November 2012 | Earn one hour of MCLE Credit in Legal Ethics
Is there a law firm in-house attorney client privilege?
Consider the following hypothetical. Something happens in the course of an attorney’s handling of a legal matter that might be argued to have been the result of the attorney’s mistake, either rightly or wrongly. The attorney exchanges emails internally with intra-firm colleagues about how to address the issue and fix any negative result, something that is in both the client and the attorney’s interest. Alternatively or additionally, the attorney may exchange emails internally with firm colleagues inquiring about what her ethical responsibilities might be in that situation. Believing her emails to be confidential, attorney freely discusses the dilemma. If a subsequent dispute develops between the law firm and the client over the firm’s legal representation on that matter, are attorney’s internal emails protected by an in-house attorney client privilege?
To answer the question, we start at the beginning. For purposes of the attorney-client privilege, a “client” is someone who consults a lawyer for the purpose of retention or advice, even if neither results. Evidence Code §951; see also Cal. State Bar Form. Opinion No. 1984-84. The attorney-client privilege applies to communications in the course of professional employment that are intended to be confidential, and follows from the establishment of the professional relationship between client and attorney. Once the relationship is established, the attorney-client privilege attaches to communications made in confidence during the course of the relationship. Moeller v. Sanwa Bank (1997) 16 Cal. 4th 1124, 1130; see also Roberts v. City of Palmdale (1993) 5 Cal.4th 363, 371. “Confidential communication" means information transmitted between an attorney and client during the course of an attorney-client relationship, in confidence, without acts of waiver, and includes a legal opinion formed and the advice given by the lawyer in the course of that attorney-client relationship. Evidence Code, §952. Generally, a client, whether or not a party to a matter, has the right to refuse to disclose, and to prevent another from disclosing, a confidential communication between that client and attorney, if the privilege is claimed by a holder of the privilege. Evidence Code, §954. A client is a “holder of the privilege.” Evidence Code §953.
Classic attorney-client relationship
When our hypothetical attorney consults with her in-house colleagues for advice on how to handle a legal or ethical issue, she is confidentially consulting the attorney colleague for legal advice — technically, a classic attorney-client relationship, which should, under normal circumstances, give rise to an attorney-client privilege covering those communications. See U.S. v. Rowe, 96 F.3d 1294, (9th Cir. 1996). In Rowe, Rowe, a partner, assigned two firm associates to assist in an internal investigation of potential misconduct by a firm attorney. Upon grand jury subpoena to the two associates thereafter, seeking to compel their testimony regarding conversations with Mr. Rowe, Rowe and the firm asserted privilege. The trial court ordered the associates to testify. The Ninth Circuit reversed. Finding that the associates were acting as in-house counsel to the law firm, the Court noted that there was “virtual unanimity by American courts” that no distinction would be made between “inside” and “outside” counsel for the purposes of the application of the privilege. Id. at 1296. Communications between the associates and Mr. Rowe/the law firm were privileged, even if rendered in the course of fact finding relating to legal advice. Id. at 1296-97.
Conflicting case law when a client matter is involved
However, in our hypothetical, there is a nuance. Attorney is consulting internal law firm attorney colleagues about an existing client matter. Withholding these communications are, some argue, the withholding of communications relating to the firm’s representation of a client from the client. Is the in-house attorney client privilege nullified in this situation? Cases across the country have come down differently in the analysis. California’s federal courts have weighed in on the issue three times, all originating from the Northern District of California, with no decision offering clear definitive guidance. No published California state court case has yet spoken.
California Rule of Profession Conduct Rule 3-310 states:
“(C) A member shall not, without the informed written consent of each client:
(1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or
(2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or
(3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.”
