Friday, July 1, 2016
A significant opinion on in-house attorney-client privilege from the New York Appellate Division for the First Judicial Department.
The primary issue on this appeal is whether attorneys who have sought the advice of their law firm's in-house general counsel on their ethical obligations in representing a firm client may successfully invoke attorney-client privilege to resist the client's demand for the disclosure of communications seeking or giving such advice. We hold that such communications are not subject to disclosure to the client under the fiduciary exception to the attorney-client privilege (recognized in Hoopes v Carota, 142 AD2d 906 [3d Dept 1988], affd 74 NY2d 716 ) because, for purposes of the in-firm consultation on the ethical issue, the attorneys seeking the general counsel's advice, as well as the firm itself, were the general counsel's " real clients'" (United States v Jicarilla Apache Nation, 564 US 162, 172  [Apache Nation], quoting Riggs Natl. Bank of Washington, D.C. v Zimmer, 355 A2d 709, 711-712 [Del Ch 1976]). Further, we decline to adopt the "current client exception," under which a number of courts of other jurisdictions (see e.g. Bank Brussels Lambert v Credit Lyonnais [Suisse] S.A., 220 F Supp 2d 283 [SD NY 2002]) have held a former client entitled to disclosure by a law firm of any in-firm communications relating to the client that took place while the firm was representing that client. Because we also find unavailing the former client's remaining arguments for compelling the law firm and one of its attorneys to disclose the in-firm attorney-client communications in question, we reverse the order appealed from and deny the motion to compel.
In 2008, the defendant law firm, Schnader Harrison Segal & Lewis LLP (SHS & L), through the managing partner of its New York City office, defendant M. Christine Carty, Esq., represented plaintiff Keith Stock in the negotiation of his separation agreement from his former employer, MasterCard International. Unbeknownst to plaintiff during the negotiation of the separation agreement, his termination by MasterCard triggered the acceleration of the ending dates of the exercise periods of certain stock options granted to him under MasterCard's Long-Term Incentive Plan (LTIP). Specifically, the termination of plaintiff's employment caused the exercise periods of his vested stock options under the LTIP to shrink from 10 years to between 90 and 120 days. Although SHS & L negotiated a delay of the date of plaintiff's termination for the purpose of allowing additional stock options to vest, the firm did not negotiate an extension of the truncated exercise periods of the vested options.
In January 2009, plaintiff learned from Morgan Stanley Smith Barney (MSSB), the administrator of the MasterCard LTIP, that all of his vested stock options, which allegedly had been worth more than $5 million in aggregate, had already expired under the terms of the LTIP as a result of the termination of his employment. Plaintiff thereupon consulted with SHS & L concerning possible remedies for this loss. Plaintiff, represented by SHS & L, subsequently commenced a lawsuit in federal court against MasterCard and an arbitration proceeding before the Financial Industry Regulatory Authority (FINRA) against MSSB. The SHS & L attorneys who represented plaintiff in these litigations were Theodore Hecht, Esq., and Cynthia Murray, Esq.
On January 8, 2011, 11 days before the hearing of plaintiff's arbitral proceeding against MSSB was scheduled to begin, MSSB's counsel gave notice that it intended to call Carty to testify as a fact witness at the arbitration. This development prompted Carty, Hecht and Murray to seek legal advice from SHS & L's in-house general counsel, Wilbur Kipnes, Esq. The subject on which Carty, Hecht and Murray sought Kipnes's advice was their and the firm's ethical obligations, in light of MSSB's demand for Carty's testimony, under the lawyer-as-witness rule (see Rules of Professional Conduct [22 NYCRR 1200.0] [RPC] rule 3.7). Kipnes never worked on any matter for plaintiff, and plaintiff was not billed for any of the time he devoted to the consultations with Carty and Hecht.
The FINRA arbitral hearing opened on January 19, 2011. Carty, who had been prepared by Murray for her appearance, testified on April 4, 2011. On April 5, 2011, the parties delivered their closing arguments to the arbitrators. Later that month, the arbitral tribunal issued an award denying all of plaintiff's claims against MSSB. Around the same time, most of plaintiff's claims in the federal court action against MasterCard were dismissed, and the case subsequently settled.
