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July 11th, 2016
Less Exposure: New York Appeals Court Finds Privilege For Law Firm In-House Counsel
A New York appeals court gave attorneys a reason to celebrate just before the July 4th holiday weekend. In Stock v. Schnader Harrison Segal & Lewis LLP, the First Department held that communications between lawyers and their law firm's in-house General Counsel are protected by the attorney-client privilege. This is the first time a New York appellate court has recognized an "intra-firm" privilege, overturning a lower court decision that had ignited fireworks in the professional responsibility community.
Stock initially retained Schnader, Harrison, Segal & Lewis ("Schnader Harrison") to represent him in his departure from MasterCard International, Inc. (MasterCard). According to Stock, the firm failed to advise him that his departure would significantly accelerate the expiration date of certain stock options worth approximately $5 million. The options expired and Stock, on Schnader Harrison's advice, brought an arbitration against MasterCard and its plan administrator to recover the value of the lost options.
The arbitration against MasterCard (and underlying litigation) was unsuccessful, and Stock sued Schnader Harrison for malpractice. In the course of discovery, Stock sought 24 documents reflecting communications the Schnader Harrison partner had with other lawyers at the firm, including the firm's General Counsel. Schnader Harrison argued that these documents were protected from disclosure under the "intra-firm" attorney-client privilege. The trial court disagreed, holding that the documents were discoverable under the "fiduciary exception" to the attorney-client privilege. According to the court, because Schnader Harrison was a fiduciary with special obligations to Stock, he "ha[d] a right to disclosure from his fiduciaries of communications that directly correlate to his claims of self-dealing and conflict of interest."
The First Department's Decision
The First Department unanimously reversed, holding that the fiduciary exception did not apply and the communications at issue were privileged. The Court reasoned that when the Schnader Harrison attorneys sought the advice of the firm's General Counsel, they were not doing so to discharge any fiduciary duty to Stock, but rather to "receive appropriate legal counsel about their ethical duties." Thus, the Court held, "for the purposes of the in-firm consultation on the ethical issue, the attorneys seeking the [G]eneral [C]ounsel's advice, as well as the firm itself, were the [G]eneral [C]ounsel's real clients." (citations omitted). The Court noted that Stock was not billed for any of the time spent consulting with the firm's General Counsel and that the General Counsel "never worked on any matter for [Stock]." In other words, the Court treated the consultation with the firm's General Counsel the same as if the firm's lawyers had sought the advice of outside counsel, which the Court noted would also have been privileged.
The Court also declined to adopt the "current client" exception to the attorney-client privilege. (Under the "current client" exception, a law firm cannot claim privilege for internal communications relating to the client's representation, including consultations with the firm's in-house counsel, that occurred while the representation was ongoing --- at least until the client is aware that it is adverse to the law firm). The Court ruled that the "current client" exception would create unworkable results for both the client and the law firm and observed that courts across the country, as well as the American Bar Association, had recently discredited this exception.
Some Practical Take-Aways
The decision provides valuable guidance to New York lawyers on how to protect their intra-firm communications from disclosure. Specifically, a communication is more likely to fall within the privilege if it meets the following criteria:
- The advice should relate to the lawyer's own ethical or legal obligations concerning the matter;
- Any time spent communicating with in-house General Counsel should not be charged to the client;
- The attorney providing the legal advice should be someone who is not directly involved in the underlying client-matter;
- The purpose of the communications with law firm General Counsel should be clearly identifiable; and
- In the event of a malpractice claim, the law firm should refrain from putting the communications with the in-house General Counsel "at issue."
Additionally, though not specifically discussed in the decision, attorneys should also consider taking the following steps to preserve the privilege:
- Designating one or more attorneys within the law firm as in-house General Counsel or Ethics Counsel, so as to create a clear attorney-client relationship between the inquiring lawyer and the law firm; and
- Ensuring that any communications with the law firm's General Counsel be kept confidential and not transmitted beyond attorneys who need to know the substance of the communications, which may include firm management.
If you have any questions about the attorney-client privilege in the context of ethics advice, or about other professional responsibility issues, please contact Nicole Hyland at (212) 826 5552 or firstname.lastname@example.org, Ronald Minkoff at (212) 705 4837 or email@example.com, John Harris at (212) 705 4823 or firstname.lastname@example.org, Richard Maltz at (212) 705 4804 or email@example.com, or Tyler Maulsby at (212) 705 4893 or firstname.lastname@example.org, or any other member of the Frankfurt Kurnit Legal Ethics & Professional Responsibility Group.
Other Legal Ethics and Professional Responsibility Alerts
Third Annual Litigation Ethics Summit
On November 13, 2020, Frankfurt Kurnit held its Third Annual Litigation Ethics Summit, consisting of three hour-long panels, earning the attendees three ethics CLE credits in New York and California. Read more.
November 19 2020
A Primer On New York’s COVID-19 Executive Orders and What They Mean for Your Practice
This past week, New York has taken a number of steps to restrict movement in and around the State in an effort to contain the COVID-19 crisis. Governor Andrew Cuomo has issued executive orders and the chief judges of the state and federal courts have issued administrative orders that have had a sweeping impact on the legal industry as well as the business community at large. Read more.
March 22 2020
ABA Opinion Limits Restrictions on Departing Partners
There’s important news for law firm leaders who have recently revised partnership and shareholder agreements to restrict partner departures. In ABA Formal Opinion 489, the ABA Standing Committee on Ethics and Professional Responsibility spells out new limits on notice periods, on rules governing communications with clients, and on so-called “ownership” of clients. Here’s what firm managers need to know to stay on the right side of the ethics rules. Read more.
February 6 2020