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Privilege Shields Law Firm’s Internal Probe if Its Counsel Didn’t Deal With Outside Client

Wednesday, July 18, 2012

By Kirk Swanson  

Privilege and work product protection attach to lawyers' communications with their firm's in-house counsel about a dissatisfied client when the conflict of the lawyers still representing the client cannot fairly be imputed to the attorney serving as in-house counsel, the Georgia Court of Appeals declared July 13 (Hunter, Maclean, Exley & Dunn v. St. Simons Waterfront LLC, Ga. Ct. App., No. A12A0716, 7/13/12).

The court, speaking through Judge Stephen Louis A. Dillard, offered guidance for determining when imputation in this context can be avoided. The analysis--which draws heavily from a 2005 law review article--depends mostly on evidence that the in-house counsel was not and did not become involved in the outside client's representation.


Firm Counsel and Conflict Imputation

The Georgia Court of Appeals indicated that whether it is appropriate to impute to a firm's internal counsel the conflict that develops when a law firm continues to represent a client while investigating whether the client may have a claim against it depends in large part on how much time the lawyer in question serves in the general counsel role:  

▸Imputation of the conflict typically is not appropriate when the firm's general counsel serves in that position full-time and does not represent outside clients, the court said.

▸Serving as general counsel part-time qualifies for the privilege if the lawyer “'does so on a formal, ongoing basis'” and the lawyer “had 'no involvement in the outside representation at issue and the firm is clearly established as the client before the in-firm communication occurs.'”

▸When a firm uses one of its lawyers as internal counsel on an as-needed basis only, the court said, imputation of the other lawyers' conflict to firm counsel is appropriate “'unless the firm can show that an attorney-client relationship was established before the in-firm communication occurred,' which shifts the burden to the law firm 'to show that the identity and role of “firm counsel” was clearly defined.'”

The court warned that even if this test is satisfied, “a conflict may nevertheless result if in-firm counsel delegates tasks or directs aspects of the client representation through attorneys who are subject to imputation.”


The opinion makes clear that the attorney-client privilege for a law firm's internal communications may apply even if the firm's in-house counsel serves in that role only on a part-time or as-needed basis.

Notably, the court announced that its analysis also applies to lawyers' discussions with outside counsel about their firm's dilemma. Those communications will be protected from discovery only if the firm can establish that outside counsel was consulted solely to advise the firm about its own course of action, and did not become involved in the firm's representation of the client's interests in the underlying matter, Dillard said.

Consultations.

The case grew out of the representation of real estate developer St. Simons Waterfront LLC (SSW) by the law firm of Hunter, Maclean, Exley & Dunn in the sale of expensive condominiums. When a number of buyers rescinded their purchase contracts, SSW indicated a desire to enforce the specific performance clause in the agreements. The law firm expressed doubt whether this provision would be upheld in court.

Representatives of SSW and Hunter Maclean held a conference call about how to proceed. Firm lawyers came away with the impression that SSW was so unhappy with the law firm's services that, in the court's words, “it was probable that SSW would eventually file a claim against the firm.”

Two of the lawyers consulted the firm's in-house general counsel, Arnold Young, soon after the call. The firm began an internal investigation, headed by Young. According to the court, Hunter Maclean did not inform SSW that the law firm was “evaluating its own exposure or building a defense” while the firm was still representing SSW.

The firm said it began to seek replacement counsel for SSW, but the trial court found that Hunter Maclean continued to represent the company for several months until new counsel was in place. Before the representation ended, Hunter Maclean contacted and eventually retained an outside attorney, Darla McKenzie, asking her to advise the firm about how to proceed.

After retaining new counsel SSW sued the law firm for malpractice, breach of fiduciary duty, and fraud. It sought depositions and documents from both Young and McKenzie. The trial court held that Hunter Maclean's communications with McKenzie were privileged, but that internal discussions involving Young were not.

Firm Counsel's Role.

The court of appeals surveyed many of the decisions from other jurisdictions on the topic of privilege for internal law firm communications, but in the end it adopted the framework advocated by New York Law School professor Elizabeth Chambliss in her article The Scope of In-Firm Privilege, 80 Notre Dame L. Rev. 1721 (2005).

The premise that the court adopted is 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.'”

The key, the court said, is to determine whether the conflict the lawyers representing the outside client have--from helping the firm while still representing the client--is imputable under Georgia Rule of Professional Conduct 1.10 to the lawyer serving as the firm's own counsel.

Whether a firm's internal counsel devotes all her time to that role is not determinative in deciding the imputation issue, the court said, although it affects what a trial judge should consider before ruling on the firm's privilege claim. Using Chambliss's article as guidance, the court explained the differences when internal counsel is full-time, part-time, or ad hoc. (See box.)

Waiver Requires Full Disclosure.

If the other lawyers' conflict is imputable to firm counsel, the court said, the client may waive the conflict for the time being by agreeing to the firm's continued representation--but a valid waiver depends on informed consent, which in turn requires the firm to give “adequate notice to the client of the firm's potentially adverse interests,” Dillard stated. The court offered this advice:

[A] law firm would be well advised to explain in writing the firm's perception and (1) seek the client's informed consent for an immediate withdrawal, disclosing to the client the potential harm that could result from such withdrawal, and/or (2) seek the client's informed consent to continued representation until such time as the firm can withdraw, with disclosure that the firm will simultaneously take steps to protect its own interests. Nevertheless, in the latter option, … the firm should segregate the attorneys who will continue with the client representation and the attorneys who will conduct the investigation, except for the limited purpose of providing pertinent information necessary to begin the investigation.  

 

The appellate court remanded the case so that the trial court could resolve the privilege questions using the guidelines Dillard explained in this opinion.

If Young was “completely segregated from the underlying matter,” or if SSW gave informed consent to establish a waiver of conflict, “the usual rules of privilege will attach,” Dillard said.

But if neither of those circumstances exists, he continued, the trial judge must look at SSW's discovery request and the law firm's privilege log, and then order production of communications that implicate the conflict of interest--which Dillard described as “those discussing claims the client might have against the firm, known errors in the firm's representation of the client, conflicts in its representation, and other circumstances that would have triggered the firm's duty to advise the client and obtain the client's consent.”

Outside Counsel.

A trial court should use the same analytical approach in determining whether discussions between a firm and outside counsel it has retained are privileged, Dillard stated.

“In other words,” he said, in this case “the trial court must determine whether the attorneys with whom McKenzie communicated--aside from any necessary exchange of background information for investigation and research purposes--were subject to an imputed conflict of interest and, if so, continue to apply the analysis discussed supra.”

Much the same process will determine whether a law firm may claim work product protection for its internal discussions about a problem client, the court added.

Hunter Maclean was represented by Susan W. Cox, Benjamin J. Colson, and Marc M. Bruce of Edenfield, Cox, Bruce & Classens, Statesboro, Ga.

Representing SSW were John G. Nelson of Weissman, Nowack, Curry & Wilco, Atlanta, and Jenny E. Jensen of Jones, Jensen & Harris, Norcross, Ga.


Full text at http://op.bna.com/mopc.nsf/r?Open=kswn-8w6png.

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