Outside Inhouse Lawyer Blog : New York & Seattle Corporate Dispute Lawyer & Attorney : Grace M. Healy : Outside counsel : King County, Tacoma, Bellevue

Last July, I did a post on the problem of a client who was denied the protection of the attorney-client privilege for its communications with its in-house lawyer because the lawyer was not actually authorized to practice law. The magistrate had ruled that a client must use due diligence to ensure that its lawyer is authorized to practice law for its communications with that person to be privileged.  In the absence of that effort, the client's communications were subject to discovery.

Earlier this week, in Gucci America, Inc. v Guess?, Inc. Judge Scheindlin reversed this decision and ruled that the privilege exists if the client has a reasonable belief that the attorney is authorized to practice law in any state or nation.

The opinion concludes:

To require businesses to continually check whether their in-house counsel have maintained active membership in bar associations before confiding in them simply does not make sense. While an attorney has an obligation to ensure that he is properly practicing law -- and faces the specter of disciplinary action if he engages in unauthorized practice -- the sins of the attorney must not be visited on the client so long as the client has acted reasonably in its belief that its counsel is, in fact, an attorney.

It probably is still a good idea for employers to check that in-house counsel are active members of a bar – if for no other reason than to spare the expense of this sort of battle.
 

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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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At my first oral argument – a motion to dismiss for failure to prosecute – opposing counsel argued that the judge should not dismiss the case because his co-counsel would get his a** in a sling. The judge pointed out that the assertion was not his most attractive argument.

That came to mind today when I read United States v. Graff. The Ninth Circuit decision sets out what is necessary for an employee to claim the benefit of a company's attorney client privilege. That said, as described in the decision, defendant was not an attractive candidate for anything but the most narrow application of the attorney client privilege.

Defendant had set up an health insurance company, fraudulently marketed coverage, and diverted a significant amount of the company’s funds to buy jewelry, a sports car and a house, while some people who allegedly were insured had their credit ratings destroyed, failed to get a kidney transplant, or almost failed to get necessary chemotherapy, etc.

Defendant argued that evidence presented at trial by the corporation’s attorneys was privileged. He claimed that he had an independent relationship with the lawyers because he was not an employee of the company. As a corporate consultant, he and the company had a joint relationship with counsel; the company couldn’t waive his privilege.

He wasn’t an employee because he couldn’t be – he was banned from insurance work in the State of California. Unsurprisingly, the court determined that he was functionally an employee of the company and did not have an independent relationship with counsel. The decision sets forth what is necessary for a finding that a person who, although technically not an employee, is functionally an employee.

After determining that defendant was a functional employee, the court went on to determine if – as an individual -- he shared the attorney client privilege with the corporation. The decision adopted a five-part analysis to make this determination:

• Did the employee approach the attorneys for the purpose of seeking legal advice;
• When he did so, did he make it clear to the attorneys that he was seeking legal advice in his individual rather than in his representative capacity;
• Did the attorneys see fit to represent him personally, knowing a conflict could arise;
• Were his conversations with the attorneys in confidence; and
• The substance of the conversations with the attorneys did not concern matters within the company or the general affairs of the company.

This issue comes up frequently -- mercifully, not in a fact pattern this dramatic -- so this is an important case. Employees, and management, must understand that the lawyers represent the company – not the individuals in the executive suite.
 

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Last week the New York Law Journal featured two decisions regarding attorney-client and work product disputes in litigation between Gucci America and Guess?.

In the first decision, the protection of the attorney-client privilege was denied because Gucci’s in-house lawyer was not an active member of any bar – he only maintained inactive status in California.

Active bar membership is necessary for the benefit of the attorney client privilege. There is an exception to this rule where: the lawyer fraudulently held himself out to the client as an attorney; the clients genuinely and reasonably believe that the person is an attorney; and if, pursuant to this belief, the client made confidential communications to the person. Here, Gucci’s belief that the in-house counsel was a lawyer was unreasonable – it never tried to confirm the extent of the counsel’s qualifications.

This decision has implications for everyone: clients must take steps to confirm that their lawyers maintain active bar membership; litigators, in disputes where attorney client privilege is asserted, should confirm that the communications involved a licensed attorney as well as substance protected by the privilege. The information regarding bar status is usually available on-line.

The second decision involves work product privilege and choice of law issues between United States and Italian law. Gucci was instructed to revise its privilege log, and to meet and confer with opposing counsel before returning to the court for decision.
 

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Many corporations have accident reporting policies which require their employees to draw conclusions about the cause of an accident or whether it could have been avoided. The goal is improved safety, but the result is often heartburn for in-house counsel because documents prepared in the ordinary course of business generally must be produced in litigation. With the goal of improved safety, reports are often -- rightly or wrongly -- very self-critical.

Corporate counsel who hope to keep conclusions in confidence will often promptly hire outside counsel to assist in an accident investigation when litigation is anticipated.  They should be encouraged by last week’s decision of Magistrate Smith in Byrd v Wal-Mart Transportation, LLC, in the US District Court, Southern District of Georgia, which found the conclusions in a report were privileged even if the report was prepared pursuant to a corporate policy.

 Following a fatal truck accident, Wal-Mart’s in-house lawyers immediately hired outside local counsel because litigation was anticipated. Counsel was involved in the investigation of the accident. In the ordinary course of business, Wal-Mart has its safety personnel perform an investigation, which is then reviewed by a “Serious Accident Committee.” The committee issues an opinion as to whether the accident was “preventable” or “non-preventable.”

 During Wal-Mart’s corporate deposition plaintiff inquired about the conclusions of the Serious Accident Committee. Wal-Mart claimed privilege; plaintiff argued that the conclusions were reached in the ordinary course of business, rather than in anticipation of litigation, and had to be disclosed. The court granted Wal-Mart a protective order noting that this line of inquiry involved mental impressions that are privileged. Plaintiffs’ lawyers might take heart from a foot note that suggests that the deponent would have had to have been privy to counsel’s deliberations in order for the privilege to apply.

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