During the course of representing clients, lawyers often encounter ethical conundrums not easily solved without analyzing the rules governing the practice of law in their jurisdiction.  There is a continuum of the means by which lawyers seek such advice.  On one end, they confer informally with their partners or co-counsel.  On the other end, lawyers retain ethics specialists from outside their firms.  In the middle, firms formally designate an “in-house” counsel responsible for advising the firm’s lawyers on ethics and other issues that may create liability for the firm.  From the perspective of maintaining privilege over these types of communications, casual conversations are extremely risky.  Consulting outside counsel is the safest route, but for financial reasons and for convenience, many lawyers may believe that the best course of action is consulting their firm’s formally designated “in-house” counsel.  However, the dangers of this approach were highlighted with the decision by a New York trial judge in December 2014 ordering the disclosure of ethics advice given to three attorneys by their firm’s in-house general counsel.  Although that decision has been reversed by the Appellate Division, First Department, a review of both decisions is instructive for attorneys deciding when and how to seek advice on the course of action to take to comply with their ethical obligations.

In Stock v. Schnader Harrison Segal & Lewis, a Schnader lawyer represented an executive in negotiating his separation from MasterCard.  The former executive later learned that upon his termination his vested stock options expired and retained other Schnader lawyers who commenced a federal court litigation and arbitration against MasterCard.  During the course of the arbitration, MasterCard’s counsel gave notice that it intended to call as a witness the Schnader lawyer involved in the separation negotiations.  The Schnader lawyers sought advice from their firm’s in-house general counsel on their firm’s ethical obligations.  In a subsequent action against Schnader for malpractice based on the underlying separation agreement representation, the former executive sought disclosure of the communications between the Schnader lawyers and their in-house counsel, arguing that although the firm could withhold the communications from the rest of the world as privileged, it could not withhold them from him because the communications took place while Schnader represented him and were related to his representation.  The trial court agreed and compelled disclosure, raising serious concerns among lawyers across New York as to their ability to seek in-house confidential ethical guidance, related to their client representations.

In a much-anticipated decision issued this summer, the Appellate Division, First Department provided these lawyers with some comfort when it overruled the trial court, holding that a law firm attorney who seeks advice from a firm’s general counsel concerning ethical obligations in representing a firm client can invoke the attorney-client privilege to withhold such communications from the client. The Court’s 28-page unanimous decision evaluated and rejected as inapplicable in this context the “fiduciary” and “current client” exceptions to the attorney client privilege, on which the lower court had relied.  The “fiduciary” exception may apply when a representative who is a fiduciary – such as a trustee – seeks legal advice on behalf of a beneficiary who may be considered the “real client.”  Under the “current client” exception, a former client is entitled to disclosure of any in-firm communications relating to his or her representation that took place during the representation.  The Court also disagreed with the trial court that the communications had not been confidential; that the lawyers waived privilege with respect to certain emails by placing them at issue; and that the lawyers waived privilege by selectively disclosing privilege communications.

Although the application of the fiduciary exception to the attorney-client privilege to intra-firm communication was an issue of first impression in New York, the Court relied on decisions of the highest courts in Georgia and Massachusetts “concluding that, when lawyers seek the advice of their firm’s in-house counsel concerning possible conflicts, ethical obligations and potential liabilities arising from the representation of a current firm client, the in-house counsel’s ‘real clients’ are the lawyers and the firm itself – not the firm client from whose representation the issues arise – and, therefore, evidence of communications seeking or rendering such advice may be withheld from the firm client as privileged.” The Court also noted that the House of Delegates of American Bar Association in 2013 adopted a resolution endorsing the view that the fiduciary exception “does not apply to confidential communications between law firm personnel, acting on behalf of the law firm in its individual capacity, and the firm’s in-house or outside counsel, even if those communications regard the law firm’s own duties, obligations, and potential liabilities to a current client.”

The Court’s opinion gives comfort to New York lawyers seeking ethics advice from within their firms during the course of a representation. But the protection is narrow and such advice should not be casually sought.  The First Department focused in particular on the facts that the Schnader in-house counsel (1) “never work[ed] on any matter for plaintiff,” and (2) “plaintiff was not charged for the time the in-house counsel devoted to the consultation.”  Also, the lawyer consulted in that case is described by the Court as Schnader’s “in-house counsel.”  Communications with a colleague without the formal “in-house counsel” designation may not be privileged.  Moreover, how a court will react to case in which an in-house counsel was designated solely for a particular matter, and previously had not been designated as the firm’s in-house counsel, remains uncertain.

Notwithstanding the clarity offered by First Department’s Schnader decision, a lawyer seeking confidential ethics advice during the course of a client representation must consider the implications of seeking such advice in-house. In some situations, the burden of retaining an outside lawyer may be outweighed by the greater comfort of knowing that the outside lawyer’s advice is less likely to be susceptible to a motion to compel and more likely to remain confidential.

From the Insider Blog: White Collar Defense & Securities Enforcement.