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special / Legal Ethics

Warning: Ethical Lapses Will Cost You Money (Special Credit)

Over the years it has seemed to me that the law school courses in legal ethics or professional responsibility (which I taught in the mid-1970's) were part of legal education that would soon be forgotten by newly admitted lawyers once the bar exam requirement had been satisfied. Students considered such courses as "necessary evils" that did not have the "sex appeal" of other more profitable and exciting substantive subjects in the real world of a law practice. After all, one could not bill for legal ethics or professional responsibility.
The fallacy of this assumption was recently proved a case decided by the court of appeal. In a split decision, the court held there could be no waiver of the attorney-client privilege by any party other than the one to whom the privilege applied. See McDermott Will & Emery LLP v. Superior Court, 10 Cal.App.5th 1083 (2017).
Legal ethics and professional responsibility most certainly was center stage in this case as lawyers' lapses cost their firm money - indeed, the court disqualified certain of the defense lawyers, as well as their entire law firm. The problem? The lawyers had failed to recognize the potentially privileged nature of communications they had received; they proceeded to analyze those communications and used them despite objection by the holder of the privilege who had inadvertently disclosed the items in question.
The trial court found that Hausman, the nearly 80-year-old lead plaintiff and real party in interest ("holder"), did not waive the attorney-client privilege by forwarding to his sister‑in‑law a confidential e-mail he received from his personal attorney. This was because he inadvertently and unknowingly forwarded the e-mail from his iPhone, and therefore lacked the necessary intent to waive the privilege, even though there was no restrictive language regarding a privileged communication. The trial court also impliedly found that plaintiff-holder's sister-in-law did not and could not waive his privilege when she forwarded the e-mail message to her husband, who then shared it with four other individuals. The holder's attorney-client privilege remained intact throughout because he was not aware of either his initial disclosure or these additional ones until a year after they occurred.
The trial court also disqualified the law firm retained by the defendant lawyers from further representing them in the underlying malpractice action filed by the holder's (Hausman) family arising from alleged misconduct regarding the initial probate matters. The disqualification result followed the failure of the defendants' lawyers to recognize the potentially privileged nature of the subject e-mail after receiving a copy; they were also criticized for proceeding to analyze and make use of the privileged material. And the lawyers did not act in a vacuum: the plaintiff-privilege holder objected that the privileged e-mail had been inadvertently disclosed. In this situation, the court explained, the defendants' lawyers had an ethical obligation to return the privileged material and refrain from using it. See McDermott, supra, 10 Cal.App.5th at 1106-1111 (citing State Comp. Ins. Fund v. WPS, Inc., 70 Cal.App.4th 644 (1999)(State Fund)).
The Law
State Fund is the seminal decision that formed the lynchpin for discussion by both the majority and dissent in the McDermott case. Under State Fund, an attorney's duties are not limited to inadvertently disclosed, privileged documents she receives from opposing counsel. The rule may also apply to those she receives from her opponent's client. Indeed, regardless of how the receiving attorney obtained the documents, whenever a reasonably competent counsel would conclude the material obviously or clearly appears to be privileged, and it is reasonably apparent the disclosure was inadvertent, the State Fund rule requires the receiving attorney to review the documents no more than as is necessary to determine whether they are privileged. Then the receiving lawyer is obligated to immediately notify the privilege holder or his counsel that the receiving attorney has documents that appear to be privileged, and promptly return them. Following this, if there is a dispute as to the privileged nature of the documents, the parties may request the court to resolve it.
The receiving attorney's reasonable belief the holder waived the privilege or that an exception applies, does not vitiate the attorney's State Fund duties if the documents are ultimately found to be privileged and there has been no waiver. The receiving attorney assumes the risk of disqualification when she elects to use the documents before the parties or the trial court have resolved any dispute over privilege and waiver.
Split Decision: Majority Opinion
The McDermott majority emphasized that the lawyers in question had an ethical obligation to return the privileged material and refrain from using it. The disqualification was necessary because there was a genuine likelihood the lawyers' improper use of the material "would affect the outcome of the lawsuit, the integrity of the judicial proceedings, and the public's confidence in the proceedings." The petition for writ of mandate directing the trial court to vacate both its order finding there was no waiver of the privilege, and its order disqualifying the lawyers in question from representing the defendants in the underlying lawsuits, were denied. On review, the McDermott majority determined that substantial evidence supported the orders of the trial court, which did not abuse its discretion in selecting disqualification as the appropriate remedy for the violation.