A conflict of interest exists when a lawyer’s duty on behalf of one client obligates the lawyer to take action prejudicial to the interests of another client. Flatt v. Sup. Crt. (1994) 9 Cal.4th 275, 282, fn2. Here, the argument is that when attorney seeks legal advice from her intra-firm colleagues, she is a firm client under Rowe, with that representation occurring while the attorney’s representation of the firm's outside client is ongoing. Arguably, this situation triggers questions relating to duty of undivided loyalty which an attorney owes to each of his clients. Truck Ins. Exchange v. Fireman's Fund Ins. Co. (1992) 6 Cal.App.4th 1050, 1056-7.
Thelen court discusses competing public policies
California’s take on the existence of a law firm in-house attorney client privilege starts with Thelen Reid & Priest LLP v. Marland, (N.D. Cal. 2007) 2007 WL 578989, a 2007 case out of the Northern District of California. Thelen involved a dispute over entitlement to funds after a qui tam action. Among other discovery disputes, Marland, the firm’s client, demanded that the firm produce communications with the firm’s in-house counsel, who had advised the firm’s handling attorneys. Thelen asserted attorney-client privilege and work product protection. While granting the motion to compel in part, the Thelen court discussed the conflicting policies at stake:
“The court recognizes that law firms should and do seek advice about their legal and ethical obligations in connection with representing a client and that firms normally seek this advice from their own lawyers. Indeed, many firms have in-house ethics advisers for this purpose. A rule requiring disclosure of all communications relating to a client would dissuade attorneys from referring ethical problems to other lawyers, thereby undermining conformity with ethical obligations. Such a rule would also make conformity costly by forcing the firm either to retain outside counsel or terminate an existing attorney-client relationship to ensure confidentiality of all communications relating to that client. This court declines to follow such a strict rule, preferring one that is consistent with a law firm in-house ethical infrastructure. Accordingly, Thelen is to produce some but not all communications in which a Thelen lawyer seeks or gives advice on the firm’s ethical obligation to Marland.”
Id. at *8. The Court then articulated the following rule: “while consultation with an in-house ethics adviser is confidential, once the law firm learns that a client may have a claim against the firm or that the firm needs client consent in order to commence or continue another client representation, then the firm should disclose to the client the firm's conclusions with respect to those ethical issues.” Id. Thelen was ordered to produce withheld documents except those reflecting in-house consultations on ethical and legal obligations to the client. Of that subset, Thelen was only required to produce “certain conclusions” of those consultations: 1) communications discussing claims client might have against firm, 2) communications discussing known errors in firm’s representation of client, 3) communications discussing known conflicts in representation, or 4) communications reflecting “other circumstances” that triggered Thelen’s duty to advise client and obtain client consent. Id. “Conflicts include any representation — whether of Thelen itself, CDOI, or another — adversely implicating or affecting the interests of [client], when Thelen was receiving information from and/or providing legal advice to its own lawyers while at the same time continuing to represent [client.].” Id. This rule applied to both privilege and work product. Id.
SONICblue Inc. highlights risks of law firm self-representation
A year later, a bankruptcy court weighed in, applying the Thelen rule, but sparingly. In In re SONICblue Inc. (Bkrtcy N.D. Cal. 2008), 2008 WL 170562, the law firm had been general corporate, securities, and litigation counsel to SONICblue, and had given a legal opinion. SONICblue eventually filed bankruptcy, with the firm acting as debtor’s counsel. Several litigations ensued. Allegations of undisclosed conflicts were asserted against the firm. The firm was disqualified as debtor’s counsel. A trustee was appointed and directed by the court to investigate the apparent improprieties and to propose a remedy for the lack of disclosures. The trustee sought discovery from the firm, after he waived SONICblue’s attorney client privilege. The firm asserted privilege for communications with its in-house counsel.
In analyzing the privilege issues, the court started with the observation that when a law firm chooses to represent itself, it runs the risk that the representation may create an impermissible conflict of interest with one or more of its current clients, even if one of those clients is the firm itself. In light of these ethical concerns, SONICblue noted that courts that have considered the issue have “resoundingly found” that, where conflicting duties exist, the law firm's right to claim privilege “must give way to the interest in protecting current clients who may be harmed by the conflict.” Id. at *9. “As a result, a law firm cannot assert the attorney-client privilege against a concurrent outside client, when the communications that it seeks to protect arise out of self-representation that creates an impermissible conflicting relationship with the concurrent outside client.” Id.
