The attorney-client privilege covers ethics advice that lawyers get from their law firm’s general counsel, and the communications do not need to be disclosed to the client, said a unanimous five-judge panel of the New York Appellate Division last week, in a closely-watched case. In Shock v. Shnader Harrison Segal & Lewis LLP, the court ruled that the law firm was the “real client” in getting the advice from the GC, and held that the fiduciary exception didn’t apply.

Underlying case: tale of expiring stock options

We have been following developments since late 2014, when the trial court decided in Shock’s legal malpractice case that the privilege did not apply to communications that lawyers at the Shnader firm had with the firm’s general counsel in the underlying case. (Thompson Hine LLP, the sponsor of this blog, was one of 74 firms signing on to an amicus brief seeking reversal of the trial court’s ruling.)

In the underlying case, the Shnader firm represented the client in negotiating his separation from his employer. The firm did not negotiate an extension of the exercise period for the client’s vested stock options. When the former employer later advised the client that more than $5 million in options had expired with the termination of his employment, the client consulted the Shnader firm again about his remedies. In an arbitration before the Financial Industry Regulatory Authority (FINRA), the employer said that it was going to subpoena the lawyers who handled the separation agreement negotiation, and indicated that it was seeking to point the finger at the law firm as being partly responsible for any loss to the client.

That sent the Shnader lawyers to their firm’s general counsel for ethics advice. When Shock eventually sued the Shnader firm for malpractice, he sought production of 24 e-mails reflecting that advice.

The New York County commercial division court ordered the firm to turn over the documents. Without extensive analysis, the court agreed with the plaintiff client that the firm lawyers did not expect their communications with the firm’s general counsel to be kept confidential from the client. The court also invoked the “fiduciary exception” to privilege, saying that the client had “a right to disclosure from his fiduciaries of communications that directly correlate to his claims of self-dealing and conflict of interest.”

Trial court ruling is reversed

In a 28-page opinion, a five-judge panel of the Appellate Division’s First Department unanimously reversed.

The court rejected application of the fiduciary exception, ruling that the Shnader lawyers “had their own reasons, apart from any duty owed to plaintiff, for seeking the legal guidance … Because the purpose of the consultation with [the firm’s GC] … was to ensure that the attorneys and the firm understood and adhered to their ethical obligations as legal professionals, the attorneys and the firm, not plaintiff, were the ‘real clients’ in this consultation.”

The court put particular emphasis on two facts: first, that the Shnader firm’s general counsel had never participated in the client’s representation; and second, that the firm did not bill the client for the lawyers’ ethics consult with the GC. That solidified the court’s view that the firm and its lawyers were the clients, and entitled to the privilege protection available to other clients.

Relying on New York state ethics opinions, the court also said that “we do not believe that a consultation by attorneys with their firm’s in-house counsel on a purely ethical issue arising from the representation of a current client … inherently gives rise to a conflict of interest between the firm and the client.”

Adding to a trend?

In reaching its conclusion, the Shock court cited similar recent holdings from state high courts in Georgia and Massachusetts. The ABA has also taken the position that the fiduciary exception does not apply to confidential communications between law firm personnel and the firm’s in-house or outside counsel, even regarding the firm’s duties or potential liability to a current client. That favorable trend continues, with the opinion of this influential court.