In reaching its conclusions, the appellate majority began by discussing the legal principles governing the attorney-client privilege and the fact that it is a creation of the legislature that prevents the courts from using implied exceptions to expand or limit it. Under section 954 of the California Evidence Code, the client has the right to refuse or prevent disclosure of a confidential communication between attorney and client. This means the client must be aware of anything that would waive the privilege, because only the client may do so without coercion through disclosure of a significant part of the communication, or consent to do so by some other person. In the latter instance, consent is indicated through words or actions (including failure to assert the privilege where legal standing and opportunity to do so exist), indicating consent to the disclosure.
While uncoerced disclosures can create waivers, there is no waiver from an inadvertent disclosure. The privilege holder must have intentionally exercised "some measure of choice and deliberation." A privilege holder's characterization of intent may be considered "but is not necessarily dispositive." The legal effect of an inadvertent disclosure in determining a waiver of the privilege depends on the trial court's determination after considering both subjective intent and manifestation of any intent to disclose.
It is also important to consider evidence that demonstrates what precautions the holder took to protect the privilege, and how quickly the holder moved to seek return of the inadvertently disclosed material. Conflicts in the evidence are to be resolved by the trial court, and the reviewing court may not conduct a de novo review of that determination. In McDermott, the correct standard of review on appeal was determined to be substantial evidence, which supported a conclusion that there was no waiver because the facts did not support "any of the recognized means for waiving the privilege."
The reviewing court concluded that the holder did not personally consent to a waiver simply because of his initial inadvertent email to his sister-in-law and the subsequent chain of disclosures she initiated. These were activities the holder did not discover until a year later. Other disclosures were not discovered by the holder and his counsel until almost two years following the holder's initial email disclosure to his sister-in-law.
The court was clear that the holder "simply could not consent to disclosures he knew nothing about." Once the privilege holder's attorney discovered the emails in question, the privilege was immediately asserted. The lawyer demanded return of all copies. The fact that some of the emails were not marked as privileged did not change the court's interpretation.
When the defendants' lawyers ascertained that they might be in possession of privileged attorney-client material that was inadvertently disclosed by someone other than the privilege holder or his lawyer, the discovering attorneys had an ethical obligation to notify the holder or his attorney of that discovery. Although the State Fund decision may indicate that the opposing attorney in that case received the privileged material through "the inadvertence of opposing counsel during litigation," the McDermott court determined that there is no rule or policy underlying such a limitation on the scope of the rule. Furthermore, subsequent case law has not applied the rule and limited it to such a circumstance. Any other conclusion would unduly restrict the rule to "stolen, privileged materials, but not those inadvertently disclosed."
Because the substantial evidence supported the finding that the receiving lawyer should have recognized the privileged nature, and any further examination would be prohibited, the defendants' lawyers' State Fund ethical duties were immediately triggered. That case requires limited reading of disclosed material-only enough to determine that it appears to be privileged--after which the attorney in possession of the privileged item(s) must promptly notify opposing counsel. If counsel fail to agree on whether the material is privileged, or whether there has been a waiver, either counsel may seek assistance from the trial court to resolve the dispute.
The receiving attorney cannot alone "act as judge and unilaterally make that determination." Consequences for violating the State Fund rule carry risks to the offending counsel that could include disqualification from continuing as attorney of record for her client. In McDermott, opposing trial counsel failed to follow the requirements of State Fund, thus justifying disqualification of the offending counsel.
And take note: No evidence of actual damage from use of the privileged material was required by the court in McDermott, nor was it necessary that there be any specific indication by the offending lawyers that they intended to use the privileged material.
The McDermott Dissent
As noted above, the McDermott decision was not unanimous. The dissenting justice took the position that the decision by the majority was an unwarranted extension of the applicable ethical rule established by State Fund, even in view of the unusual situation presented by this case. Further, even if the ethical rule was applicable, it should not be applied here because the defendants' lawyers did not violate the rule, and their conduct was not clearly proscribed by the controlling case law of State Fund.