At the same time, the SONICblue court recognized that “public policy encourages lawyers to consult with in-house counsel to understand and comply with their professional responsibilities and ethical restraints.” Agreeing with Thelen, the SONICblue court found public policy favored allowing the privilege to be asserted until such time as the firm has, or should have, determined that dual representation of itself and an outside client should not continue without the informed consent of the outside client. In doing so, the court rejected the firm’s argument that since it was acting in its personal defense, the fiduciary exception to the privilege did not apply.
Turning to applying the Thelen rule to the facts of the case, the court found that the firm had “some inkling of impending ethical issues” in 2005 when internal emails discussed the potential impact of a coverage dispute on the firm’s perceived handling of the case. “Nevertheless, the present record does not establish the existence of conflict at that time.” The court noted that in June 2006, “at least a potential conflict” existed when the client demanded a tolling agreement from the firm. But the court still found no conflict that would disable the in-firm privilege until Aug. 18, 2006, the date when the tolling agreement was actually executed, at which time the firm’s ability to withhold intra-firm communications “became impaired.” Id. at *10.
E-Pass articulates broader ‘full-alignment’ standard
The most recent case on the subject in California is the 2011 decision in E-Pass Technologies, Inc. v Moses & Singer, LLP (N.D. Cal. 2011) 2011 WL 3794889. In E-Pass, plaintiff sued their former counsel for malpractice. Plaintiff filed a motion to compel production of documents the firm withheld under the attorney-client privilege and work-product doctrine, described as “email communication with counsel.” The E-Pass court framed the issue as “whether and to what extent these privileges apply to communications within a law firm regarding potential claims against the firm arising from its representation of an outside client.” Applying Thelen, the court categorized the documents at issue into four categories: 1) communications during the attorney client relationship; 2) post-termination communications that were billed to plaintiff; 3) post-termination communications, unbilled to plaintiff; and 4) communications with third parties.
Pertinent to our discussion, the first category dealt primarily with the firm’s representation of E-Pass in an attorneys’ fees motion brought against both E-Pass and the firm. The court called the firm’s argument “unprecedented” that it could engage in intra-firm communications relating to how to protect itself from liability on the fee motion, while representing E-Pass on that same motion, and thereafter withhold those communications from plaintiff. “[Firm]’s interests were in conflict with those of E-Pass to the extent its interests were not fully aligned with E-Pass.” The court found if the firm intended to confidentially represent itself on the fee motion, it had a duty to get E-Pass’ informed written consent to the firm’s continuing representation of E-Pass. Because it did not do so, there was no privilege in this category of documents. Id. at *3. By articulating a standard of “full alignment” between the firm’s interest and the outside client’s interest to trigger an impaired privilege, the E-Pass court appears to have employed a broader standard than the “once law firm learns that a client may have a claim against the firm or firm needs client consent” trigger that was articulated in Thelen.
What we are left with is the conclusion that California law on the issue of the law firm in-house attorney-client privilege relating to an ongoing client matter is not definitive. California appears to honor the attorney-client privilege and work product when in-house counsel consults with outside counsel in these situations, but not where the inquiries occur in-house, at least not always. The language of the cases and their factual applications do give rise to some question of where the line between privilege and impairment is drawn. Until the law is clarified in this area, attorneys should proceed with caution.
Disclaimer: the information in this column is intended to be educational only, and does not constitute legal advice. Please cite check all authorities before using.
* Wendy Wen Yun Chang is a partner in the Los Angeles office of Hinshaw & Culbertson, LLP. She is a certified specialist in legal malpractice law by the State Bar of California’s Board of Legal Specialization, and is vice-chair of the State Bar of California’s Standing Committee on Professional Responsibility and Conduct. She is also a member of the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee. The views expressed herein are her own.