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self-study / Legal Ethics

Law Firms & In-House Privilege

When attorneys face potential malpractice claims from existing clients, they often turn to their firm's in-house counsel or a trusted partner to seek legal advice and guidance. Such intrafirm communications are undoubtedly meant to be confidential and privileged, often addressing whether the attorney erred or how to mitigate any potential harm. However, attorneys involved in disputes with existing clients still owe clients a fiduciary duty of loyalty and must communicate significant developments so long as the representation continues.

Until recently, considerable uncertainty existed in California as to whether an attorney's duties to his or her client trumped application of the attorney-client privilege to intrafirm communications about the existing client's representation. Fortunately, a recent decision provides much-needed guidance on this obviously touchy situation. (See Edwards Wildman Palmer v. Superior Court, 231 Cal. App. 4th 1214 (2014).)

Recent Dispute

Shahrokh Mireskandari filed a legal-malpractice action against both the law firm of Edwards Wildman Palmer LLP and Dominique Shelton, a partner in the firm's Los Angeles office. The firm represented the client for only two months, during which time the client voiced dissatisfaction over the firm's representation in an invasion-of-privacy case against the Daily Mail, a newspaper based in the United Kingdom. In response to the client's complaints, Shelton had numerous communications with the firm's general counsel (Jeffry Swope) and its claims counsel (James Christman), about how she should respond to the client, as well as how she should handle the attorney-client relationship. During those communications, Swope and Christman gave Shelton advice regarding legal issues relating to the firm's representation of Mireskandari.

The firm "deputized" Mark Durbin, a partner in its Chicago office, to supervise the preparation of all pleadings in the client's case and assist Shelton in responding to client complaints. (See Edwards Wildman, 231 Cal. App. 4th at 1223.) The firm did not bill the client for any of Swope's, Christman's, or Durbin's time.

During Shelton's deposition in the malpractice action, the client's attorneys asked her several questions about her communications with the firm's general counsel and sought production of documents related to them. Shelton claimed the attorney-client privilege. The trial court granted the client's motion to compel based on two exceptions to the privilege recognized by federal courts-the "fiduciary" and "current-client" exceptions. The trial court reasoned: "If there were ... discussions among members of the firm regarding the client, the client's case, what was going on, that belongs to the client. The client is the holder of the privilege." (231 Cal. App. 4th at 1223.) The court of appeal reversed, finding that the fiduciary and current-client exceptions did not apply in California. (231 Cal. App. 4th at 1227-1233.)

Attorney-Client Privilege

In California, the attorney-client privilege is codified in a statute that vests the "holder" of the privilege (generally the client) with a privilege to refuse to disclose, or prevent another from disclosing, a "confidential communication between client and lawyer." (See Cal. Evid. Code § 954.) There are two general prerequisites. First, the communication must be made in the course of the attorney-client relationship. Second, the communication must be made "in confidence by a means which, so far as the client is aware, discloses the information to no third persons other than those who are present to further the interest of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted." (See Cal. Evid. Code § 952.)

In the Edwards Wildman case, the court examined whether an attorney-client relationship actually existed between Shelton and the in-firm attorneys with whom she consulted about the client's complaints. The court found that a formal agreement or compensation is not necessary to create the attorney-client relationship for purposes of the privilege. The relationship exists whenever a person consults an attorney to obtain the attorney's legal services or advice. (See 231 Cal. App. 4th at 1226.) The court also found that there was no reason the privilege could not apply when one attorney consults another attorney in the same firm for the purpose of securing confidential legal advice about a current client. (231 Cal. App. 4th at 1227.) Therefore, if an attorney-client relationship did exist and no exceptions applied, Shelton's communications with the firm's general counsel would be protected.

Exceptions to the Privilege

The attorney-client privilege is not absolute. It is subject to eight statutory exceptions. (See Cal. Evid. Code §§ 956-962.) In the Edwards Wildman case, the client did not invoke any of the statutory exceptions but instead relied on the fiduciary and current client exceptions recognized in two federal court opinions from the Northern District of California. (See Thelen Reid & Priest LLP v. Marlyand, 2007 WL 578989 (N.D. Cal.); In re SonicBlue, Inc., 2008 WL 170562 (Bankr. N.D. Cal.).)

In Thelen the court found that a law firm's fiduciary duties to an existing client precluded it from asserting the attorney-client privilege with respect to intrafirm communications that implicate or affect the client's interests. Recognizing that attorneys often seek ethics advice from in-house counsel, the Thelen court held that "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." (Thelen, 2007 WL 578989 at *8.)

Similarly, the court in SonicBlue found that a law firm could not shield intrafirm communications about a client so long as the firm's representation continues. The court reasoned 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." Accordingly, "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." The court concluded that "a law firm cannot assert the attorney-client privilege against a current outside client when the communications that it seeks to protect arise out of self-representation that creates an impermissible conflicting relationship with that outside client." (SonicBlue, 2008 WL 170562 at *9.)

The Edwards Wildman court did not follow the same path. It noted that neither the fiduciary nor current-client exceptions are based on any of California's eight statutory exceptions. The court held that California judges are not permitted to create additional exceptions or expand existing ones. Thus the court ruled that the fiduciary and current-client exceptions to the attorney-client privilege do not apply in California. (Edwards Wildman, 231 Cal. App. 4th at 1230-31.)

Ethics Issues

Although the Edwards Wildman court rejected the fiduciary and current-client exceptions, it nevertheless recognized that a law firm's self-representation in regard to a dispute or threatened claim by a current client "may raise thorny ethical issues." (231 Cal. App. 4th at 1233.) Indeed, a conflict of interest may arise if an attorney consults with in-house general or ethics counsel when the primary goal is to protect the attorney or firm from consequences of a professional lapse that has already occurred. (See Cal. Prac. Guide Prof. Resp. (TRG), Ch. 4-E, § 4:264.17.)

