Keeping The Attorney-Client Privilege In-House

Part One of Two

The role of in-house counsel has increased and diversified. A reason for this is greater use of in-house counsel to control outside legal fees. Minimizing fees is important for small and mid-size businesses and has proven economically efficient for larger businesses. In-house counsel are more familiar with the business, easily accessible, and form key relationships with employees. In-house counsel roles have evolved from straightforward legal adviser to business adviser, human resource manager, and much more. (Chad R. Brown & American Corporate Counsel, In-House Counsel Responsibilities in the Post-Enron Environment, 21 No. 5 ACCA Docket 92, 93 (2003) (citing Janet B. Wright, The Practice Setting for You?, Corporate Counsel 18, No. 1, GPSolo 45, 45 (2001)).

Attorney-client privilege should technically apply equally to in-house and outside counsel. However, it has been narrowed in the context of in-house counsel, partly due to the fear that mere participation of in-house counsel will be used to seal off disclosure of information about the basis for business transactions simply by funneling their communications through an attorney.

Determining when the attorney-client privilege applies to in-house counsel is a fact-specific analysis complicated by different roles that in-house counsel play. Issues as to what role the attorney was fulfilling arise most frequently in cases involving in-house counsel who may perform a number of functions for the corporation, only some of which place them in the role of legal advisor. The general standard to determine whether a communication is protected by the attorney-client privilege focuses on the subject matter of the communication and the role of in-house counsel. Courts ask whether the communication was sought primarily or predominantly for legal advice and whether counsel provided that advice in the role of a legal adviser. Other factors which may effect whether a communication by in-house counsel is privileged include whether the counsel expressly identifies the materials as “privileged” or “confidential.”

Following are steps that in-house counsel can take to avoid waiving the attorney-client privilege. While none are foolproof, when taken together, they should help to keep client communications confidential.

Understanding the Attorney-Client Privilege

While narrower than the scope of confidential communications between attorney and client, the attorney client privilege can be waived upon authorization to a non-privileged person, while the duty to protect client confidences would survive such limited authorization. See, Restatement (Third) of the Law Governing Lawyers '111 cmt. d. (the privilege between attorney and client is cherished.) This encourages clients to fully disclose information, making it more likely that an attorney will obtain information needed to provide sound legal advice.

Unlike most evidence excluded by formal rules of evidence, evidence protected by attorney-client privilege is always highly reliable, and of great interest to courts in fact-finding and evaluation processes. Permitting a party to withhold attorney-client privileged information may frustrate the judicial process by excluding such reliable evidence. The judicial process tolerates the privilege because it recognizes a social good as being “derived from the proper performance of the functions of lawyers acting for their clients (which) is believed to outweigh harm that may come from the suppression of evidence in specific cases.” (United States v. United Shoe Mach. Corp., 89 F. Supp. 357, 358 (D. Mass. 1950).)

Rules of Evidence and Civil Procedure

An issue likely to arise during the discovery phase of litigation is whether a communication is protected by attorney-client privilege. As a rule of evidence, an attorney has an affirmative duty to assert the privilege before discovery or when seeking to have a privileged communication admitted into evidence. Most courts' rules of discovery require disclosure of specific information about records for which an attorney asserts the privilege. Specific disclosure requirements for privileged records vary from court to court. However, details of the description in a so-called privilege log will not be questioned unless the party seeking this information calls into question the specificity of the log. This questioning of the privilege assertion usually occurs well after records sought were drafted and sent. This includes e-mails, whether in a complex business transaction or in a communication by a client to his prospective attorney after being injured by an allegedly defective product. Whether a document is privileged is not determined by hindsight of an attorney or client seeking protection of the privilege, but rather, on foresight in protecting its confidentiality when created. Nothing could be worse for the attorney's client in litigation than having a special master appointed to stop a corporation's computer system while the appointed expert downloads thousands of e-mails from individual computer hard-drives as well as law firm back-up tapes. For a detailed description of a relevant court order on court-ordered discovery of computers, see Simon Prop. Group L.P. v. mySimon, Inc., 194 F.R.D. 639, 643 (S.D. Ind. 2000)).

Under the Federal Rules of Civil Procedure, a party may obtain discovery “regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things ….” (Fed. R. Civ. P. 26(b)(1)). The privileges noted in Rule 26(b)(1) are encompassed in Rule 501 of the Federal Rules of Evidence.

