partner had actually drafted the contract now in dispute. As Andy dug deeper into his research, he realized that Prominent Partner had omitted key elements from the agreement. As discovery progressed, the facts became worse for Important Client. Indeed, the provisions of the contract did not appear to express the parties' actual intent.
Important Client became increasingly annoyed with Andy and started making comments about the firm's responsibility for this looming disaster. Not only was the case looking like a loser, but the blame appeared to lie with Prominent Partner. After several restless nights, Andy decided he needed legal advice.
Andy had been to enough risk management presentations to know that the person he needed to consult was the law firm's general counsel. But would the advice he received stay within the firm, or was he required to share it with Important Client?
The contract case was settled on terms unfavorable to Important Client, which then retained counsel and brought a malpractice claim against the firm and Prominent Partner. The (now-former) Important Client then demanded documents reflecting Andy's discussions with the firm's general counsel, as well as the general counsel's notes from investigating the situation and interviewing Prominent Partner.
Was the firm obligated to produce the requested items?
General Counsel's Role
Today nearly every large law firm, most midsize firms, and even many small firms have an attorney available for ethical advice. The formality of the position varies from firm to firm. The lawyer may be called general counsel, risk management partner, ethics partner, loss prevention attorney, or something similar. A smaller or midsize firm without such a position may have an outside attorney available to address ethical concerns and help resolve conflicts the firm faces.
As law professor Elizabeth Chambliss has noted: "In addition to improving risk management and lowering the cost of liability insurance, the presence of firm counsel may improve the ethical climate of the firm." (The Scope of In-Firm Privilege, 80 NOTRE DAME L. REV. 1721, 1722 (2005).)
Although the duties of a general counsel will vary, it's important to protect communications between the general counsel and the firm's attorneys who may seek guidance. Assuming all the other indicia of a privileged communication are in place (see Cal. Evid. Code §§ 950-962), there is little question as to the privileged nature of such a communication regarding a former client of the firm.
But what about a current client? The obligations of full disclosure and keeping the client informed, and the duty of loyalty all bear on whether such communications can be protected from discovery.
California state courts have yet to address the issue head-on. Courts in other states, however, have weighed in on both sides of the question, with varied results and different rationales.
A somewhat older line of cases consistently holds that a communication regarding an existing client cannot be deemed privileged from discovery by that client. One of the first reported cases on point involved a law firm that was sued for malpractice. The firm refused to turn over certain internal communications, citing its own attorney-client privilege. The court, while acknowledging that a law firm could assert the privilege (provided the requisite elements of a privilege were in place), held that the privilege would not apply if the firm's representation of itself created a conflict of interest with a current client. (In re Sunrise Securities Litigation, 130 F.R.D. 560, 597 (E.D. Pa. 1989).)
Other courts around the country have issued similar rulings. (See VersusLaw, Inc. v. Stoel Rives, LLP, 126 Wash. App. 1047 (Ct. App. 2005) (while intrafirm communications may be privileged, communications concerning an existing client create a conflict of interest and therefore cannot be); and Asset Funding Group, LLC v. Adams & Reese LLP, 2008 WL 4948835 (E.D. La.) (neither attorney-client privilege nor work product doctrine will support withholding documents from client).)
In California, federal courts have also examined the issue. One district court recognized the confidential nature of an attorney's consultation with others in her firm regarding her ethical and legal obligations, but also held that if the firm learned of a potential claim by the client against the firm, the firm would be obligated to disclose its conclusions to the client. (Thelen Reid & Priest LLP v. Marland, 2007 WL 578989 at *8 (N.D. Cal. 2007).)
As a federal bankruptcy judge observed, when a law firm chooses to represent itself, it runs the risk that such representation will create an "impermissible" conflict of interest with a current client, and thus the firm's right to claim privilege "must give way to the interest in protecting current clients who may be harmed by the conflict." (In re SONICblue, Inc., 2008 WL 170562 at *9 (Bankr. N.D. Cal. 2008).)
In mandating disclosure of communications between firm lawyers and their legal counsel, courts have focused on two key considerations pertaining to a law firm's relationship with a current client: the firm's conflict of interest, and its fiduciary obligations.
The conflict of interest exception to the attorney-client privilege was enunciated most clearly by the SONICblue court, which held that seeking advice from another attorney within the firm creates a conflict of interest between the existing client and the firm's right to protect itself by self-representation. When this occurs, the client's right to discovery prevails over the rights of the law firm to keep its internal discussions confidential. (SONICblue, 2008 WL 170562 at *9.)
Under the fiduciary exception to the attorney-client privilege, when a law firm continues to represent a client despite a threat of a claim from the client, an inherent conflict of interest exists and the privilege of communications made for the firm's own defense must be subordinated to the duties owed to the client. (In re Sunrise Securities Litigation, 130 F.R.D. at 595.)
Both decisions essentially disregard the fact that the firm has designated one of its own as general counsel, finding that a conflict of interest by one or more attorneys in the firm is imputed to the other lawyers in the firm, including the firm's general counsel
In light of this reasoning, the prospects for successfully asserting a privilege between the firm's general counsel and its attorneys looks bleak, at least to the extent the attorneys were discussing a current client.
A series of more recent holdings offers encouragement for the proposition that communications between a firm's general counsel and its attorneys regarding a current client should be considered privileged.