In addition, "recognition of the attorney-client privilege under these circumstances does not undercut a firm's duty to keep a client apprised of developments in the case or alert the client to an incident of malpractice." Failure to do so may result in the firm's or attorney's breach of their ethical duty to fully and fairly disclose facts material to the client's interests. (Edwards Wildman, 231 Cal. App. 4th at 1234.)

However, the court also concluded that "it does not follow that the looming specter of ethical issues mandates the extinguishment of the attorney-client privilege." (231 Cal. App. 4th at 1233.)

Genuine Relationship

Responding to the client's argument that an intrafirm exception would encourage or permit firms to create artificial attorney-client relationships "in order to negate the firm's duties and place information regarding the representation behind the cloak of privilege," the Edwards Wildman court ruled that "the privilege will attach only when a genuine attorney-client relationship exists." (231 Cal. App. 4th at 1234.)

According to the court, four factors provide a helpful template in determining whether such a genuine attorney-client relationship exists: (1) the law firm must have designated, either formally or informally, an attorney or attorneys within the firm to represent the firm as in-house or ethics counsel, so that an attorney-client relationship exists between in-house counsel and the firm when the consultation occurs; (2) when a current outside client has threatened litigation against the law firm, the in-house counsel must not have performed any work on the particular client matter or a substantially related matter; (3) the time spent on the in-house communications may not have been billed to the client; and (4) the communications must have been made in confidence and kept confidential. (See Edwards Wildman, 231 Cal. App. 4th at 1234-35.)

Applying these factors, the court found that Shelton met her burden of establishing the existence of an attorney-client relationship with Swope and Christman. During her deposition, Shelton testified that she considered Swope to be her attorney. Moreover, Shelton and Christman were respectively designated as the firm's general counsel and claims counsel before the dispute with the client arose; they did not work on the client's case; and they did not bill the client for the time spent advising Shelton. Finally, both Swope and Christman declared that they gave Shelton legal advice regarding her response to the client's complaints and management of the relationship.

On the other hand, the court concluded as a matter of law that Shelton had failed to establish the existence of an attorney-client relationship with Durbin. Unlike Swope and Christman, Durbin had not been designated as the firm's general or ethics counsel prior to the dispute with the client. Rather, as the court pointed out, Durbin was "deputized" by Swope and Christman-after the dispute arose-to actually work on the client's case, including supervising the preparation of pleadings (Edwards Wildman, 231 Cal. App. 4th at 1223). Based on these facts, the court found that the firm could not establish that Shelton's communications with Durbin were made in the course of an attorney-client relationship between them.

Designating Counsel

Designating in-house or ethics counsel is the first step to ensuring that intrafirm communications about current-client disputes are protected under the attorney-client privilege. Many large law firms likely have designated counsel in such a role. Smaller firms, on the other hand, likely do not. Although formal designation of a permanent in-house counsel position is the best practice for protecting intrafirm attorney-client communications, it is not required under Edwards Wildman. However, not designating in-house counsel may be an impediment to later enforcement of the attorney-client privilege regarding intrafirm communications about a current-client dispute.

The attorney-client privilege does not attach to communications when the dominant purpose for the communication is something other than to obtain a legal opinion or advice. (Costco Wholesale Corp. v. Superior Court, 47 Cal. 4th 725, 735 (2009).) Absent the in-house counsel moniker, serious questions could arise regarding the purpose of the communication that could undermine the attorney-client privilege's application. This could be particularly problematic for firms with a small number of lawyers.

Fortunately, no specific formalities are required to designate in-house counsel. The designation must, however, be made prior to the intrafirm communication taking place. This could be done, for example, in minutes taken during a partnership meeting, in a firm-wide memorandum, or an intrafirm email communication.

Designation of in-house counsel after a current-client dispute arises-but before a confidential communication takes place-may suffice. Post-dispute designations, however, may give rise to questions about the designated attorney's role in the client's case prior to his or her being designated as in-house counsel. If a post-dispute designation is necessary, the attorney designated as in-house counsel must be an attorney who has not worked on the client's case or even on a substantially related matter. Ideally, the attorney designated would be someone who has no knowledge of the client's case, even though this does not appear to be a necessary factor under Edwards Wildman.

Though in-house counsel may desire to keep track of his or her time handling the current-client dispute, in-house counsel's time must not be billed to the client. Instead, firms should have a separate administrative code or billing number for in-house counsel to track his or her time in that circumstance.

Keep It Confidential!

Even if in-house counsel is properly designated, communications that are not kept confidential will not be privileged. All written communications such as e-mails or memos with designated in-house counsel about a current-client claim or dispute should be expressly marked as an intra-firm attorney-client privileged communication.

Moreover, intrafirm communications should be strictly limited between in-house counsel and the attorney seeking legal advice or guidance. For example, confidential emails should not be copied or shared with other attorneys in the firm who have worked on the client's matter. To ensure maximum protection, notes, memos, or other communications stored in databases that are accessible firm-wide should be password-protected or restricted, and only accessible by the firm attorneys to whom the privilege applies.

Attorneys need legal advice, and they often turn to their colleagues to obtain it. Adherence to the guidelines recognized in Edwards Wildman will assist in protecting intrafirm legal advice. At the same time, attorneys who seek in-house counseling must be mindful of their ethics obligations to clients. Attorneys must be careful to disclose to their clients the significant developments in the matters being handled. This can be done without also breaching the attorney-client privilege that attaches to communications with in-house counsel.

Jessica R. MacGregor is a partner and Shane M. Cahill is a senior associate at Long & Levit in San Francisco, where they defend lawyers and other professionals.

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