In June 2016, New York joined the growing number of jurisdictions recognizing that communications between an attorney and his firm’s in-house general counsel regarding the attorney’s ethical obligations in representing a firm client are protected by the attorney-client privilege (Stock v. Schnader Harrison Segal & Lewis LLP, 35 N.Y.S.3d 31 (1st Dep’t 2016)).
The case grows out of plaintiff Keith Stock’s engagement of Schnader Harrison Segal & Lewis LLP to negotiate his separation agreement from his former employer, MasterCard International. MasterCard’s termination of Stock triggered the acceleration of his deadline to exercise stock options under MasterCard’s incentive plan from 10 years to 90 - 120 days. M. Christine Carty, the Schnader partner who handled the negotiation, did not include an extension of the deadline to exercise Stock’s vested options and did not inform Stock about the acceleration of the deadline.
Several months later, Morgan Stanley Smith Barney, the administrator for the MasterCard incentive plan, informed Stock that all of his vested options – worth more than $5 million – had expired under the terms of the plan due to his termination. As a result, Stock, represented by other Schnader attorneys, filed a lawsuit against MasterCard and an arbitration proceeding before the Financial Industry Regulatory Authority against Morgan Stanley, in an attempt to recover this loss.
Less than two weeks before the arbitration, Stock learned that Morgan Stanley intended to call Carty to testify as a fact witness. This notice prompted Carty and her colleagues to seek legal advice from Schnader’s in-house general counsel regarding the firm’s ethical obligations.
After Stock lost his FINRA arbitration against Morgan Stanley, and had most of his claims against MasterCard dismissed, he filed an action against Schnader due to the failure to advise him about the acceleration of the deadline to exercise his options, alleging, inter alia, professional negligence and breach of fiduciary duty.
In response to discovery demands, Schnader served a privilege log listing approximately 24 emails exchanged among Schnader’s general counsel, Carty and the attorneys handling the arbitration, regarding Morgan Stanley’s intent to call Carty as a witness. Stock moved to compel production of these emails – an application that the lower court granted. Schnader appealed the lower court’s decision to the First Department – New York’s intermediate court of appeals.
Stock advanced two key arguments to support affirmance. First, he argued that under the “fiduciary exception” to the attorney-client privilege, he was entitled to the emails. The fiduciary exception generally prevents a trustee from invoking the attorney-client privilege to withhold from trust beneficiaries evidence of the trustee’s communications with an attorney retained to advise the trustee in carrying out its fiduciary duties (Stock, 35 N.Y.S.3d at 36). Stock analogized
himself to a trust beneficiary and argued that the email communications took place while Schnader was representing him and were for his benefit (Id. at 35-36).
The court rejected this argument based on its review of decisions from other jurisdictions. It explained that the applicability of the fiduciary exception depends on whether the “real client[s]” of the attorney rendering the advice – the Schnader general counsel – were the fiduciaries (the Schnader attorneys) in their individual capacities or, alternatively, the beneficiary (Stock) to whom the fiduciary duty was owed (See id. at 37-38). The fiduciary exception does not apply to “attorney-client communications of a fiduciary who seeks legal advice to protect his or her own individual interests rather than to guide the fiduciary in the performance of . . . duties to the beneficiary” (Id. at 38).
The court concluded that the fiduciary exception did not apply to the emails because Schnader and its attorneys were the “real clients” for the purposes of their consultation with the general counsel (See id. at 39).
The Schnader attorneys had personal reasons for seeking legal guidance from the general counsel, apart from any duty to Stock (See id). Carty was concerned about the application of New York Rule of Professional Conduct 3.7, the lawyer-as-witness rule (See id. at 39-401), and the litigators handling the arbitration were concerned about possible disqualification or professional discipline for any violation of the Rules in their handling of the arbitration (See id. at 40). The court found significant that the general counsel never worked on any matter for Stock (See id. at 39). And, the court repeatedly noted that the plaintiff was not billed for any of the time devoted to the consultations (See, e.g., id. at 34, 39 and 40).
In addition, the court noted that the interests of Schnader, in making sure its lawyers adhered to their ethical obligations, were potentially inconsistent with the interest of Stock in prosecuting the arbitration against Morgan Stanley. Indeed, Schnader’s general counsel could have concluded that the firm should withdraw from representing Stock – resulting in significant delay and possible additional expense in resolving Stock’s claims (See id. at 40-41).
Finally, the court observed that the public policy behind principles advanced by the attorney-client privilege apply equally in these circumstances. Open and frank discussions between an attorney and her client should be encouraged at all times. Seeking such advice in a timely manner could minimize any damage to the client from any conflict or error (Id. at 40). Thus, the privilege is triggered well before the relationship between the attorney and the client has become openly hostile.
Second, Stock argued that he was entitled to the emails under the “current client exception” to the attorney-client privilege (See id. at 43). The current client exception bars the invocation of the privilege when the internal communications relate to the client’s ongoing representation (See id. at 43). The rationale is that advice from the firm’s general counsel to other firm attorneys on a matter “as to which the firm’s interests and those of a current outside client are incongruent, involves the firm in an impermissible simultaneous representation of conflicting interests” – those of the outside client and those of the firm, as the general counsel’s client (Id). The conflict “emerges” from the imputation to the general counsel of the firm’s representation of the outside client 2 (Id. at 43; see also Koen Book Distributors v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283 (E.D. Pa. 2002)).
