The Dual Roles of In-House Corporate Counsel: The Impact on the Attorney-Client Privilege

In-house attorneys are wielding increasing and enormous power in the running of corporate America. Attorneys these days play leading, not just supporting, roles, getting involved in virtually every kind of business decision. Theirs are the minds that chief executives increasingly turn to for advice. - Forbes, November 6, 1995

This observation from the cover story of Forbes magazine several years ago is followed by an impressive list of in-house corporate attorneys whose annual salaries exceed $2 million. In short, as the magazine's cover puts it, "Once underlings, in-house lawyers are rising in power and pay."1

This is sure to be good news for in-house counsel, but what effect does this have on the attorney-client privilege? When an attorney changes "hats" from lawyer to business adviser, for example, does the privilege cease to attach? What about protection for communications that provide a combination of legal and business advice? And even when the lawyer is wearing the lawyer's hat, to whom within the corporation does the privilege attach? Does this apply only to top management, or to rank-and-file employees as well? This article will seek answers to these questions in an effort to provide in-house corporate counsel with some guidance for protecting their corporate clients' interests while effectively fulfilling their dual roles.

IN-HOUSE COUNSEL RANKS ARE GROWING

Based on their particular blend of skills and experience, attorneys employed in-house by corporations - both for-profit entities as well as trade and professional associations - are often asked by their employers to perform business functions in addition to their corporate legal duties. This is not an isolated phenomenon, but rather the mainstream for today's in-house practitioner. According to a 1992 survey, 52 percent of in-house general counsel have non-legal executive duties (up from 47 percent in 1982)2. This percentage is independent of the 53 percent of respondents who hold the well-accepted, dual general counsel/corporate secretary position (up from 47 percent in 1982)3. These figures continue to grow at a rapid pace.

Corporate counsel serving in dual legal and business roles bring enhanced value to their clients. The major advantage to corporations of employed (rather than retained) counsel is the regular benefit of legal counsel and representation by lawyers who are extremely knowledgeable about the client and its business operations, its history and goals.

Corporate counsel who perform dual roles represent a natural and valuable extension of the essential nature of in-house practice, and provide what no single-role attorney can virtually ever provide - bring legal judgment to bear on the myriad daily decisions and actions being taken by corporate managers.

Also, many in-house attorneys find their jobs rewarding because of the legal and business roles they serve. In fact, this unique blend of business and legal functions attracts corporate counsel to join the ranks of those "inside." As Viacom Inc.'s in-house counsel Philippe Dauman said recently, "I cannot think of a better job in the world than the one I have now."4 According to Viacom Chairman Sumner Redstone, "Dauman is not just the general counsel; he is key in determining the vision, strategy and operation of Viacom."5

However, it is a mistake for attorneys to undertake business functions on behalf of a client without a sufficient understanding of the legal effect such actions may have. Having multipurpose responsibilities often cause the already fine line between "legal" and "business" communications to become even more blurred - a line that is crucial to the application of the attorney-client privilege.

THE ATTORNEY-CLIENT PRIVILEGE: BACKGROUND

Generally, communications between attorneys and their clients are privileged. There are, however, many universally recognized exceptions to this rule. The issues surrounding communications between corporate counsel and their clients are especially complex. Corporate counsel, in-house and outside alike, provide clients with more than just legal advice. In today's legal environment, corporate counsel serve as business advisors and strategists as well as legal counselors. Therein lies the major stumbling block to asserting the attorney-client privilege in this context, because one of the requirements for the privilege to apply is that the client or would-be client must have sought legal advice, opinion, service, or assistance, as opposed to merely business advice.6

It is now well-established that a corporation may assert the attorney-client privilege to protect its communications with counsel.7 However, if a communication sought to be protected by the privilege contains both legal and business advice, the privilege only applies to the legal opinions or advice. 8

For both corporations and individuals, the attorney-client privilege serves to promote full, frank communication between attorneys and their clients. This encourages observance of the law and aids in the administration of justice. Moreover, the privilege "rests on the need for advocate and counselor to know all that relates to the client's reasons for seeking representation if the professional mission is to be carried out."9

However, a corporation may not merely pass materials through corporate counsel's hands in order to invoke the privilege and thereby insulate itself from disclosure of facts or documents. As one court noted, the "in-house counsel's law degree and office are not to be used to create a 'privileged sanctuary for corporate records.'"10

The requirements necessary to assert the attorney-client privilege were enunciated in United States v. United Shoe Machinery Corp.,11 an oft-cited 1950 case in which the court stated:

The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate, and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client, (b) without the presence of strangers, (c) for the purpose of securing primarily either (i) an opinion of law, (ii) legal services, or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed, and (b) not waived by the client.