In April 2013, plaintiff commenced this action against SHS & L and Carty in Supreme Court, New York County. Plaintiff alleges that SHS & L and Carty committed malpractice when they counseled him in connection with the termination of his employment by MasterCard in that they failed to advise him that his termination would accelerate the expiration of his vested stock options under the LTIP. Plaintiff also asserts claims against SHS & L and Carty for breach of fiduciary duty and violation of Judiciary Law § 487 by allegedly "attempt[ing] to cover up" the alleged malpractice and "[b]y trying to blame MasterCard and MSSB for their own mistakes." The merits of plaintiffs' claims against SHS & L and Carty are not at issue on this appeal.
The parties advise us that no prior reported decision of any New York state court has considered the application of the fiduciary exception in a case where the fiduciaries invoking the attorney-client privilege are lawyers who, during their representation of a client, sought legal advice (whether from their firm's in-house counsel or outside counsel) concerning issues of professional ethics or potential malpractice liabilities arising from the firm's representation of that client. In recent years, however, the courts of a number of other states — including the highest courts of Georgia (St. Simons Waterfront, LLC v Hunter, Maclean, Exley & Dunn, P.C., 293 Ga 419, 427-429, 746 SE2d 98, 107-108 ) and Massachusetts (RFF Family Partnership, LP v Burns & Levinson, LLP (465 Mass 702, 713-716, 991 NE2d 1066, 1074-1076 ) — have held that the fiduciary exception to the attorney-client privilege, assuming that the jurisdiction recognizes it, does not apply to communications between lawyers and their firm's in-house counsel addressing such concerns arising from the ongoing representation of a firm client (see also Garvy v Seyfarth Shaw LLP, 359 Ill Dec 202, 215, 966 NE2d 523, 536 [Ill App Ct 2012] [declining to adopt the fiduciary exception but noting that it would not apply in the case at bar if Illinois recognized it]). These courts have concluded that, when lawyers seek the advice of their firm's in-house counsel concerning possible conflicts, ethical obligations and potential liabilities arising from the representation of a current firm client, the in-house counsel's "real clients" are the lawyers and the firm itself — not the firm client from whose representation the issues arise — and, therefore, evidence of communications seeking or rendering such advice may be withheld from the firm client as privileged....
The relevant facts of this case — which are not in material dispute — establish that the fiduciary exception does not apply to the January 2011 emails because SHS & L and its attorneys were the "real clients" for purposes of these attorneys' consultation with Kipnes, the firm's in-house general counsel, whose time spent on the consultation was not billed to plaintiff and who never worked on any matter for plaintiff. The three SHS & L attorneys who sought Kipnes's legal advice — Carty, whom plaintiff's adversary in the FINRA arbitration intended to call to testify about her past representation of plaintiff in the negotiation of his separation agreement, and Hecht and Murray, the litigators who were representing plaintiff in the arbitration — had their own reasons, apart from any duty owed to plaintiff, for seeking the legal guidance. MSSB's announced intention to call Carty to testify against plaintiff raised an obvious issue under RPC rule 3.7, the lawyer-as-witness rule. The attorneys, not plaintiff, would be subject to disqualification or professional discipline for any violation of the RPC in their handling of the arbitration. In addition, SHS & L itself had an obligation "to ensure that all lawyers in the firm conform[ed]" to the RPC (RPC rule 5.1[a]) and thus to have Carty, Hecht and Murray receive appropriate legal counsel about their ethical duties.
The interests of SHS & L and its attorneys in adhering to their ethical obligations did not necessarily coincide with plaintiff's interest in successfully and efficiently prosecuting the arbitration against MSSB. For example, an opinion by SHS & L's in-house counsel that the firm should withdraw from representing plaintiff would have protected the professional interests of the firm and its attorneys but would not have directly advanced plaintiff's claims in the arbitration or the federal court action. Indeed, the firm's withdrawal from the representation likely would have significantly delayed the resolution of plaintiff's claims and increased the expense of the arbitration. Any benefit to plaintiff from his attorneys' adherence to their ethical [*9]obligations as a result of the consultation with the in-house counsel would have been indirect and incidental (cf. Riggs, 355 A2d at 713 [ordering disclosure of the trustee's attorney-client communications to the trust beneficiaries, who were "not simply incidental beneficiaries who chance to gain from the professional services rendered"]). Thus, because the purpose of the consultation with Kipnes — for whose time, to reiterate, plaintiff was not billed — was to ensure that the attorneys and the firm understood and adhered to their ethical obligations as legal professionals, the attorneys and the firm, not plaintiff, were the "real clients" in this consultation...
