The Fiduciary Duty Exception to the Attorney-Client Privilege

1. SO MANY DUTIES, SO LITTLE TIME:The Fiduciary Duty Exception to the Attorney-client Privilege, Supervision of Non-Attorneys, and Supervision of Junior Attorneys Robert Marc Chemers Matthew J. Egan Donald Patrick Eckler Pretzel & Stouffer, Chartered March 10, 2015

2. WHAT IS THE FIDUCIARY DUTY EXCEPTION TO THE ATTORNEY-CLIENT PRIVILEGE? Recently, several courts have addressed whether the law should extend the attorney-client privilege to protect communications between a law firm’s in-house counsel, seeking advice from other firm lawyers on how to handle a client’s potential malpractice claim against the firm. Crimson Trace Corporation v. Davis Wright Tremaine LLP, 355 Ore 476 (2014); Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC, 293 Ga. 419 (2013); RFF Family Partnership, LP v. Burns & Levinson, LLP, 465 Mass. 702 (2013); Garvy v. Seyfarth & Shaw, 2012 IL App (1st) 110115; MDA City Apartments, LLC v. DLA Piper LLP, 2012 IL App (1st) 111047.

3. WHAT IS THE FIDUCIARY DUTY EXCEPTION TO THE ATTORNEY-CLIENT PRIVILEGE? Communications arguably fall within attorney-client privilege as the lawyer accused of malpractice turned to in-house counsel for legal advice on how to handle the malpractice issue. This exception to the attorney-client privilege is commonly referred to as the fiduciary duty exception. Each of these cases, for sometimes different reasons, have rejected the application of the fiduciary duty exception to the attorney-client privilege and has protected the disputed communications from disclosure to the former client.

4. WHAT IS THE FIDUCIARY DUTY EXCEPTION TO THE ATTORNEY-CLIENT PRIVILEGE? Before this recent development, courts often required the production of communications involving a client’s malpractice claim, even though the communications arguably fell within the purview of attorney-client privilege. Koen Book Distributors. v. Powell, Trachman, Logan, Carrle, Bowman & Lombardo, P.C., 212 F.R.D. 283, 285-286 (E.D. Pa. 2002); Bank Brussels Lambert v. Credit Lyonnais, S.A., 220 F.Supp.2d 283, 287 (S.D. N.Y. 2002); SonicBlue, Inc. v. Portside Growth and Opportunity Fund., 2008 Bankr. LEXIS 181, at *26 (Bankr. N.D. Cal. Jan. 18, 2008); Thelen Reid & Priest, LLP v. Marland, 2007 U. S. Dist. LEXIS 17482 (N.D. Cal. Feb. 21, 2007); TattleTale Alarm Systems v. Calfee, Halter & Griswold, LLP, 2011 U.S. Dist. LEXIS 10412 (S.D. Ohio, Feb. 3, 2011).

5. Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC • Recently, the highest courts of review of several sister jurisdictions have squarely addressed the fiduciary-duty exception’s application to the attorney-client privilege in the legal malpractice context. • In 2013, the Supreme Court of Georgia examined this issue in Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC. • In that case, the court applied Georgia’s codified attorney-client privilege analysis to determine whether an attorney’s com­munication with his law firm’s in-house counsel regarding a client’s potential malpractice claim would result in the ap­plication of the fiduciary-duty exception.

6. Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC The court held that to avoid production in discovery, the party seeking the protection of the attorney-client privilege needed to show: (1) the existence of an attorney-client relationship; (2) the communications concerned the purpose for which legal advice was sought; (3) the communications were maintained in confidence; and (4) no exception to the privilege applied.

7. Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC • Regarding the maintenance of confidentiality element, the court said that intra-firm communications regarding the malpractice must only in­volve “in-house counsel, firm management, firm attorneys, and other personnel with knowledge about the representation that is the basis for the client’s claim against the firm,” otherwise communications about the malpractice claim may not be subject to protection. • Concerning the exceptions to the attorney-client privilege, the court reasoned that the fiduciary-duty exception did not ap­ply because the client’s malpractice claim established a clear lack of mutuality be­tween the firm and its client, which resulted in adverse positions much like in Garvy. • The Georgia Supreme Court, however, did not have occasion to address how the court would rule when reviewing an issue like that offered in MDA, i.e., where there is no direct assertion of malpractice or clear adversarial position when the firm sought legal advice from its in-house counsel or outside defense counsel.

