Law Firm In-House Privilege Revisited

A recent decision by a Commercial Division judge in New York County has caused shivers of anticipation among New York's professional responsibility community. In an Interim Order in Stock v. Schnader Harrison Segal & Lewis LLP [Index No. 651250/13, 2014 NY Slip Op. 33171U (Sup. Ct. N.Y. Co. 12/5/2014)], Justice Melvin L. Schweitzer held that communications between the law firm's general counsel and a firm lawyer about ethical and malpractice issues in an ongoing case were not privileged, and thus had to be disclosed to the firm's client in a later malpractice action. [Id. at *1.] The law firm has already filed a Notice of Appeal, setting up the first opportunity for a New York appeals court to address whether law firms in this state are entitled to assert what is known as the "law firm in-house privilege" — an issue which has roiled courts across the country for more than 25 years.

This is an issue of huge importance to lawyers in private practice in New York and around the country. It raises a fundamental question: are law firms like ordinary businesses, which may protect as privileged communications between employees and in-house lawyers seeking legal advice, or does lawyers' status as fiduciaries for their clients mean those communications should be treated differently? Finding the correct answer requires courts to parse both ethical issues and the law of fiduciary duty. More important, it requires them to weigh the practicalities of day-to-day law practice against basic ethical principles, and the rights of lawyers against the rights of clients.

The Stock Decision

In Stock, the plaintiff had retained the law firm Schnader, Harrison, Segal & Lewis (Schnader Harrison) to represent him in connection with his departure from MasterCard International Inc. (MasterCard). [Id.] The plaintiff claimed that a Schnader Harrison partner had failed to advise him that his departure would accelerate the expiration date of his stock options, worth $5 million, from 10 years to 90-120 days. [Id.] The options expired worthless and the plaintiff, on Schnader Harrison's advice, brought an arbitration against MasterCard and its plan administrator to recover the value of the lost options. [Id. at *2.] In preparation for her testimony, the Schnader Harrison partner spoke to the firm's General Counsel and other firm lawyers about that testimony and possible ethical issues. [Id.]

When the lawsuit against MasterCard was unsuccessful, the plaintiff sued Schnader Harrison and the relationship partner for malpractice. [Id. at *3.] He claimed, among other things, that the partner had failed to attempt to negotiate an extension of the option expiration, and had covered up the firm's own potential liability in order to induce him to keep the firm as his counsel in the arbitration. [Id.] In the course of discovery, the plaintiff sought 24 documents reflecting communications the partner had with other Schnader Harrison lawyers, including the firm's General Counsel, in advance of her testimony. [Id at *1.]

In ordering the production of these documents, Justice Schweitzer rejected Schnader Harrison's claim that the partner's communications with the firm's General Counsel were covered by the firm's in-house privilege. [Id.] He likened Schnader Harrison's relationship with its client to the relationship between a trustee and a beneficiary, finding that the law firm was a fiduciary with special obligations to its client. [Id. at *2.] Citing Hoopes v. Carotta, [142 A.D.2d 906, 909-10 (3rd Dept.), aff'd, 74 N.Y.2d 716 (1989)], the first case in New York to apply the "fiduciary exception" to the attorney-client privilege, Justice Schweitzer held that "Stock *** has a right to disclosure from his fiduciaries of communications that directly correlate to his claims of self-dealing and conflict of interest." [Stock, Slip Op. at *2.] Reviewing the facts, the Court held that the plaintiff's claim that the law firm had a conflict was "colorable," the lawyers should have realized there was a conflict, and the lawyers, as fiduciaries, "were *** obligated to inform him of the facts underlying [MasterCard's] claim that his attorneys' 'failures' might have caused his losses, the existence of a potential conflict, and that he should seek independent counsel for advice." [Id. at *3.] Because the lawyers were the client's fiduciaries at the time they had the internal communications about the case, Justice Schweitzer suggested, they could not assert the privilege. [Id. at *1-3.]

Early 'In-House Privilege' Cases

The Stock holding is consistent with the early cases that addressed the issue, including the one case that has ruled on the law firm in-house privilege under New York law. In that case, Bank Brussels Lambert v. Credit Lyonnais (Suisse) [220 F. Supp.2d 283, 286-88 (S.D.N.Y. 2002)], the District Court rejected the privilege assertion on the ground...