In sum, we find that the fiduciary exception simply has no application to the January 2011 emails. Those communications were part of a consultation between three SHS & L attorneys and the firm's in-house counsel to obtain advice about the ethical obligations of the firm and the attorneys, in representing plaintiff in his arbitration against MSSB, in light of the demand by plaintiff's adversary for the testimony of Carty, a member of the firm. The in-house counsel had never worked on any matter for plaintiff, and plaintiff was not charged for the time the in-house counsel devoted to the consultation. While plaintiff, as the firm's client, might well have benefited incidentally from this consultation, SHS & L and the attorneys concerned, not plaintiff, were the in-house counsel's "real client" in rendering his advice...
The foregoing analysis of NYSBA Opinion 789 persuades us that no conflict arose solely by virtue of the fact that defendant Carty and the SHS & L attorneys representing plaintiff in the arbitration consulted with the firm's in-house counsel as to their ethical obligations under the attorney-as-witness rule when informed that opposing counsel in the arbitration intended to call Carty as a witness. Since the existence of a conflict between the law firm and its outside client with respect to the subject matter on which the in-house counsel was consulted is the lynchpin of the applicability of the current client exception, that exception, even if we were to adopt it, would not apply to a consultation with the in-house counsel on that purely ethical matter. Still, insofar as the consultation at issue in this case might have extended to whether SHS & L was potentially liable to plaintiff for malpractice, or how the firm should prepare to defend itself against such a claim, the consultation concerned a matter as to which plaintiff's interests and those of the firm unquestionably conflicted. Under that scenario, the current client exception, if we were to adopt it, apparently would apply to the January 2011 emails generated by the consultation. But we find compelling the arguments against the adoption of that rather draconian exception to the attorney-client privilege
Finally, the court had specific views about an amicus brief
In its brief urging us to affirm the order directing SHS & L to disclose the January 2011 emails to plaintiff, amicus curiae the Association of Corporate Counsel (ACC) takes a position even more hostile to a law firm's assertion of attorney-client privilege against a client than that of the decisions adopting the current client exception. The ACC argues that "when an attorney engages in confidential communications regarding a current client's representation with another attorney, the client' for purposes of privilege law is the current client — not his or her lawyer. Thus, the privilege is the right of the client, not his or her lawyer, to assert." The ACC makes clear that it believes that this principle should apply "whether [the lawyer being consulted is] employed by the [inquiring] lawyer's law firm or an outside law firm." Thus, the ACC would have us essentially eliminate the applicability of the attorney-client privilege, as against a lawyer's client, to any consultation by the lawyer relating to his or her work for that client while the representation was ongoing, even if the consultation was with outside counsel, and even if the intended purpose of the consultation was to benefit the lawyer, not the client, as in consideration of whether a malpractice claim might exist. The ACC argues that any other rule "would fly in the face of [a lawyer's] duty to act with undivided loyalty" to a client.
Having rejected the current client exception, we also decline to adopt the even stricter rule urged upon us by the ACC, which apparently has not, to date, been endorsed by any American court. Beyond question, "[l]oyalty and independent judgment are essential aspects of a lawyer's relationship with a client," and "[t]he professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of the client and free of compromising influences and loyalties" (RPC rule 1.7 Comment ). The issue here, however, is how lawyers should deal with the dilemma that arises when they realize, in the course of an ongoing representation, that they and the client may have conflicting interests in the matter. In this regard, the ACC overlooks that a law firm's duty of loyalty to its client, as strong as it is, "does not prevent the firm from attempting to defend against client claims" (Chambliss, 80 Notre Dame L Rev at 1748), and that the firm's right to defend itself includes the right to reveal client confidences to the extent reasonably believed necessary "to secure legal advice about compliance with [the RPC] or other law" (RPC rule 1.6[b]) or "to defend [the firm] . . . against an accusation of wrongful conduct" (RPC rule 1.6[b][i]). Accordingly, the end result of adopting the ACC's position would be to "encourag[e] the firm to withdraw at the first hint of a problem," thereby "limit[ing] the firm's opportunity . . . to mitigate harm to the client" (Chambliss, 80 [*18]Notre Dame L Rev at 1747 [footnote omitted]; see also RFF Family Partnership, 465 Mass at 712-713, 991 NE2d at 1074 [noting that denial of the privilege to in-house consultations may prompt a firm to "withdraw without adequately protecting the client's interests"]). As previously discussed, we think it preferable, for both law firms and clients, to afford consultations with a firm's in-house counsel the protection of the attorney-client privilege, even as against the client, so as to "encourage firm members to seek early advice about their duties to clients and to correct mistakes or lapses, if possible, to alleviate harm" (Chambliss, 80 Notre Dame L Rev at 1724).