An Ohio case was one of the first reported decisions to hold that a firm's lawyers were entitled to assert the privilege in discussing their ethical concerns about an existing client. Using a balancing test, the court noted that upholding the privilege promoted the attorneys' ability to seek advice. (TattleTale Alarm System, Inc. v. Calfee, Halter & Griswold LLP, 2011 WL 382627 (S.D. Ohio).)
In another instance, an Illinois appellate court rejected the fiduciary duty exception to the privilege, holding that the legal advice sought by the firm related to an adversarial position taken by the fiduciary. (Garvey v. Seyfarth Shaw LLP, 966 N.E. 2d 523 (Ill. App. Ct. 2012).)
And more recently, two decisions from the highest state courts in Massachusetts and Georgia offer even more authority for the proposition that such communications should be held to be privileged against discovery.
In RFF Family Partnership, LP v. Burns & Levinson, LLP (465 Mass. 702 (2013)), the Massachusetts Supreme Judicial Court rejected both the current client and fiduciary duty exceptions to the attorney-client privilege, holding that the consultation between the firm attorneys and the firm's in-house counsel concerning a malpractice claim asserted by a current client were protected.
In the Georgia case, the court reached a similar conclusion, rejecting the conflict of interest argument and upholding the privilege. (St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C., 2013 WL 3475328 (Ga. 2013).)
These decisions took note that in an analogous context, communications with in-house counsel for a corporation or a public agency are protected by the attorney-client privilege. (See Upjohn Co. v. United States, 449 U.S. 383, 389 (1981).)
Under the hypothetical situation posed at the outset, Andy Associate's firm cannot ignore its duties of disclosure to Important Client because the client must be advised of significant developments in its matter. (Bus. & Prof. Code § 6068(m); Calif. Rule of Prof. Conduct 3-500.) These duties are not abrogated when Andy seeks advice from the firm's general counsel.
Even courts that have ruled in favor of upholding the privilege have not given blanket approval for all communications concerning an existing client. To establish that the attorney-client privilege applies, the required elements still must be proved: A client has a privilege to refuse to disclose and to prevent another from disclosing a confidential communication between the client and his or her lawyer (Cal. Evid. Code § 954); that privilege may be waived by consent or disclosure (Cal. Evid. Code §912); and the communication in question must have occurred in the course of the relationship - and been intended to be confidential (Cal. Evid. Code §952).
However, there is no guarantee that a court will actually sustain the attorney-client privilege in any given case. Indeed, appellate advocates will raise the same issues discussed in the foregoing decisions.
Moreover, the decisions in Burns & Levinson and St. Simons Waterfront provide helpful, specific guidelines that courts may well consider in upholding the privilege. These suggestions are incorporated in the tips below.
Keeping It Privileged
As California practitioners await a definitive ruling, taking the following measures will enhance the odds that a court will uphold the attorney-client privilege for lawyers who seek legal advice in the midst of a client matter.
- Designated attorney. Giving a specific attorney the title of general counsel is a first step in establishing the validity of the privilege. The firm's management must convey the message that a designated attorney has been charged with being informed regarding ethical issues and serving as counsel to the firm's lawyers. Formalities will count.
- General counsel's independence. It is important that the general counsel has not personally worked on the matter giving rise to the issues she is consulted on and, ideally, that she has done no legal work directly for the client involved. In large firms where the general counsel's role is solely that of counsel to the firm, this will not be an issue. But frequently in smaller or midsize firms, general counsel is a part-time position, with the lawyer in that role expected to continue to serve the firm clients. Having no representational relationship to the client will be key.
- No billing entries. Nothing will defeat a claim of privilege faster than sending a bill to a client showing either time spent by attorneys in the firm consulting with the general counsel or the GC's time in consulting with those attorneys. These consultations are for the benefit of the firm. Although the client may tangentially benefit as well, if the firm wants to retain a claim of privilege, the client should never be billed.
- Separate files. Any written or electronic communications regarding those consultations should be kept in a separate file, such as one maintained by the general counsel, rather than in the client's files.
- Confidential communications. Who is involved in the discussions will matter. Preserving the privilege for the law firm will depend on whether the lawyers involved have treated the communications as privileged. If too many people are involved, if the discussions are not considered confidential by the participants, or if there is evidence the privilege has been waived, it will not be upheld.
- Face time. A firm should encourage attorneys with ethical concerns to pick up the phone or stop by the general counsel's office rather than send emails or leave voice mails. A verbal communication will not create a document trail that can be subject to a subpoena for documents. If email is inevitable - as it often seems to be - consider establishing a separate "general counsel mailbox" so that messages are directed to a privileged and secured email address within the firm, rather than to an individual's mailbox. Emphasize the importance of copying only those who truly need to be involved in the discussion.
- Advance waiver. Consider adding a provision to the law firm's engagement letter that advises a soon-to-be client that attorneys working on its matter may at some point need to consult with the firm's general counsel. Stipulate that the client waives its right to discover the nature of that discussion, subject to the firm's obligations to keep the client informed as to material developments in its matter. This waiver will be of necessity somewhat lengthy, since for it to be effective the client must give informed written consent. Such waivers have not been tested in any California state court, so their effectiveness remains uncertain.
- Outside advice. A firm may also consider seeking advice from counsel outside the firm. This approach should defeat the conflict of interest exception since outside counsel would have only a single client, the law firm.
It is impossible to predict how California judges will handle this issue when they are at last compelled to address it. We can expect spirited debate from both sides.
Michele K. Trausch, a partner in the San Francisco office of Hanson Bridgett LLP, also serves as the firm's general counsel.