Court Refuses to Expand Privilege for Intracorporate Communications

It’s a simple concept: the attorney–client privilege generally protects from compelled disclosure a client’s communications to his client.  And under the Upjohn subject matter test, the corporate attorney–client privilege generally protects corporate employees’ communications to the company’s in-house counsel. Upjohn Co. v. United States, 449 U.S. 383 (1981).

The question arises whether the privilege applies to communications between corporate employees regarding a legal matter, yet occurring without an in-house lawyer present. corporateemployeesWhile not a frequently addressed subject, several courts have applied the privilege to intracorporate communications if the communications’ purpose is to facilitate the rendition of legal services.  For a collection of cases, see Alexander C. Black, What Corporate Communications are Entitled to Attorney–Client Privilege, 27 A.L.R.5th 76 § 44 (1995).  But Magistrate Judge Stephanie A. Gallagher of the U.S. District Court for the District of Maryland recently refused to expand the privilege to communications among corporate employees and inventors of a patent owned by the corporation.  Prowess, Inc. v. Raysearch Labs. AB, 2013 WL 509021 (D. Md. Feb. 11, 2013).

Prowess, Inc. licensed a patent from the University of Maryland–Baltimore (UMB).  The patent inventors were UMB employees.  During discovery, Raysearch sought communications between the patent inventors and Prowess employees.  Prowess claimed the corporate attorney–client privilege protected these communications because they occurred at the direction of Prowess’ attorneys.

Judge Gallagher agreed that the privilege may apply to intracorporate communications, but noted that, while the patent inventors had a relationship with Prowess, they were not Prowess employees.  And on this basis, she ruled that, because the inventors were third parties, Prowess employees’ communications with the inventors “cannot be considered ‘intracorporate.’”  Judge Gallagher rejected the privilege and ordered disclosure of the conversations between Prowess employees and the patent inventors.

PoP Analysis. Judge Gallagher’s ruling comports with the maxim that evidentiary privileges should not be lightly created nor expansively construed.  United States v. Nixon, 418 U.S. 683, 710 (1974). Extending the corporate attorney–client privilege to communications between corporate employees and third parties—despite the relationship—goes too far even if these discussions will assist in-house counsel.

The Kovel doctrine may prove a better alternative to gain privilege protection for this type of communication.  Originating in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), the doctrine holds that clients may involve certain experts (accountants in Kovel) to assist an attorney’s understanding of certain concepts.  And so long as necessary for counsel to render legal advice, the Kovel doctrine extends the attorney–client privilege to these discussions.

Important Ruling: Attorney-Client Privilege Exists for Companies in Liquidation Proceedings

Does the corporate attorney-client privilege continue to exist when a company falls into liquidation proceedings?  Although the U.S. Supreme Court provided some guidance on this issue in CFTC v. Weintraub , 471 U.S. 343 (1986), federal courts remain split on whether the privilege exists after a company ceases operations and no longer has officers, directors, or managers who can assert or waive the privilege.

Although the attorney-client priviBankruptlege is absolute, meaning that a party may not overcome the privilege once established, some courts create an exception where a company ceases to exist and no longer has officers or directors.  And of the courts applying this exception, some hold that the privilege ceases only when the company is completely dissolved–meaning liquidation proceedings are complete, while other courts see no distinction between a company in liquidation proceedings and a company that has simply stopped functioning.

The USDC for the Eastern District of California faced this issue in Wallis v. Centennial Ins. Co., 2013 WL 43441 (E.D. Cal. Feb. 1, 2013), and ruled that the privilege continues to exist while a company remains in liquidation proceedings.  In Wallis, an insured sought a declaratory judgment that two insurance companies should pay her attorneys’ fees incurred in a lawsuit covered by the companies’ insurance policies.  The insured sought to depose the companies’ attorneys, but the companies asserted the attorney-client privilege even though they were in liquidation proceedings by order of a New York state court.

The insured argued that the privilege no longer existed because both companies were dissolved and were not “going concerns.”  The companies, however, argued that the privilege simply transferred from their management to the liquidator.

Given the split of authority, the court found some merit to each party’s argument, but ultimately ruled that the attorney-client privilege continues to apply while a company remains in liquidation proceedings.  Drawing support from Weintraub, which permitted a bankruptcy trustee to waive the privilege in a bankruptcy liquidation proceeding, the court found persuasive that the insurance companies were neither formally dissolved nor “so completely non-functioning that their attorney-client privilege is extinguished.”

The court did not indicate whether the privilege remained alive after completion of the liquidation proceedings, and so the Wallis decision lends support to the narrow position that the privilege transfers to the liquidator when a company ceases day-to-day functioning and lacks officers and directors to assert or waive the privilege.

Ethics Opinion: Lawyer May Not Reveal Privileged Information When Responding to Former Client’s Internet Postings

I suppose this is happening with increased regularity—a former client unhappy with his lawyer takes his gripes to the Internet.  And the Internet postings are mostly disparaging, taking aim lawyer’s competency or his fees.  The question arises whether the lawyer may respond without violating his ethical duties of confidentiality or breaching the attorney–client privilege.

The Los Angeles County Bar Association Professional Responsibility and Ethics Committee recently addressed this situation in a Formal Ethics Opinion.  Laptop MegaphoneThe precise issue was in what manner, if any, may an attorney publicly respond to disparaging public comments by former client.  The underlying quiz in this situation was whether a lawyer could publicly respond to a former client’s Internet postings that he committed malpractice and overcharged the client.

The Ethics Committee correctly noted that, unless the former client consents to the lawyer’s response or waives the attorney–client privilege, the lawyer remains obligated to preserve the former client’s confidential and privileged information.  Under California law, courts may not create exceptions to the State’s attorney–client privilege statute, and this statute does not “permit an attorney to defend himself or herself by disclosing confidences or privileged information.”  In other words, there is no self-defense exception to California’s attorney–client privilege.

The Ethics Committee did not, however, ban the lawyer from making any response.  The Committee opined that the lawyer may respond so long as the response does not disclose confidential or privileged information, does not injure the former client in a matter involving the former representation, and is “proportionate and restrained.”

The Ethics Opinion cite is Formal Op. No. 525: Ethical Duties of Lawyers in Connection with Adverse Comments Published by a Former Client.  You may access the opinion here.