Internal discussions among Orrick’s chief legal officer and other firm lawyers about a conflict of interest remain privileged under federal common law, a federal magistrate judge for the Northern District of California has held in quashing a third-party subpoena directed to the firm  — even though the firm still represented the client at the time of the discussions.  The opinion is the latest in a line of federal and state cases on the developing doctrine of law-firm privilege.

Intra-firm privilege claimed

In Loop AI Labs Inc. v. Gatti, et al., Loop alleged that its former CEO, Gatti, secretly worked for one of its competitors and misappropriated Loop’s trade secrets.

Orrick has not been involved in that litigation, but it represented Loop for almost three years, including in matters related to Gatti and her employment with Loop.  At the same time, Orrick also represented the competitor Gatti allegedly went to work for.

Loop served Orrick with a third-party subpoena for documents, including internal Orrick communications about the conflict of interest and the litigation between the parties.  In its motion for a protective order, Orrick asserted that as with any other client, a law firm is entitled to an attorney-client privilege covering confidential communications with its internal legal counsel.

Loop argued that federal common law recognizes a fiduciary exception to the attorney-client privilege, and that until Orrick withdrew from representing it in March 2015, Orrick had a fiduciary duty to act in Loop’s best interests.  Therefore, Loop contended, Orrick should not be permitted to withhold any internal communications with the firm’s in-house lawyers that took place during the representation.

“Fiduciary exception” does not apply

The federal magistrate judge rejected the argument.  She recognized the fiduciary exception, which other courts in the district had applied in legal malpractice cases, based on the 2007 decision in Thelen Reid & Priest LLP v. Marland.  The Thelen court had held that where there is a potential conflict of interest between a firm and its client, the firm may not withhold communications discussing potential claims of the client, known conflicts as to the client or known errors in representing the client.

But, said the magistrate judge, the court in Thelen also held that communications “reflecting consultations between the firm’s lawyers regarding the firm’s legal and ethical obligations to its client” remain shielded by privilege.  The policy announced in Thelen was that “[a] rule requiring disclosure of all communications relating to a client would dissuade attorneys from referring ethical problems to other lawyers, thereby undermining conformity with ethical obligations.”

Here, the magistrate judge found, the fiduciary exception did not apply:  there was no evidence that Orrick knew that Gatti was working simultaneously for Orrick’s conflicting clients.  Nor did Orrick know of any malpractice claim that Loop might have had.  And Orrick did not do any work for Loop after the firm became aware of the potential conflict.  Instead, Orrick took steps to evaluate its ethical obligations,  and withdrew from representing Loop two weeks later.

Developing privilege law for in-house firm counsel

We’ve written several times before about the developing law of privilege for in-house law firm counsel.  With some exceptions, the trend seems to be toward recognizing that “as with any other client, a law firm enjoys an attorney-client privilege covering confidential communications with its internal legal counsel,”  as the court said in this case.  The contested issues in this area appear to be on the application of the fiduciary exception.