The Double Edged Sword: Internal Law Firm Privilege and the "Fiduciary Exception"

By Fucile, Mark J. | Defense Counsel Journal, July 2009 | Go to article overview

The Double Edged Sword: Internal Law Firm Privilege and the "Fiduciary Exception"


Fucile, Mark J., Defense Counsel Journal


I. Introduction

AS law firms have grown in both size and organization, internal ethics and claims advice has increasingly taken on institutional form. Where in years past a law firm lawyer might have informally sought out a seasoned colleague to discuss a sensitive question of professional ethics or a potential claim against the firm, today that same discussion is more likely to be had with a formally designated internal firm counsel or a member of a firm committee charged with providing ethics and claims advice. (1)

Paralleling this institutionalization of internal advice on ethics and claims has been the recognition of the attorney-client privilege for such internal law firm discussions not unlike the privilege long recognized for corporations and other entities. (2) At the same time, however, courts have also increasingly recognized a "fiduciary exception" to internal law firm privilege when a firm's otherwise privileged discussions put it in conflict with a current firm client. Under the fiduciary exception, the law firm's fiduciary duty to the client "trumps" the firm's internal privilege and has led to the discovery of otherwise privileged internal communications concerning the client--typically in subsequent malpractice or related lawyer civil liability litigation by the client against the firm.

The fiduciary exception is not without critics. But, regardless of its relative legal and policy merits, the fiduciary exception's increasing recognition by courts makes it a very real consideration both for internal counsel providing advice to firm lawyers and for defense counsel handling subsequent disputes in which a former client seeks such communications by way of document request or deposition. This article will examine three aspects of the fiduciary exception. First, it will briefly survey the development of the exception in the law firm context. Second, it will explore the boundaries of the exception. Third, it will then conclude with a discussion of the practical impacts of the exception for both law firm internal counsel and outside defense counsel.

II. The Fiduciary Exception in the Law Firm Context

The fiduciary exception did not originate with law firms. Rather, the exception traces its lineage to the English trust law concept that a fiduciary is prevented from asserting the attorney-client privilege against a beneficiary on a matter of trust administration. (3) In the law firm context, the generally acknowledged starting point is In re Sunrise Securities Litigation. (4)

As its name implies, Sunrise was a consolidated series of securities claims arising out of the failure of Sunrise Savings and Loan Association (Sunrise) in the 1980s. One of the defendants was the law firm that had served as Sunrise's outside general counsel. During discovery, the law firm withheld documents that, in part, concerned internal advice from firm attorneys regarding its representation of Sunrise. The firm argued that the documents were protected from discovery by the attorney-client privilege, analogizing them to a consultation with in-house counsel in the corporate context. The claimants moved to compel their production. The court initially rejected the concept that a law firm could claim privilege for internal discussions with lawyers functioning as the equivalent of in-house counsel, but then reversed itself on reconsideration, finding that "it is possible in some instances for a law firm, like other business or professional associations, to receive the benefit of the attorney client privilege with seeking legal advice from in house counsel." (5) The court, however, tempered its recognition of internal privilege by applying the fiduciary exception when the internal advice created a conflict between the law firm's own interests and that of a current client. (6) The court then returned the specific application of the exception to a special discovery master. (7)

After the Sunrise decision, the fiduciary exception in the law firm context was essentially dormant for over a decade. …

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The Double Edged Sword: Internal Law Firm Privilege and the "Fiduciary Exception"
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