Why The 'Stock' Decision Is Wrong — And Why It Is Right

Like so many New York lawyers, I was happy when the First Department decided Stock v. Schnader Harrison, Segal & Lewis, LLP, 35 N.Y.S.3d 31 (1st Dept. 2016 (Stock). Indeed, I was probably happier: The First Department's decision, which applied the attorney-client privilege to cover all communications between a law firm's in-house counsel and firm attorneys, made my job as firm General Counsel a great deal easier. I had also written an article in this publication last November criticizing the trial court's ruling in Stock — a ruling the First Department overturned — and pointing out how out-of-step the court had been with recent rulings in other states that had upheld the law firm in-house privilege. See R. Minkoff, "Law Firm In-House Privilege Revisited," New York Legal Ethics Reporter (Feb. 2015), citing St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C., 293 Ga. 419 (2013) (St. Simons) and RFF Family Partnership, L.P. v. Burns & Levinson, LLP, 465 Mass. 702 (2013) (RFF). Indeed, my firm signed on to the amicus brief which more than a dozen prominent New York law firms had submitted to the First Department supporting the law firm's position.

But in deciding Stock, the First Department gave the legal community more than it had bargained for. Though the holding is quite clear and the result sensible, the First Department's underlying logic should deeply trouble all New York lawyers and their clients. Why? Because in adopting the broadest possible view of the in-house law firm privilege, the Court played fast and loose with both basic fiduciary duty principles and the Rules of Professional Conduct. For the most part, this was unnecessary: The Court could have reached its result in a much simpler way.

Importance of the Facts

To understand my concerns, we have to start with the facts. The plaintiff, Keith Stock (Stock), retained defendant M. Christine Carty (Carty), a member of Schnader, Harrison, Segal & Lewis LLP (Schnader), to represent him in negotiating a severance agreement with his former employer, MasterCard International (MasterCard). According to the Complaint, both Stock and Carty were unaware that the severance would accelerate the exercise periods of certain stock options. The options expired, costing Stock $5 million.

When Stock learned of this, Schnader advised him to commence a court case against MasterCard and an arbitration against the administrator of the stock option plan in an effort to either reinstate the options or collect damages. As the arbitration hearing approached, the administrator sought to call Carty as a witness. Carty and the two Schnader attorneys handling the arbitrator sought legal advice from Schnader's in-house General Counsel, Wilbur Kipnes (Kipnes), apparently about their obligations under N.Y. Rule of Professional Conduct (RPC) 3.7, the "advocate-witness" rule. This resulted in the exchange of "about two dozen" emails (Kipnes Emails). The record indicates that Kipnes did not charge Stock for his time on this consultation; less clear is whether Carty and the other Schnader lawyers did.

Stock lost the arbitration and settled with MasterCard. With his losses still not recouped, Stock then sued Schnader and some of its attorneys, including Carty, for legal malpractice (among other claims). In response to discovery demands, Schnader listed the Kipnes Emails on its privilege log. Stock sought to compel their disclosure, claiming that Schnader could not invoke the attorney-client privilege to shield the Kipnes Emails from its own client.

Before going further, it is important to focus on what the Kipnes Emails were — or, more specifically, what they were not. They were not created after a dispute had broken out between Stock and Schnader; they were created while Schnader still represented Stock. They were not created to provide Schnader with advice on a potential malpractice claim; they were created to advise Schnader attorneys on their ethical obligations. They were not created in the context of an obvious conflict between Schnader and Stock. To the contrary, Stock and Schnader's interests at the time were completely parallel, as neither wanted Schnader disqualified because of the attorney-witness rule on the eve of the arbitration hearing.

In this way, Stock was very different from two earlier cases that had adopted the law firm in-house privilege, St. Simons and RFF. In those cases, the prior clients had already threatened or asserted malpractice claims against the law firms when the communications with in-house counsel took place. Thus, the differing interests between the client and the law firm had crystallized, and the need for the firm to consult with counsel to protect itself was clear. This was not true in Stock, where the communications took place while the firm and the client's interests were (at least arguably) still congruent, and before any overt claim of malpractice. (If there had been such a threat, Schnader could not have continued representing Stock in the arbitration without a conflict waiver. Neither the trial court nor the First Department indicated that Schnader requested or obtained such a waiver.)

Flawed Analysis of the 'Fiduciary Exception'

In seeking to obtain the Kipnes Emails, Stock relied on two principal arguments to circumvent the attorney-client privilege: (i) the "fiduciary exception" to the attorney-client privilege...