Privilege Depends on Conflicts and Nature of In-House Position
By Henry R. Chalmers, Litigation News Associate Editor – October 15, 2012

A law firm cannot automatically assume that communications between the firm’s attorneys and its in-house counsel are privileged—especially when the communications involve potential malpractice exposure to a disgruntled current client, according to the Georgia Court of Appeals. Rejecting the trial court’s absolutist approach and employing an analytical framework proposed in a recent law review article, the court found that the question of in-house privilege hinges instead on whether a conflict of interest with the client exists as well as the formal nature of the in-house position.

In Hunter, Maclean, Exley & Dunn v. St. Simons Waterfront, LLC, St. Simons Waterfront (SSW) retained a law firm to assist in developing and selling condominiums, including drafting sales contracts. When buyers began rescinding the sales contracts, SSW sought a legal opinion from the firm regarding specific performance of the contracts. The firm concluded that language in the sales contracts likely eliminated SSW’s ability to sue for specific performance.

In a terse February 2008 phone call between SSW and the firm attorneys working on the matter, SSW expressed displeasure with the firm’s legal advice. After the call, the attorneys sought guidance from the firm’s in-house general counsel (a partner at the firm), expressing their concern that SSW might sue the firm for malpractice.

The firm did not, however, cease working on SSW’s matters. Instead, it continued negotiating with rescinding buyers for several months. The firm also did not inform SSW that it was evaluating its own potential exposure nor that it was being assisted in this regard by some of the same attorneys who continued to represent SSW against the rescinding buyers. SSW ultimately sued the law firm for legal malpractice, breach of fiduciary duty, and fraud.

Assertion of Privilege
In discovery, the firm refused to produce its in-house general counsel’s relevant communications and internal investigation documents, asserting attorney-client privilege and work product protection. SSW argued that the communications and documents were not privileged because they were created and transmitted while the firm continued to represent SSW, making them relevant to the underlying contract rescission disputes. SSW asserted that it was a significant conflict of interest for the firm to consult with one of its internal partners, even if that partner was identified as the firm’s “in-house counsel,” and therefore any privilege was waived.

The trial court granted SSW’s motion to compel, finding it troublesome that the firm “perceived a conflict and began taking immediate action to protect itself but did not inform SSW of the conflict and continued to represent the client.” It said the concern was exacerbated because SSW “was oblivious” to any potential conflict.

The court rejected the law firm’s argument that in-house counsel could separate himself from the ongoing client obligation, finding that a partner of the firm could not detach himself from the firm’s act of protecting its own interests to the detriment of its client. The court also found that the conflict created by the attorneys who continued working on SSW matters must be imputed to the in-house counsel. Thus, the court deemed the privilege waived.

Appeals Court Rejects Absolutist Position
On appeal, the Georgia Court of Appeals acknowledged that the case of first impression placed the court in “uncharted jurisprudential waters.” In navigating its way to a resolution, the court noted a split in authority from other states.

It observed that several jurisdictions had taken an absolutist position (similar to the trial court in this case), automatically imputing a conflict of interest to in-house counsel when a potential conflict with a current client emerged. Courts in those jurisdictions hold that the attorney-client privilege does not apply when a firm’s in-house counsel is called upon to interpret potential malpractice claims while the firm continues to represent the client.

The Georgia Court of Appeals rejected such a “Draconian position” because it “discourage[s] firms from seeking early advice when problems with clients arise.” Instead, it adopted an analytical framework championed by New York Law School professor Elizabeth Chambliss in a recent law review article [PDF]. Her approach focuses 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”—a factual question to be decided by the trial court.

Survival of Privilege Depends on In-House Counsel’s Capacity
Using this framework, the Georgia Court of Appeals decided that the first inquiry must be whether the in-house counsel has an individual conflict under Rules 1.7 or 1.9 of the Georgia Rules of Professional Conduct. If in-house counsel was not involved in the client’s representation, the in-firm communications and investigations may be privileged, depending “on the structure of the in-house position.”

The Georgia Court of Appeals emphasized that, under each of these scenarios, any privilege afforded to in-house counsel would be waived if the in-house attorney was also involved in representing the client. The court ultimately remanded to the trial court for reevaluation under this framework.

“There’s a tendency in this area of law to look for absolute answers,” says John C. Martin, Chicago, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee. “In contrast,” he notes, “this court’s approach does a nice job of unpacking the underlying issues and acknowledging a law firm’s interest in encouraging attorneys to consult with in-house counsel regarding possible malpractice claims.”

Ultimately, courts should employ standards of review that protect reasonable in-house consultation, says Thomas G. Wilkinson Jr., Philadelphia, cochair of the Conflicts of Interest subcommittee of the Section’s Ethics and Professionalism Committee. “Candid and frank communications are typically protected in the context of outside counsel,” Wilkinson observes, adding that “confidential communications with the firm’s general counsel are no less deserving of privilege protection.”

Where Do We Go from Here?
The Georgia case provides several practice pointers for law firms to consider regardless of where they are located. If the firm practices in a jurisdiction that does not recognize an internal law firm privilege, Wilkinson recommends that “it consider retaining outside counsel early.” “Unfortunately,” says Wilkinson, “law firms are not always as proactive as their clients in seeking out independent legal advice on a professional liability issue.”

Wilkinson also advises law firms “to impose some discipline on internal communications about an actual or potential claim, and make clear the procedure to follow when a situation arises that may ripen into a professional liability claim.” “Simply assigning a litigator at the firm to ‘handle’ a potential client claim and report to management may not be enough to protect those communications from discovery,” he warns. “There should be a clear designation of professional liability defense counsel and an effort to maintain a normal lawyer-client relationship to the extent possible.”

Keywords: attorney-client privilege, conflicts of interest, in-house counsel

 
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