HIGHLIGHTS:

  • The First Judicial Department of the New York Appellate Division has upheld a claim of attorney-client privilege for documents reflecting communications between attorneys at a firm and that firm's in-house counsel.
  • The New York ruling adds to a string of recent decisions in other jurisdictions that have upheld the application of attorney-client privilege for communications between lawyers at a firm and their in-house counsel.
  • The strength of the opinion should make it easier for courts in states that have not yet addressed the issue to reach the same conclusion.

In Stock v. Schnader Harrison Segal & Lewis, 2016 WL 3556655 (N.Y. App. Div. 2016), the First Judicial Department of the New York Appellate Division upheld, in a case involving a former law firm client seeking to sue the firm, a claim of attorney-client privilege for documents reflecting communications between attorneys at the firm and that firm's in-house counsel. It was the first such appellate-level decision within the New York State judicial system. New York, therefore, joins a string of recent judicial decisions in other jurisdictions that uphold the application of attorney-client privilege for communications between lawyers at a firm and their in-house counsel. The strength of the opinion should also make it easier for courts in states that have not yet addressed the issue to reach the same conclusion.

This case arose from the prior representation by Schnader Harrison Segal & Lewis (the Firm) of plaintiff Kenneth Stock in the negotiation of a separation agreement from Stock's former employer. Subsequent to the completion of those negotiations, Stock also hired the Firm to represent him in federal litigation and an arbitration with his former employer to obtain certain rights that he believed were due him under the agreement.

The former employer took the position that Stock's woes were substantially caused by the Firm's representation of Stock in negotiating the separation agreement. When the former employer gave notice that it would call a Firm lawyer who had actively participated in the negotiations as a fact witness at the arbitration, several Firm lawyers consulted with the Firm's general counsel about the Firm's potential duties under New York Rule of Professional Conduct (RPC) 3.7, the state's attorney-witness rule. The Firm's in-house general counsel had never performed any work for Stock, and none of the time pertaining to these consultations was billed to Stock.

The arbitration ended in the former employer's favor, and the federal lawsuit brought by Stock was shortly dismissed thereafter. Stock then sued the Firm for malpractice and, in so doing, sought access to the in-house communications referenced above. Although the trial court had ordered that the documents be produced, the Appellate Division reversed and held that the documents were protected by the Firm's attorney-client privilege.

The Appellate Division first noted that there was no universal a priori reason why law firms could not claim attorney-client privilege for communications with in-house counsel in the same general manner that business corporations do. The Appellate Division therefore agreed with Stock that the question before it was not whether in-house communications could be subject to attorney-client privilege at all but whether an exception to the attorney-client privilege applied on these facts.

The Appellate Division then noted that prior New York authority, like the authority in many but not all United States jurisdictions, supports what is called a "fiduciary exception" to attorney-client privilege. Under New York's version of the fiduciary exception, attorney-client privilege cannot be invoked for communications between a fiduciary and someone who is ostensibly the fiduciary's lawyer if the "real client" for purposes of the communications is a beneficiary of the fiduciary relationship rather than the fiduciary as an individual. The Appellate Division had no difficulty finding that in this instance, the "real client" of the discussions with the Firm's in-house counsel was the Firm (and its lawyers) and not Stock, the underlying client.

The Appellate Division also noted that its decision that the Firm or its lawyers were the real client was not affected by the fact that, at the time of the consultations with Firm in-house counsel, the relationship between Stock and the Firm had not yet reached the stage of actual hostility. The Appellate Division noted that much of the benefit of attorney-client relationships would be lost if the privilege could only be invoked when parties were actually, rather than just potentially, hostile towards each other.

The Appellate Division also rejected the assertion that privilege be considered waived if, in addition to discussing potential application of the attorney-witness rule under New York RPC 3.7, in-house counsel and Firm lawyers had discussed the potential civil malpractice liability of the Firm to Stock. The court held that this would strengthen, not weaken, the case for privilege because it would make even more clear the fact that the Firm or its lawyers were the real client.

The Appellate Division went on to note that cases in several jurisdictions had held that attorney-client privilege could not be upheld as to communications with in-house lawyers when those communications were about a then-current firm client. After observing that there was no prior appellate authority in New York that had addressed this issue, the Appellate Division declined to create such an exception.

The Appellate Division explained that those who support the current client exemption base their support on the idea that when a lawyer at a firm consults in-house counsel about the firm's obligations to a client or about difficulties in meeting those obligations, there is necessarily a conflict of interest between lawyer and client that requires that the privilege give way. The Appellate Division disagreed.

To begin with, the Appellate Division asserted that it did not believe it appropriate to say that a conflict of interest could be said to exist merely because a jurisdiction's rules of professional conduct require them to consider their own ethical obligations in the course of deciding what they can or cannot do for a client.

The Appellate Division then went on to note that the current client exception conflates two distinct bodies of law: one regarding conflicts of interest (i.e., what lawyers can or cannot do when conflicts may arise) and one regarding the law of evidentiary and testimonial privileges (i.e., whether the conditions for privilege protection have or have not been met). In the view of the Appellate Division, these two bodies of law can and should be kept apart.

The Appellate Division then concluded that the Firm's in-house counsel did not in fact have a conflict of interest. This conclusion was based on several considerations. First, the in-house counsel had not done any work for Stock. Second, New York RPC 1.10(a), the state's general firmwide attribution-of-conflicts rule, should only be applied to representation of third parties as clients and not to a law firm's representation of itself. Third, the Appellate Division noted that attorney-client privilege unquestionably would exist if a lawyer at a firm consults outside counsel and that this result would be inconsistent with holding in-house communications in otherwise identical contexts not to be privileged.

Conclusion and Takeaways

As usual, some open questions remain. The Appellate Division noted, for example, that there was no basis on the record before it for any argument that the Firm had waived privilege or was or would be asserting any kind of advice of counsel defense based in whole or in part on communications for which privilege was being claimed. In addition, the Appellate Division's repeated reference to Firm in-house counsel not having done any work for Stock should at least alert law firm general counsel to have someone else act in their stead if they are working for the client whose work is being discussed or, perhaps, have done any work on related matters for that client.

Nonetheless, the strength of the opinion – and the many other authorities and opinions cited in it – build a very strong case for the availability of attorney-client privilege for communications between the lawyers at a firm and the firm's in-house counsel.