Court Provides Guidance on Attorney-Client Privilege and Allied Litigant Doctrine 1

The Texas Supreme Court recently held, in a bad faith case, that communications between an insurer’s attorney and the insured were not protected from discovery by any evidentiary privilege.  And in doing so, the court distinguished and offered guidance on the attorney-client privilege and its interplay with the allied litigant doctrine, common interest doctrine, joint client privilege, and insurer-insured privilege.

In In re XL Specialty Insurance Company, 373 S.W.3d 46 (Tex. 2012), an employee of Cintas Corporation brought a workers’ compensation claim against Cintas’s insurer, XL Specialty, which was resolved after an administrative hearing.  During the administrative hearing, XL Specialty’s outside counsel communicated about the case to Cintas (not its lawyer).  In a subsequent bad faith case brought by the employee against XL Specialty, the employee sought to discover the lawyer’s communications with Cintas.

In a thorough opinion, the Court rejected all privilege claims and ordered production.  Texas’s attorney-client privilege rule, found at Tex. R. Evid. 503, provides, in part, that the privilege protects communications “by the client or representative of the client, or the client’s lawyer or a representative of the lawyer, to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest.”

The Court determined that this rule is appropriately termed the “allied litigant privilege” because it contains pending-action and common-interest requirements. The allied litigant privilege thus protects communications made between a client, or the client’s lawyer, to another party’s lawyer, but not to the other party itself.  And because XL’s lawyer spoke with Cintas (a nonparty), and not a lawyer for Cintas, the allied litigant doctrine did not apply. The Court recognized that XL and Cintas had a shared interest in the underlying workers’ compensation claim, but held that the “rule requires that the communication be made to a lawyer or her representative representing another party in a pending action.”

The Court also rejected and distinguished other related privileges:

Joint Client Privilege

According to the Court, the joint client privilege applies when the same attorney simultaneously represents two or more clients on the same matter.  And communications made to the lawyer for purpose of rendering legal advice to the clients are privileged except where a controversy erupts between the clients.

Joint Defense and Common Interest Doctrines

The Court noted that many courts and lawyers confuse these two doctrines.  While both doctrines apply to communications between parties who have separate counsel, the joint defense doctrine applies only in the context of litigation when multiple parties communicate for purpose of forming a joint defense strategy.  The common interest doctrine works similarly, but is broader as it applies to parties sharing a mutual interest regardless of their status in the pleadings (could be plaintiff and defendant) and regardless whether they are involved in litigation.

Insurer-Insured Privilege

In interesting comments, the Court stated that Texas does not recognize an insurer-insured privilege, but stated that “under certain circumstances, communications between an insurer and insured may be shielded from discovery by the attorney-client privilege.” But because XL did not show that its lawyer’s communications with Cintas fell within Rule 503, the Court did not consider this angle.

Court Issues Tough Decision on In-House Counsel and the Attorney-Client Privilege 1

Many in-house counsel and legal commentators posit that courts are increasingly eroding the corporate attorney-client privilege, particularly as it applies to in-house counsel.  A relatively recent decision from a Wisconsin federal court may buttress that sentiment.

In Solis v. Milk Specialties Co., 854 F. Supp. 2d 629 (E.D. Wis. 2012), the Labor Department filed a petition to enforce an administrative subpoena requiring Milk Specialties Company (MSC) to produce two reports: (1) MSC’s Five Year Strat Plan and (2) Dust Review Report.  The genesis of these documents is important.  On April 12, 2010, MSC and OSHA settled an OSHA citation against MSC for allegedly violating a general duty clause through existence of combustible dust hazards without proper ventilation. In January 2011, MSC’s in-house counsel asked MSC’s VP for Enviromental Health & Safety to begin a review process that resulted in the Strat Plan and Dust Review Report.  MSC argued that OSHA took the position that MSC must comply with NFPA standards in order to meet OSHA standards under the general duty clause.

In July 2011, OSHA issued a new citation based on an employee complaint, and in August 2011, OSHA initiated another investigation following a fire incident resulting from a dust explosion in a machine.  The adminstrative subpoena was issued in the fire investigation and covered the Strat Plan and Dust Review Report.  The Dust Review Report contained cost estimates for equipment in order to become NFPA compliant, and the Stat Plan provided the Environmental VP’s opinion on additional steps MSC could take to become NFPA compliant.

The Court rejected MSC’s claim that these two reports were protected from subpoena by the attorney-client privilege.  The Court correctly stated that, to gain protection under the privilege, MSC had the burden of showing that the documents were prepared for purposes of rendering legal advice, but noted that “carrying that burden is more difficult for in-house counsel because counsel is often involved in business matters as well as legal.”