Acknowledging this to be an "unusual privilege dispute," the dissent considered the conduct of the challenged lawyers to be "objectively reasonable." According to the dissent, the majority had greatly expanded the existing law to condemn the challenged conduct.
The dissent was grounded by the assertion that "the unusual situation in this case bears no material resemblance to the situation" in State Fund, a case in which plaintiff's lawyers had erroneously sent the privileged documents directly to counsel for defendant, including copies of other documents that had been produced during discovery. This was all done in preparation for trial. The disclosure was clearly erroneous, inadvertent, and unjustified. By way of contrast, in McDermott, the holder of the privilege forwarded an email to a nonlawyer, who forwarded it to another nonlawyer, who provided hard copies to other nonlawyers, and then to a lawyer who subsequently became a client but earlier was a lawyer for the holder's family company. This lawyer put it in her client file where defendants' trial counsel eventually discovered it.
The dissent asserted that only one in the series of disclosures was arguably inadvertent--the initial disclosure to the holder's sister-in-law. The dissent categorized that disclosure as "not patently inadvertent, and the claimed inadvertence was subject to reasonable dispute." Nor did any of the disclosures occur concerning formal discovery or trial preparation, but rather regarding an attempt at mediation to resolve the dispute without litigation, where the second person to receive the disclosed material had been acting as an "informal mediator."
Further, the dissent was sympathetic to the fact that the holder's lawyers "did absolutely nothing in response." No demand was made for return of the material nor was a request for a protective order sought. Since the holder's own lawyers failed to protect the privilege for their client, the lawyers for defendants had no obligation to do so. The "arguably inadvertent disclosure" was made by the holder as the client rather than by his lawyer, and the disclosure occurred outside of the preparation for trial and production of documents. There was nothing "wrongful" about acquisition or possession of the email in question.
Here it was noted there was no inadvertent disclosure of privileged documents in a larger group that might have indicated a mistake had occurred. And, no disclosure came directly from the holder, but rather from someone else down the chain. A single document made its way from the holder to nonlawyers other than counsel for defendants, and it was not "reasonably apparent" that the email was "provided or made available through inadvertence." Any obligations of defendants' lawyers were discharged when they produced the email to counsel for the holder. The trial court failed to make any express finding regarding any asserted obligations of, or violations by, defendants' lawyers under State Fund. Finally, the dissent noted that disqualification of the defense lawyers was improper because their actions were not "clearly proscribed" under State Fund.
The dissent was adamant that here, "as in State Fund, the disputed conduct has never been condemned by any decision, statute or Rule of Professional Conduct applicable in this state." It advocated that "this was an unusual privilege dispute" where the conduct of defendants' counsel "was objectively reasonable." The conclusion was that this does not justify the "now greatly expanded" rule of State Fund by the majority to condemn defendants' lawyers' conduct in a manner that is "not a proper basis for disqualification."
McDermott was a split decision with spirited opinions. A petition for review has been filed in the California Supreme Court. See McDermott Will & Emery LLP v. Superior Court, No. S242029, filed May 19, 2017). What is clear at this junction is that this is a very important decision that lawyers must pay attention to.
Indeed, McDermott proves that the old saw about ethics and professional responsibility not translating into dollar is a major fallacy. Not knowing ethical rules can not only get you in trouble with the State Bar, but it can also get you disqualified from a case. And when that happens, you are not going to get paid.
Moreover, in McDermott's wake, "I didn't know" will not be a persuasive defense (not that it ever was).
It behooves our law schools to put much more emphasis on ethics and professional responsibility before sending their graduates into the practice arena. And those entering the profession need to pay close attention, because passing the bar exam is not the end of their professional learning process.

A. Marco Turk is professor and director emeritus of the Negotiation, Conflict Resolution and Peacebuilding program at CSU Dominguez Hills, and an adjunct professor of law, Straus Institute for Dispute Resolution, Pepperdine University School of Law. He is also a practicing neutral who regularly mediates for the California Court of Appeal, 2nd District.


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