8. RFF Family Partnership, LP v. Burns & Levinson, LLP • The Supreme Judicial Court of Mas­sachusetts took a different approach to reviewing the attorney-client privilege’s application concerning in-house commu­nications regarding a client’s malpractice claims. • In RFF Family Partnership, LP v. Burns & Levinson, LLP, the court found that the attorney-client privilege applied to communications with in-house attorneys regarding malpractice claims made by current clients.

9. RFF Family Partnership, LP v. Burns & Levinson, LLP The party asserting the privilege must establish: (1) the law firm had designated an attorney or attorneys within the firm to represent the firm as in-house counsel; (2) the in-house counsel had not performed any work on the client matter at issue or any substantially related matter; (3) the time spent by the attorneys in these communications with in-house counsel was not billed to the client; and (4) the communications were made and maintained in confidence.

10. Crimson Trace Corporation v. Davis Wright Tremaine LLP • Most recently, in Crimson Trace Corporation v. Davis Wright Tremaine LLP, 355 Ore 476 (2014), the Supreme Court of Oregon reversed the holding of the trial and relying upon the language of the codified attorney-client privilege, found that the privilege applied to protect communications, between the former lawyers of the plaintiff and their in-house counsel, and that the exception did not apply. • Davis Wright Tremaine ("DWT") was engaged by Crimson Trace to prosecute certain claims related to a patent infringement dispute with LaserMax.

11. Crimson Trace Corporation v. Davis Wright Tremaine LLP • As the litigation turned poorly for Crimson Trace, based upon a counterclaim in the patent litigation brought by LaserMax that the patent, that was the basis for the patent infringement claim, was invalid, a dispute arose between DWT and Crimson Trace. • DWT had prepared the original patent application and therefore, a potential conflict of interest arose between DWT and Crimson Trace.   • A settlement was ultimately reached between Crimson Trace and LaserMax in the patent litigation. That agreement was to be confidential. However, DWT, acting as counsel for Crimson Trace, disclosed part of the settlement agreement in a way that implied that LaserMax had conceded liability. LaserMax complained and the court required that the entire agreement be disclosed. A legal malpractice lawsuit brought by Crimson Trace against DWT ensued.

12. Crimson Trace Corporation v. Davis Wright Tremaine LLP • Once the dispute between DWT and Crimson Trace arose, the lawyers representing Crimson Trace consulted with the Quality Assurance Committee ("QAC") at the firm. Id. at 479. The QAC was a small group of lawyers at DWT that had been specifically designated by the firm as in-house counsel. • During the course of the legal malpractice claim, Crimson Trace sought the communications between the lawyers who represented Crimson Trace in the underlying litigation and the QAC. • Finding that the attorney-client privilege did not apply because of the conflict of interest by the QAC in representing members of the firm in conflict with clients of the firm, and in spite of the fact the communications were kept confidential, the trial court ordered that DWT produce the communications.

13. Crimson Trace Corporation v. Davis Wright Tremaine LLP • In reversing the trial courts' opinion, the Supreme Court of Oregon first addressed whether the attorney-client privilege applied at all to this situation. • Oregon's attorney-client privilege is codified in Oregon Evidence Code Section 503. Id. The Court viewed its tasked as determining what the legislature intended in codifying the attorney-client privilege. • Similar to most states: there are three elements for the attorney-client privilege to apply in Oregon: 1) the communication is between the client and lawyer, 2) the communication was confidential, and 3) the communication was made for the purpose of obtaining advice. • The Court rejected Crimson Trace's argument that there is a fourth requirement: the reasonable expectations of the parties that an attorney-client relationship existed. Id.