The court also declined to adopt the “current client exception.” Initially, the court rejected the idea that consultation by attorneys with their firm’s general counsel “on a purely ethical issue arising from a representation of a current client . . . inherently gives rise to a conflict of interest between the firm and the client” (See id. at 44). It noted that a “lawyer’s interest in carrying out the ethical obligations imposed by the [Rules] is not an interest extraneous to the representation of the client. It is inherent in that representation and a required part of the work in carrying out the representation” (Id. at 45 (citing New York State Bar Association (“NYSBA”) Ethics Op. 789, at ¶12)). The court held that there is no conflict when the subject of the consultation relates to an ethical issue (Id. at 45-46 (citing NYSBA EthicsOp. 789, at ¶¶15-16)).
The court then addressed whether the current client exception ethical, but rather related to a firm’s potential malpractice liability. Stock argued that where the consultation concerned a matter as to which the client’s interests unquestionably conflicted with those of the firm, the exception should apply. The court, however, found “compelling” the arguments against adopting that “rather draconian” exception to the attorney-client privilege (Id. at 46). The court ruled that even if the general counsel’s advice and consultation with the firm attorneys created a conflict of interest, a violation of the professional conduct rules does not result in a waiver of an “otherwise valid evidentiary privilege attaching to the consultation” (See id). The court viewed this situation as improperly allowing Stock to use the professional conduct rules as a “procedural weapon against his former lawyers” (See id).
Finally, the court reemphasized that the general counsel never personally represented Stock in the underlying matter. As such, his consultation with the Schnader attorneys – and their disclosure of confidential information to him relating to the Stock engagement – was no different than if those attorneys had consulted outside counsel. They would have been allowed to disclose confidential information to defend themselves from the malpractice claim.3 Applying the current client exception in this context would penalize the law firm for seeking advice from one of its own attorneys, and not promote the principles of loyalty and confidentiality that the imputation rule was designed to protect (Id. at 47). The court relied on recent decisions from other jurisdictions and public policy considerations, noting that “[r]equiring a law firm to consult outside counsel would not remove or remedy any potential conflict of interest that created the need for the consultation in the first place. Further, limiting a law firm’s ability to invoke the attorney-client privilege to consultations with outside counsel would not only increase the cost of obtaining ethical advice but, more importantly, would likely substantially delay the process of obtaining such advice” (Id. at 4). It “declined” to impose such a requirement, which would result in delay and increase the potential prejudice to both the client and the law firm, with no compensating benefit to the client (See id. at 49).
The Schnader case is another decision in an important jurisdiction recognizing that the attorney-client privilege that protects communications between attorneys and outside clients also applies to communications between attorneys and in-house general counsel. Although Pennsylvania state courts have not yet opined on this issue, the key factors that compelled this decision provide instruction to attorneys here who seek to have such communications protected.
First, the attorney-client privilege may be compromised if a firm’s in-house general counsel personally works on the outside client’s matter. Whenever possible, avoid staffing in-house general counsel on substantive firm matters. This may be impractical, particularly in smaller firms, where a firm’s in-house general counsel also maintains a robust substantive practice for outside clients. One solution for such firms would be to appoint another attorney who practices in a different field to supplement the role of in-house counsel. In that way, firm attorneys may obtain advice in-house by consulting with the attorney who is not staffed on the outside client’s case that has triggered the need for consultation.
Second, the time spent seeking advice for the primary purpose of protecting the firm or its attorneys should not be recorded to a billable number or invoiced. These consultations should be charged to the client only where the attorneys seeking the advice are doing so for the benefit of the outside client. This could occur, for instance, when there is a question about the propriety of the conduct of opposing counsel.
Third, the firm should assert the privilege only with respect to a limited number of communications, exchanged over a brief period of time, between the key players – counsel representing the outside client and the in-house general counsel. Had Schnader attempted to shield all communications relating to the representation, the court might have ruled differently. Instead, the firm’s measured approach reflected its thoughtful, and narrow, application of the privilege in this context. Firms should think carefully about whether the purpose of each specific communication was for the benefit of the firm or the representation of the outside client. Each communication deserves careful consideration and analysis. A global, over-inclusive claim of privilege with respect to every internal communication relating to the representation of the outside client is likely to raise a red flag.
Applying these considerations should be the key to protecting consultations with a firm’s in-house general counsel.
1 Pa. Rule of Prof’l Conduct 3.7 is substantially the same as the New York Rule. It provides generally that, absent certain exceptions, a lawyer may not act as an advocate in the same proceeding in which he is likely to be a necessary witness.
2 Rule of Prof’l Conduct 1.10(a) in both Pennsylvania and New York states generally that if a conflict of interest prevents one lawyer at the firm from representing a client, the conflict is imputed to all lawyers at the firm who likewise would be prohibited from representing that client.
3 See Rule 1.6(b)(5)(i) in New York and 1.6(c)(5) in Pennsylvania which permit attorneys to disclose confidential information to secure legal advice about the lawyer’s compliance with the Rules.
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