Even though the two reports were prepared at the request of MSC’s attorney, the Court ruled they were neither legal advice nor prepared to secure legal advice. MSC argued that the two reports provide a basis for in-house counsel to render advice as to mitigating the risks of additional litigation and financial exposure if OSHA’s NFPA standards were required.  Rejecting this argument, the Court stated:

Without further explanation, it appears the only advice [the in-house lawyer] could provide to MSC, as a result of [the VP’s] opinions, is how to come into compliance with OSHA’s understanding of regulatory requirements.  This is, at bottom, business advice. . . . [I]t would not constitute legal advice if [the VP] had independently informed MSC’s management of how to comply with regulations; coming from the mouth of an attorney does not change that.

PoP Analysis.  This decision shows the difficulty in convincing a court that communications from executives to in-house lawyers are protected by the attorney-client privilege.  Here, the in-house counsel asked a VP to prepare reports about complying with certain regulatory standards so the company could respond to OSHA arguments; yet, the Court found the reports to be business advice.  While the opinion is silent on this issue, one wonders whether the Court would have reached a different result if the reports (1) began with an introduction that they were produced at the request of counsel; (2) that the reports are confidential; and (3) that they were prepared so that in-house counsel could provide legal advice to the company.  Because of the overwhelming amount of cost-related data, perhaps the Court would have reached the same decision; but implementing these type of explanatory statements on the reports and transmittal emails, will go a long way in convincing a judge reviewing reports in camera that the attorney-client privilege applies.

Attention Law Firm In-House Counsel: New Decision on the Attorney-Client Privilege 1

It is commonplace for law firms to maintain their own in-house counsel, but application of the attorney-client privilege in this setting presents a dynamic situation between law firm members and the firm’s internal counsel.  Some large law firms ask a firm lawyer to forego his or her practice and serve as a full-time in-house counsel, but most simply tag a firm lawyer to serve as the firm’s in-house lawyer while maintaining a full-time practice.  In either situation, law firm members do not hesitate to pop in the firm counsel’s office for a discussion as soon as an adverse client situation arises, even while the client remains a firm client; and when they do, conflicts of interest and the attorney-client privilege become prominent issues.

The Georgia Court  of Appeals, in Hunter, Maclean, Exley & Dunn v. St. Simons Waterfront, LLC, 730 S.E.2d 608 (Ga. Ct. App. 2012), entered the “unchartered jurisprudential waters” of attorney-client privilege for law firm in-house counsel, and produced a thorough and guiding opinion on the subject.   The opinion is lengthy and worth a thorough read, but this post briefly summarizes the factual situation, the question presented, and the court’s ruling.

Facts

The firm represented  a developer selling condos on St. Simons Island, but many buyers began to rescind their condo purchases. The developer became displeased with the firm’s handling of the buyers’ rescission efforts and threatened a malpractice action.  Firm lawyers, while still representing the developer in closing new condo sales and other buyers’ rescission efforts, discussed facts surrounding a potential malpractice claim with the firm’s in-house counsel.  During discovery after the malpractice action was filed, the developer sought production of communications between firm lawyers and the firm’s in-house counsel.

Question Presented

The question for the Georgia appellate court involved Georgia’s conflict of interest rules–whether the firm had a nonwaivable conflict of interest in continuing its representation after the client asserted a claim–and the attorney-client privilege.  The court had to determine the privilege’s scope in the conflict of interest situation.

Ruling

The court noted but rejected two different rules adopted by other courts. Some courts hold that the attorney-client  privilege does not protect otherwise privileged communications in which the firm’s representation of itself created a conflict of interest between the firm and the client seeking the communications, automatically imputing a conflict of interest to in-house counsel.  And other courts hold that such communications are protected and discoverable only if the client can show good cause to overcome the privilege.

The court determined both approaches were inconsistent with Georgia law.  And relying heavily on a law review article authored by Professor Elizabeth Chambliss, the court held that whether a law firm may claim privilege to legal advice  regarding duties to a current client from in-house counsel depends on whether there is a conflict of interest between firm counsel’s duty to the law firm and firm counsel’s duty to the outside client.  And this rule necessarily implicates the imputed disqualification doctrine–if a firm lawyer has a conflict of interest, then that conflict is imputed to all firm lawyers, including the firm’s in-house counsel.

The court rejected the “Draconian rule” adopted in other jurisdictions that automatically imputes conflicts of interest to in-house counsel. Instead, the court held that imputation depends on the structure of the in-house position. Thus, if the firm’s in-house counsel holds a full-time in-house position, then the conflict of interest of other firm lawyers should not be imputed to the in-house counsel, and communications with her are privileged.

Imputation also will not occur when the firm’s in-house counsel serves in a part-time capacity, so long as he does so on a formal, ongoing basis such that the firm is clearly established as the client before the communications occur.  In the part-time situation, there will be no imputation and the privilege will apply so long as the in-house lawyer had no involvement in the outside representation at issue.

But for firm lawyers who serve as in-house counsel on an ad hoc basis, these lawyers are subject to imputation unless the firm can show that an attorney-client relationship was established before the in-firm communication occurred. The burden is on the law firm to show the relationship was established; and if the firm does then the attorney-client privilege will apply.