14. Crimson Trace Corporation v. Davis Wright Tremaine LLP • The Court rejected this argument on two bases. First, the Court stated that there was no support in the statute for such a requirement. • Second, the Court rejected the attempt by Crimson Trace to apply lawyer discipline cases regarding disputes about whether an attorney-client relationship existed, holding that the reasonable expectation of the client as to the existence of a relationship has nothing to do with the issues in this case in which the attorney and client agree that there was an attorney-client relationship.

15. Crimson Trace Corporation v. Davis Wright Tremaine LLP • After rejecting the existence of a fourth element, the Court turned to the first element of whether there was an attorney and client at all in this case. • The Court first stated that there was no dispute that if the DWT lawyers had consulted outside counsel there would be no dispute. • The Court stated that nothing in the statute could by construed to preclude an in house lawyer from being an attorney and the lawyer in the same firm as being the client in an attorney-client relationship. • The Court rejected the argument that allowing attorneys within a firm to be counsel for other lawyers in the same firm would undermine the attorney-client relationship by holding that it does not matter.

16. Crimson Trace Corporation v. Davis Wright Tremaine LLP • Looking at the second element, whether the communications were confidential, the Court held that the communications were confidential despite having been made with lawyers in Washington, who Crimson Trace argued were subject to the more stringent restrictions of Washington law. • The Court rejected this argument and relied upon the requirement that Oregon applies its own law to determine evidentiary issues.

17. Crimson Trace Corporation v. Davis Wright Tremaine LLP • As to the third element, while acknowledging the trial court's finding that the attorney-client privilege would apply but for the fiduciary duty exception, the Court found that the communications were for the purpose of obtaining legal advice as to the fulfillment of professional responsibilities to Crimson Trace. • Having concluded that the attorney-client privilege applied, the Court then considered whether any exceptions to the privilege applied. • After looking at the exceptions to the attorney-client listed in the applicable statute, and determining that none of those applied, the Court turned to the fiduciary duty exception.

18. Crimson Trace Corporation v. Davis Wright Tremaine LLP • The Court ruled that because the fiduciary duty exception is not listed as an exception to the attorney-client privilege in the statute. • The Supreme Court of Oregon's analysis is entirely reliant on the language of the statute codifying the attorney-client privilege.

19. THE SOURCE OF THE FIDUCIARY DUTY EXCEPTION • According to the United States Supreme Court in United States v. Jicarilla Apache Nation, 131 S.Ct. 2313 (2011), English courts first developed the fiduciary exception to the attorney-client privilege based on a principle of trust law in the 19th century. • As described in Jicarilla Apache Nation, “[t]he rule was that when a trustee obtained legal advice to guide in the administration of the trust, and not for the trustee’s own defense in litigation, the beneficiaries were entitled to the production of documents related to that advice.”

20. THE SOURCE OF THE FIDUCIARY DUTY EXCEPTION • Courts applying the fiduciary duty exception reasoned “that the normal attorney-client privilege did not apply in [the situation where the beneficiary was seeking advice for the administration for the trust] because the legal advice was sought for the beneficiaries’ benefit and was obtained at the beneficiaries’ expense by using trust funds to pay the attorneys’ fees.” • Relying on Jicarilla Apache Nation, courts have imposed the fiduciary duty exception for two reasons. First, the exception applies because the trustee obtains the legal advice as a mere representative of the beneficiaries, as the trustee has a fiduciary obligation to act in the beneficiaries’ best interest when administering the trust.

21. THE SOURCE OF THE FIDUCIARY DUTY EXCEPTION • Consequently, the beneficiaries are the “real clients” of the attorney who advises the trustee on trust-related matters, and therefore, the attorney-client privilege belongs to the beneficiaries rather than the trustee. • Courts look at several factors in making this “real client” determination, including: 1. Determining when a trustee sought the legal advice to ascertain whether there was a reason for the trustees to seek advice in a personal capacity (i.e., protection from claims against the trustee) rather than in a fiduciary capacity (i.e., protection of the trust corpus); 2. Determining if the documents or advice at issue was intended for any purpose other than to benefit the trust; and 3. Determining if the trust’s funds had been used to pay for the legal advice received by the trustee or whether the advice was obtained at a trustee’s expense.