Rule 501 states the application of any claimed privilege is governed by the common law, unless otherwise provided by the Constitution or other federal statute. The party claiming the privilege has the burden of establishing the privilege applies. (Harding v. Dana Transp., Inc., 914 F. Supp. 1084, 1090 (D.N.J. 1996) (citing Wm. T. Thompson Co. v. Gen. Nutrition Corp., 671 F.2d 100, 103 (3d Cir. 1982)). Federal Rule of Evidence 501 requires the court to apply state law to determine the applicability of any evidentiary privileges in diversity actions where state law provides the rule of decision for a claim or defense. (Fed. R. Evid. 501 states in pertinent part: “Except as otherwise required by the Constitution of the United States or provided by Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience. However, in civil actions and proceedings, with respect to an element of a claim or defense as to which State law supplies the rule of decision, the privilege of a witness, person, government, State, or political subdivision thereof shall be determined in accordance with State law.”)

Rule 501 governs discovery as well. (Fed. R. Evid. 1101(c)). Under federal law, the party asserting a privilege has the initial burden of proving that the privilege is properly invoked. (See, eg, George, 2000 WL 1728511, at 1; Joyner v. Southeastern Pa. Transp. Auth., 736 A.2d 35, 38 n.3 (Pa. Commw. Ct. 1999); Waugh v. Pathmark Stores, Inc., 191 F.R.D. 427, 429-30 (D.N.J. 2000)). Once the asserting party meets that burden, the party seeking discovery must prove that an exception to the privilege allows disclosure. Id.

To properly invoke attorney-client privilege, the party resisting discovery must demonstrate that: 1) the asserted holder of the privilege is or sought to become a client; 2) the person to whom the communication was made is a member of the bar of a court, or his or her subordinate, and is acting as a lawyer in connection with the communication; 3) the communication relates to a fact of which the attorney was informed by the client without the presence of strangers for the purpose of securing primarily either an opinion of law, legal services, or assistance in some legal proceeding, and not for the purpose of committing a crime or tort; and 4) the privilege has been claimed and not waived by the client. (See, Glenmede Trust Co. v. Thompson, 56 F.3d 476, 486 n. 16 (3d Cir. 1995) (citing Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 862 (3d Cir. 1994)); In re Grand Jury Investigation, 599 F.2d 1224, 1233 (3d Cir. 1979) (quoting United Shoe Mach. Corp., 89 F. Supp. at 358-59)). The privilege does not bar all testimony by counsel concerning communications with a client. (See, Birth Center v. St. Paul Cos., 727 A.2d 1144, 1164 (Pa. Super. Ct. 1999) (citing Panko v. Alessi, 524 A.2d 930, 932 (Pa. Super. Ct. 1987)). Rather, it only bars discovery of confidential communications made by the client during the course of representation. Id.

Although the privilege covers communications from an attorney to the client, in order for such a communication to be privileged it must be based upon confidential communications received by the client. (See, Schmidt, Long & Assoc. v. Aetna U.S., 2001 WL 605199, at 4 (E.D. Pa. May 31, 2001) (citing Garvey v. Nat'l Grange Mutual Ins. Co., 167 F.R.D. 391, 395 (E.D. Pa. 1996)). The communication will not be privileged if the attorney is merely conveying facts learned from sources other than the client. (Id.) Client communications with both in-house and outside counsel are protected by the privilege. (See, Robertson v. Allstate Ins. Co., No. 98-4909, 1999 WL 179754, at 5 (E.D. Pa. Mar. 10, 1999). Any privilege that exists as to a corporate officer's role and functions within a corporation belongs to the corporation, not the officer. (See, Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 348-49 (1985)). Because a corporation can act only through its agents, a corporation's privilege consists of communications by corporate officials about their actions in the corporation and corporate matters. A corporate official thus may not prevent a corporation from waiving its privilege arising from discussions with corporate counsel about corporate matters. (See, In re Grand Jury Investigation, 599 F.2d at 1236; In re Grand Jury Subpoena Duces Tecum, 391 F. Supp. 1029, 1034 (S.D.N.Y. 1975).

Part Two, coming in November, details the federal case law and the ABA's stance on the attorney-client privilege as it applies to in-house counsel, and offers guidelines for in-house counsel for maintaining the privilege.

