Memo Prepared by Outside Counsel for Corporation Belongs to Corporation, Not In-House Counsel

Posted on September 28, 2010 by Grace Healy

D’oh, you say. I agree, but last week the Texas Court of Appeals provided a nice discussion of this principle in Kennedy v. Gulf Coast Cancer and Diagnostic Center at Southeast, Inc. The facts of the case seem unusual -- to say the least.  But, the discussion in the decision regarding the identity of a client and who has the attorney-client privilege is a good summary of the law -- including the limited circumstances in which counsel may use privileged documents. 

According to the corporation:

in late July 2009, [in-house lawyer], without authorization, had diverted approximately $405,000 of Gulf Coast's funds into a bank account, named himself as the sole signatory for the account, and used $170,000 of the funds to pay a retainer to a firm that he claimed to have selected to "represent and defend corporate officers and agents of Gulf Coast, specifically [in-house lawyer]."

The outside firm was retained to prepare a legal opinion regarding the corporation's "potential liability for its former executive's alleged misconduct."  The retention letter stated that the firm had been retained to advise the company, not its owners, officers or directors.  After the in-house lawyer was terminated, the outside firm inadvertently gave him the opinion letter.

The law firm that received the $170,000 interpleaded the funds. In the litigation that followed, former in-house lawyer wanted to disclose the contents of the memo; he distributed it to his personal lawyers and disclosed it in unsealed filings.  Defendant sought and was granted an temporary injunction restraining him from disclosing the memo.  The injunction does allow the former employee to use the memo in his defense of state bar grievance proceedings.

Frankly, from the outside, this looks like a lose, lose, lose for all (except the current lawyers) involved -- corporation, former employee and, last, but not least, outside lawyer. 

As an aside, I Googled the case name in an attempt to find a free copy of the decision, and discovered that this plaintiff/lawyer is not afraid of being a party to litigation.
 

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Second Circuit Asks NY Ct of Appeals to Clarify What Constitutes Improper Solicitation After Sale of Good Will of A Business

Posted on September 7, 2010 by Grace Healy

Stay tuned. This should be important to anyone voluntarily selling (or buying) the assets of a business, including its good will (or to anyone who hires a person who benefited from the asset sale). In case the relationship doesn’t work out, what are the limits on a seller helping his or her new employer to get the customers who were transferred as part of the sale?

In Bessemer Trust Company v. Branin, the executive of an investment company actively participated in, and was compensated for, the sale of the assets of the company. Following the sale he went to work for the purchaser. That didn’t work out. About twenty months after the sale, he left and went to another company, which approached the clients who were transferred with the sale. He apparently tried to limit his direct involvement in the solicitation, but did have some direct participation. (This grossly simplifies the facts.) The purchaser filed suit.

Historically, in New York, there has been an implied warranty of non-solicitation following the voluntary sale of the good will of a business. Here, the Second Circuit has asked the NY Court of Appeals to clarify what degree of participation constitutes improper solicitation when the new employer of the seller solicits of a former employer's—or purchaser’s -- client. The Second Circuit has asked the Court of Appeals for guidance on the following sets of circumstances:

(1) the active development and participation by the seller, in response to inquiries from a former client whose good will the seller has voluntarily sold to a third party, in a plan whereby others at the seller's new company solicit the client, and (2) participation by the seller in solicitation meetings where the seller's role is largely passive.

Because the sale of a business often results in an unhappy seller – who no longer has the same dominant role in the business – and job applicants often have to bring some business to a new employer, I hope that the Court of Appeals will find this an issue worthy of its attention.

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