22. THE SOURCE OF THE FIDUCIARY DUTY EXCEPTION • Regarding the third factor, courts distinguish between “legal advice procured at the trustee’s own expense and for his own protection,” which would remain privileged, and “the situation where the trust itself is assessed for obtaining opinion of counsel where interest of the beneficiaries are at stake.” • In the latter case, courts would apply the fiduciary exception, and typically a trustee could not withhold those communications from the beneficiaries. Id

23. THE SOURCE OF THE FIDUCIARY DUTY EXCEPTION • According to the United States Supreme Court, the second reason courts impose the fiduciary duty exception is that the trustee’s fiduciary obligation to furnish trust-related information to the beneficiaries outweighs the trustee’s interest in the attorney-client privilege. • The policy of preserving disclosure in the trustee-beneficiary relationship is “ultimately more important than the protection of the trustees’ confidence in the attorney for the trust.” • Generally, courts applying the fiduciary duty exception find that the full disclosure of information better assists a beneficiary in policing a trustee in the trust management, and a beneficiary’s ability to police in a more informed fashion outweighs “the policy consideration of attorney-client privilege.”

24. COMPLICATIONS OF THE CONTROL GROUP TEST • Prior to looking at specific steps to be taken, the first evaluation that must be made is whether the attorney-client privilege in a given state follows Upjohn Co. v. United States, 449 U.S. 383 (1981)or the "control group" test. • The majority of jurisdictions and the federal courts follow Upjohn, but a significant minority, including Illinois South Dakota, Alaska, Hawaii, Maine, New Hampshire, and Oklahoma follow the "control group" test. Delaware, Iowa, Minnesota and Kansas are in between the two.

25. COMPLICATIONS OF THE CONTROL GROUP TEST • Under Illinois’ version of the control group test, a court’s threshold determination is whether an individual is a member of the corporation’s control group. • Under Consolidation Coal 89 Ill. 2d 103, 118-19 (1982), a person is within the control group if he is top management able to make a final decision. • Other corporate employees must satisfy these elements to be in the control group:(1) the agent served as an advisor to top management of the corporate client; (2) the agent’s advisory role was such that the corporate principal would not normally have made a decision without the agent’s advice; and (3) the agent’s opinion or advice in fact formed the basis of the final decision made by those with actual authority within the corporate principal. ArcherDaniels Midland Co. v. Koppers Co., Inc., 138 Ill. App. 3d 276, 279-280 (1st Dist. 1985).

26. MANNER TO PROCEED • Once the nature of the applicable law is considered, there is good guidance from the court in Hunter, Maclean, Exley, & Dunn v. St. Simons Waterfront, LLC, 317 Ga. App. 1 (2012). • In that case, that the Georgia Court of Appeals, sitting in a state which has not decided whether the subject matter or control group test applies, held that to determine whether an attorney-client relationship existed in this context, the court looked at several facts regarding the nature of the legal relationship.

27. MANNER TO PROCEED • Those factors included (a) whether the firm maintained a designated in-house attorney for purposes of handling the firm’s malpractice claims; (b) whether the firm maintained separate files for the client’s legal work and the firm’s malpractice defense work; (c) whether the firm billed the client for the malpractice defense work or billed the defense work to the file; and (d) whether the in-house attorney designated to handle the malpractice claim for the firm had worked for the client.

28. MANNER TO PROCEED • Regarding the maintenance of confidentiality element, the court said that intra-firm communications regarding the malpractice must only involve “in-house counsel, firm management, firm attorneys, and other personnel with knowledge about the representation that is the basis for the client’s claim against the firm,” otherwise communications about the malpractice claim may not be subject to protection.

29. MANNER TO PROCEED • To apply these principles for an Illinois practitioner, a review of the applicable Illinois Rules of Professional Conduct is important. • Both Rules 1.6(b)(4) and 5.1 permit communications by lawyers in a firm with in-house lawyers. • Specifically, Rule 1.6(b)(4) provides an exception to the general confidentiality requirements of Rule 1.6 for a circumstance in which a lawyer seeks “to secure legal advice about the lawyer’s compliance with these Rules.”