Part One of Two

The role of in-house counsel has increased and diversified. A reason for this is greater use of in-house counsel to control outside legal fees. Minimizing fees is important for small and mid-size businesses and has proven economically efficient for larger businesses. In-house counsel are more familiar with the business, easily accessible, and form key relationships with employees. In-house counsel roles have evolved from straightforward legal adviser to business adviser, human resource manager, and much more. (Chad R. Brown & American Corporate Counsel, In-House Counsel Responsibilities in the Post-Enron Environment, 21 No. 5 ACCA Docket 92, 93 (2003) (citing Janet B. Wright, The Practice Setting for You?, Corporate Counsel 18, No. 1, GPSolo 45, 45 (2001)).

Attorney-client privilege should technically apply equally to in-house and outside counsel. However, it has been narrowed in the context of in-house counsel, partly due to the fear that mere participation of in-house counsel will be used to seal off disclosure of information about the basis for business transactions simply by funneling their communications through an attorney.

Determining when the attorney-client privilege applies to in-house counsel is a fact-specific analysis complicated by different roles that in-house counsel play. Issues as to what role the attorney was fulfilling arise most frequently in cases involving in-house counsel who may perform a number of functions for the corporation, only some of which place them in the role of legal advisor. The general standard to determine whether a communication is protected by the attorney-client privilege focuses on the subject matter of the communication and the role of in-house counsel. Courts ask whether the communication was sought primarily or predominantly for legal advice and whether counsel provided that advice in the role of a legal adviser. Other factors which may effect whether a communication by in-house counsel is privileged include whether the counsel expressly identifies the materials as “privileged” or “confidential.”

Following are steps that in-house counsel can take to avoid waiving the attorney-client privilege. While none are foolproof, when taken together, they should help to keep client communications confidential.

Understanding the Attorney-Client Privilege

While narrower than the scope of confidential communications between attorney and client, the attorney client privilege can be waived upon authorization to a non-privileged person, while the duty to protect client confidences would survive such limited authorization. See, Restatement (Third) of the Law Governing Lawyers '111 cmt. d. (the privilege between attorney and client is cherished.) This encourages clients to fully disclose information, making it more likely that an attorney will obtain information needed to provide sound legal advice.

Unlike most evidence excluded by formal rules of evidence, evidence protected by attorney-client privilege is always highly reliable, and of great interest to courts in fact-finding and evaluation processes. Permitting a party to withhold attorney-client privileged information may frustrate the judicial process by excluding such reliable evidence. The judicial process tolerates the privilege because it recognizes a social good as being “derived from the proper performance of the functions of lawyers acting for their clients (which) is believed to outweigh harm that may come from the suppression of evidence in specific cases.” ( United States v. United Shoe Mach. Corp ., 89 F. Supp. 357, 358 (D. Mass. 1950).)

Rules of Evidence and Civil Procedure

An issue likely to arise during the discovery phase of litigation is whether a communication is protected by attorney-client privilege. As a rule of evidence, an attorney has an affirmative duty to assert the privilege before discovery or when seeking to have a privileged communication admitted into evidence. Most courts' rules of discovery require disclosure of specific information about records for which an attorney asserts the privilege. Specific disclosure requirements for privileged records vary from court to court. However, details of the description in a so-called privilege log will not be questioned unless the party seeking this information calls into question the specificity of the log. This questioning of the privilege assertion usually occurs well after records sought were drafted and sent. This includes e-mails, whether in a complex business transaction or in a communication by a client to his prospective attorney after being injured by an allegedly defective product. Whether a document is privileged is not determined by hindsight of an attorney or client seeking protection of the privilege, but rather, on foresight in protecting its confidentiality when created. Nothing could be worse for the attorney's client in litigation than having a special master appointed to stop a corporation's computer system while the appointed expert downloads thousands of e-mails from individual computer hard-drives as well as law firm back-up tapes. For a detailed description of a relevant court order on court-ordered discovery of computers, see Simon Prop. Group L.P. v. mySimon, Inc., 194 F.R.D. 639, 643 (S.D. Ind. 2000)).

Under the Federal Rules of Civil Procedure, a party may obtain discovery “regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things ….” (Fed. R. Civ. P. 26(b)(1)). The privileges noted in Rule 26(b)(1) are encompassed in Rule 501 of the Federal Rules of Evidence.

