Major Decision on Law Firm In-House Counsel Privilege

In a much-anticipated decision, the Georgia Supreme Court held that the attorney–client privilege applies to law firms’ in-house lawyers and state ethical rules are irrelevant to the privilege analysis.  This includes conflict-of-interest and law-firm imputation rules.  St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C., 2013 WL 3475328 (Ga. July 11, 2013). You may access the decision here.

Background

The Hunter Maclean firm represented a developer selling condos on St. Simons Island.  The developer became displeased with the firm’s handling of buyers’ rescissionSlide1 efforts and threatened a malpractice action.  Firm lawyers, while still representing the developer, discussed the potential malpractice claim with the firm’s in-house counsel.  The developer filed a malpractice claim and sought these lawyer-firm counsel communications through discovery.

The state’s ethical rules provide that a conflict of interest exists where a lawyer represents a client while the client has a potential or actual malpractice claim against the lawyer.  See Model Rule 1.7.  And the rules impute the conflict of interest to other firm lawyers.  Model Rule 1.10.  The question is whether this ethical conflict of interest nullifies the privilege for communications between lawyers and their firm’s in-house counsel.

The Georgia Court of Appeals rendered a thorough, published opinion, holding that the conflict-of-interest imputation obviates the attorney–client privilege only where the firm’s “in-house counsel” serves on an ad hoc (informal) basis and the attorney–client relationship was not formally established prior to the communications.  Hunter, Maclean, Exley & Dunn, P.C. v. St. Simons Waterfront, LLC, 730 S.E.2d 608 (Ga. Ct. App. 2012).  PoP profiled this decision in an earlier post.

Three Approaches

Federal and state courts take three loosely defined positions whether the attorney–client privilege applies where a lawyer consults the firm’s in-house counsel while the firm continues to represent the client with the malpractice claim.  First, some courts hold that the conflict of interest creates a fiduciary duty exception to the privilege. See Koen Book Distribs., v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283 (E.D. Pa. 2002); Bank Brussels Lambert v. Credit Lyonnais (Suisse), S.A., 220 F. Supp. 2d 283 (S.D.N.Y. 2002).  Second, other courts hold that the privilege applies in limited situations.  Thelen Reid & Priest, LLP v. Marland, 2007 WL 578989 (N.D. Cal. Feb. 21, 2007).  And third, other courts hold that the privilege applies without regard to the ethical conflict-of-interest and fiduciary duty issues. Garvy v. Seyfarth Shaw LLP, 966 N.E.2d 523 (Ill. App. Ct. 2012); Tattletale Alarm Systems, Inc. v. Calfee, Halter & Griswold, LLP, 2011 WL 382627 (S.D. Ohio Feb. 3, 2011).

Ruling

The Georgia Supreme Court eschewed the ethical rules and held, simply, that the same attorney–client privilege analysis that applies in all other situations applies to the “law firm in-house counsel situation.”  To succeed on a privilege claim, the law firm must establish the existence of an attorney–client relationship between a firm lawyer and the firm’s in-house counsel, and courts should look at the utilization of billing procedures, maintenance of separate files for in-firm communications, and the level of formality of the in-house lawyer’s position.  The firm must also establish that the communications relate to matters on which legal advice is sought and were maintained in confidence.

The Court ruled that the rules of professional conduct do not govern the privilege’s applicability to the law firm in-house counsel situation.  While acknowledging that seeking in-house advice while simultaneously representing the affected client “presents ethical problems,” the Court simply found the ethics issue irrelevant to the privilege analysis.

The Court also rejected a fiduciary duty exception to the privilege in the law firm in-house counsel context, finding unpersuasive “the notion that the attorney’s duty of loyalty should automatically trump the privilege.”

PoP Analysis

The Hunter Maclean decision is a significant victory for law firms employing in-house counsel. This issue, containing a tricky interplay between privilege and ethics, is becoming more prevalent with the increase in law firms designating a firm lawyer as its “in-house lawyer” or employing a full-time in-house lawyer. Other states take different approaches on this evolving issue, but the Hunter Maclean decision may prove persuasive authority as other states address the matter for the first time.

For resources on this subject, in addition to the cases cited above lawyers should review In re Sunrise Sec. Litig., 130 F.R.D. 560 (E.D. Pa. 1989); Valente v. Pepsico, Inc., 68 F.R.D. 361 (D. Del. 1975); Elizabeth Chambliss, The Scope of the In-Firm Privilege, 80 Notre Dame L. Rev. 1721 (2005); Mark J. Fucile, The Double-Edged Sword: Internal Law Firm Privilege and the “Fiduciary Exception,” 76 Def. Counsel J. 313 (2009); William T. Barker, Law Firm In-House Attorney–Client Privilege Vis-à-vis Current Clients, 70 Def. Counsel J. 467 (2003); Francis J. Menton, Jr., Does the Attorney–Client Privilege Cover a Law Firm’s Consultation with In-House Counsel About Issues Involving Current Clients? 10 Engage: J. Federalist Soc’y Prac. Groups 111 (July 2009).