30. MANNER TO PROCEED • Comment 9 to Rule 1.6 provides color to this exception: A lawyer’s confidentiality obligations do not preclude a lawyer from securing confidential legal advice about the lawyer’s personal responsibility to comply with these Rules. In most situations, disclosing information to secure such advice will be impliedly authorized for the lawyer to carry out the representation. Even when the disclosure is not impliedly authorized, paragraph (b)(4) permits such disclosure because of the importance of a lawyer’s compliance with the Rules of Professional Conduct.

31. MANNER TO PROCEED • Rule 5.1 sheds light on the responsibilities of managing lawyers and firms of all sizes to ensure that the Rules are followed. Comment 3 to Rule 5.1 specifically contemplates the role of in-house counsel: Other measures that may be required to fulfill the responsibility prescribed in paragraph (a) can depend on the firm’s structure and the nature of its practice. In a small firm of experienced lawyers, informal supervision and periodic review of compliance with the required systems ordinarily will suffice. In a large firm, or in practice situations in which difficult ethical problems frequently arise, more elaborate measures may be necessary. Some firms, for example, have a procedure whereby junior lawyers can make confidential referral of ethical problems directly to a designated senior partner or special committee. • These Rules were specifically cited by the Illinois appellate court in Garvy and provide the framework for establishing procedures to comply with the Rules and to eliminate or at least mitigate the damage from any disputes with a client.

32. MANNER TO PROCEED • These suggestions should be coupled with additional steps to be taken. • First, while it is preferable to have outside counsel for claims against the firm that may arise, in house counsel should be identified and communicated to the lawyers in the firm. • Second, the in house lawyer and any fees paid to outside counsel must not be paid by or billed to the client with whom the firm is in conflict. As articulated by the Supreme Court that would vitiate the protection. • Finally, any communications regarding the dispute with the client must specifically identify that they are intended for that purpose and not for the purpose of the client's interests. The easiest way to do this, and to prevent billing to the client, is likely to open a separate file for the dispute with the client.

33. MANNER TO PROCEED • As it relates to cross-border communications within a firm related to a conflict with a client, a firm should prepare for a ruling similar to the holding in Crimson Trace that the rules regarding privilege in the state in which the malpractice action is brought apply, notwithstanding the rules in another state that may be more or less restrictive. • In Crimson Trace, the action was brought in Oregon and the lawyers had communication with in-house counsel from Washington. • The plaintiff argued that the more restrictive privilege in Washington should apply. The Oregon Supreme Court disagreed.

34. RESPONSIBILITY OF SENIOR ATTORNEYS - RULE 5.1 (a) A partner in a law firm, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm, shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct. (b) A lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional Conduct. (c) A lawyer shall be responsible for another lawyer’s violation of the Rules of Professional Conduct if: (1) the lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or (2) the lawyer is a partner or has comparable managerial authority in the law firm in which the other lawyer practices, or has direct supervisory authority over the other lawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.

35. RESPONSIBILITY OF SUBORDINATE ATTORNEYS - RULE 5.2 • A lawyer is bound by the Rules of Professional Conduct notwithstanding that the lawyer acted at the direction of another person. • A subordinate lawyer does not violate the Rules of Professional Conduct if that lawyer acts in accordance with a supervisory lawyer’s reasonable resolution of an arguable question of professional duty.

36. RESPONSIBILITY TO SUPERVISE NON-ATTORNEY PERSONNEL With respect to a nonlawyer employed or retained by or associated with a lawyer: (a) a partner, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person’s conduct is compatible with the professional obligations of the lawyer; (b) a lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person’s conduct is compatible with the professional obligations of the lawyer; and (c) a lawyer shall be responsible for conduct of such a person that would be a violation of the Rules of Professional Conduct if engaged in by a lawyer if: (1) the lawyer orders or, with the knowledge of the specific conduct, ratifies the conduct involved; or (2) the lawyer is a partner or has comparable managerial authority in the law firm in which the person is employed, or has direct supervisory authority over the person, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.