Rule 501 states the application of any claimed privilege is governed by the common law, unless otherwise provided by the Constitution or other federal statute. The party claiming the privilege has the burden of establishing the privilege applies. ( Harding v. Dana Transp., Inc ., 914 F. Supp. 1084, 1090 (D.N.J. 1996) ( citing Wm. T. Thompson Co. v. Gen. Nutrition Corp. , 671 F.2d 100, 103 (3d Cir. 1982)). Federal Rule of Evidence 501 requires the court to apply state law to determine the applicability of any evidentiary privileges in diversity actions where state law provides the rule of decision for a claim or defense. (Fed. R. Evid. 501 states in pertinent part: “Except as otherwise required by the Constitution of the United States or provided by Act of Congress or in rules prescribed by the Supreme Court pursuant to statutory authority, the privilege of a witness, person, government, State, or political subdivision thereof shall be governed by the principles of the common law as they may be interpreted by the courts of the United States in the light of reason and experience. However, in civil actions and proceedings, with respect to an element of a claim or defense as to which State law supplies the rule of decision, the privilege of a witness, person, government, State, or political subdivision thereof shall be determined in accordance with State law.”)

Rule 501 governs discovery as well. (Fed. R. Evid. 1101(c)). Under federal law, the party asserting a privilege has the initial burden of proving that the privilege is properly invoked. (See, eg, George, 2000 WL 1728511, at 1; Joyner v. Southeastern Pa. Transp. Auth. , 736 A.2d 35, 38 n.3 (Pa. Commw. Ct. 1999); Waugh v. Pathmark Stores, Inc ., 191 F.R.D. 427, 429-30 (D.N.J. 2000)). Once the asserting party meets that burden, the party seeking discovery must prove that an exception to the privilege allows disclosure. Id.

To properly invoke attorney-client privilege, the party resisting discovery must demonstrate that: 1) the asserted holder of the privilege is or sought to become a client; 2) the person to whom the communication was made is a member of the bar of a court, or his or her subordinate, and is acting as a lawyer in connection with the communication; 3) the communication relates to a fact of which the attorney was informed by the client without the presence of strangers for the purpose of securing primarily either an opinion of law, legal services, or assistance in some legal proceeding, and not for the purpose of committing a crime or tort; and 4) the privilege has been claimed and not waived by the client. ( See , Glenmede Trust Co. v. Thompson , 56 F.3d 476, 486 n. 16 (3d Cir. 1995) ( citing Rhone-Poulenc Rorer Inc. v. Home Indem. Co ., 32 F.3d 851, 862 (3d Cir. 1994)); In re Grand Jury Investigation, 599 F.2d 1224, 1233 (3d Cir. 1979) (quoting United Shoe Mach. Corp., 89 F. Supp. at 358-59)). The privilege does not bar all testimony by counsel concerning communications with a client. ( See , Birth Center v. St. Paul Cos ., 727 A.2d 1144, 1164 (Pa. Super. Ct. 1999) ( citing Panko v. Alessi , 524 A.2d 930, 932 (Pa. Super. Ct. 1987)). Rather, it only bars discovery of confidential communications made by the client during the course of representation. Id.

Although the privilege covers communications from an attorney to the client, in order for such a communication to be privileged it must be based upon confidential communications received by the client. (See, Schmidt, Long & Assoc. v. Aetna U.S., 2001 WL 605199, at 4 (E.D. Pa. May 31, 2001) ( citing Garvey v. Nat'l Grange Mutual Ins. Co ., 167 F.R.D. 391, 395 (E.D. Pa. 1996)). The communication will not be privileged if the attorney is merely conveying facts learned from sources other than the client. (Id.) Client communications with both in-house and outside counsel are protected by the privilege. (See, Robertson v. Allstate Ins. Co., No. 98-4909, 1999 WL 179754, at 5 (E.D. Pa. Mar. 10, 1999). Any privilege that exists as to a corporate officer's role and functions within a corporation belongs to the corporation, not the officer. ( See , Commodity Futures Trading Comm'n v. Weintraub , 471 U.S. 343, 348-49 (1985)). Because a corporation can act only through its agents, a corporation's privilege consists of communications by corporate officials about their actions in the corporation and corporate matters. A corporate official thus may not prevent a corporation from waiving its privilege arising from discussions with corporate counsel about corporate matters. (See, In re Grand Jury Investigation, 599 F.2d at 1236; In re Grand Jury Subpoena Duces Tecum, 391 F. Supp. 1029, 1034 (S.D.N.Y. 1975).

Part Two, coming in November, details the federal case law and the ABA's stance on the attorney-client privilege as it applies to in-house counsel, and offers guidelines for in-house counsel for maintaining the privilege.