Two cases decided within weeks of each other demonstrate New York and New Jersey’s different postures with regard to the attorney-client privilege as applied to the in-house general counsel of a law firm. A clear understanding of these privilege principles is equally important to the corporate counsel of companies seeking to invoke privilege while wearing two hats: i.e., business advice vs. legal advice.
First, in Stock v. Schnader Harrison Segal & Lewis LLP, __ N.Y.S.3d __, 2016 WL 3556655 (2016), the New York Appellate Division, First Department, reversed a trial court’s decision to compel disclosure of certain communications between attorneys and their own law firm’s general counsel. In Stock, the defendant law firm was sued by its former client arising out of the law firm’s representation of plaintiff in negotiating a separation from his former employer. As part of the representation, the law firm negotiated a delay of an excise period for certain unvested stock options to allow the plaintiff's interest in those options to vest, but allegedly failed to inform the plaintiff that his termination would accelerate the expiration of his vested stock options. After the plaintiff learned that he allowed his already vested stock options, which were valued in excess of $5 million, to expire as a result, the law firm commenced arbitration and brought suit in federal court against the former employer on behalf of the plaintiff. After the law firm was generally unsuccessful in both the arbitration and federal court action, the plaintiff brought suit against the law firm for legal malpractice. In the legal malpractice action, the plaintiff sought production of certain emails identified in the law firm’s privilege log as being between attorneys at the law firm and the firm’s general counsel during the course of the unsuccessful arbitration.
The primary issue was whether attorneys who sought the advice of their firm’s general counsel on their ethical obligations in representing a firm client may successfully invoke attorney-client privilege to withstand the client’s demand for disclosure of same. While the trial court ordered production, the appellate division reversed, holding that such communications were not subject to disclosure pursuant to the fiduciary exception to the attorney-client privilege. Rather, the court held that “because, for purposes of the in-firm consultation on the ethical issue, the attorneys seeking the general counsel’s advice, as well as the firm itself, were the general counsel’s ‘real clients’,” the communications were not subject to disclosure. The court further declined to adopted the “current client exception” by which other jurisdictions have held a former client entitled to disclosure of any in-firm communications relating to the client that took place during the firm’s representation of that client.
By way of contrast, in a recent unpublished New Jersey trial court ruling, the court ordered disclosure of a file of documents retained by a firm’s general counsel, finding that the documents were not subject to attorney-client privilege. The plaintiff, Woodhaven Lumber & Millwork Inc. of Lakewood, filed suit against its former law firm for legal practice based on certain advice the law firm allegedly provided with regard to the legality of the institution of a "rolling furlough" as an alternative to layoffs. The plaintiff alleged that the law firm and one of its individual attorneys had advised the plaintiff that it was legal for employees to collect unemployment on their furlough week, and that such employees could "volunteer" and come to the jobsite to work without pay. After one of the employees filed suit against the plaintiff, the defendant law firm and individual attorney allegedly advised the plaintiff that recent guidance from the state Department of Labor changed their view on the legality of the previous advice. The retroactive payments to the employees cost the plaintiff $300,000. The subject file contained fifty (50) pages of documents assembled by the law firm’s general counsel after the plaintiff was investigated by the state and federal authorities for the legality of the furlough program.
The trial court expressly rejected the law firm’s attempts to invoke attorney-client privilege and took special note of the fact that the first item on the privilege log was a communication between the law firm and insurance company regarding the availability of coverage for the case. In holding, the trial court stated that the attorney-client privilege clearly belonged to the client and not the lawyer and that “[a] lawyer cannot claim privilege against the client they represent.” The trial court thereafter denied the law firm’s request for a stay of the ruling, finding that the law firm had no likelihood of success on the merits of its arguments. The law firm thereafter turned over the documents to the plaintiff. Approximately three hours later, the Appellate Division issued an emergent stay of the ruling. Thereafter, the law firm settled the case.
While it is unclear how the Appellate Division in New Jersey would have ruled had the parties not settled the case, these two cases demonstrate the complexity of fleshing out the attorney-client privilege, especially when concerning conversations with a law firm’s general counsel who can wear multiple hats in the organization. While New York courts seem to recognize that a law firm’s attorney can consult their firm’s general counsel in the role of “client,” the recent New Jersey case seems to suggest otherwise.