The party that asserts the privilege will bear the burden of proving each element necessary to invoke it.12 Furthermore, that party must take appropriate steps to preserve the confidential nature of the materials sought to be protected, because "[subsequent] disclosure [to a third party] is viewed [either] as an indication that confidentiality is no longer intended or as a waiver of the privilege."13

Generally, any disclosure waives the attorney-client privilege, although there is some disagreement about whether involuntary disclosure of information waives the privilege. 14 It has also been held that the attorney-client privilege "only protects disclosures of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorneys."15

APPLYING THE PRIVILEGE TO CORPORATIONS

To date, courts have grappled with the extension of the privilege to corporate entities. A corporation is an inanimate and artificial entity created and governed by state law. A corporation requests legal advice and makes decisions based on such advice only through its employees and agents. Since a corporation is purely a legal entity and has no true operational existence, courts have found it difficult to ascertain who exactly is protected by the privilege.16

Although corporate counsel represents the corporation and not the directors, management or individual shareholders, an attorney must converse with all of these people in order to fulfill his or her duties to the corporation. 17 Further, large corporations consult attorneys on a continuous basis and make decisions that seemingly create a complete insulation of all discovery, or a "zone of silence." 18 Lastly, whenever corporations are involved, there are numerous agents, masses of documents, and frequent discussions with attorneys in order to understand the complex laws and regulations with which these legal entities are expected to comply. Courts have a difficult time defining the privilege in these communications.

Consistently applying the privilege to corporate clients is a fairly recent development in the law. The United States Supreme Court did not explicitly recognize the applicability of the attorney-client privilege in the corporate context until 1981 in Upjohn Co. v. United States.19 Since Upjohn, the courts have failed to enunciate a "bright line" standard for practitioners who serve dual business and legal roles when attempting to invoke the attorney-client privilege. Nonetheless, some jurisdictions confronted with this common situation have offered some helpful, though inconclusive, guidance.

UPJOHN CO. V. UNITED STATES

In an attempt to clear the confusion that had evolved in the federal courts with regard to the scope and applicability of the attorney-client privilege, the Supreme Court granted certiorari to Upjohn in 1981.20 In this case, the Supreme Court for the first time endorsed the application of the attorney-client privilege to corporations. Specifically, the Court overruled the previous and narrow "control group" test, thereby broadening the scope of the privilege. The Court also stated that an attorney needs to gather all available information in order to render sound legal advice. The limited control group test would protect only those communications to and from senior corporate executives. This in turn would frustrate counsel's effort to acquire the requisite information and would limit counsel's ability to ensure the client's compliance with the law.

Despite the Court's concern with the past uncertainty in this area of the law, it declined to adopt a "bright line" standard to determine when the privilege will be applicable to attorney-corporate client communication. 21 Rather, the Court stated that the law of privilege should evolve on a case-by-case basis. (It should be noted that because Upjohn concerned only an interpretation of the Federal Rules of Evidence, it is not binding on state rules.) 22 While refusing to adopt a set standard, the Court attempted to avoid the ad hoc decisions of past by specifying several relevant factors.23

After Upjohn, it is now clear - at least in the federal courts - that the privilege extends to all communications with counsel by corporate employees made under a superior's orders and for known corporate purpose of obtaining legal advice. To be protected, however, information must be related to matters within the scope of the employee's corporate duties.

In contrast, communications that pertain to business matters generally do not enjoy protection from the attorney-client privilege.24 A fundamental element of the privilege is that the attorney be in the appropriate role as an attorney during the communication with the client. Specifically, an attorney must be privy to confidential communications made for the purpose of securing legal advice from counsel.25 More specifically, the attorney-client privilege only protects confidential communications made to an attorney for the purpose of securing legal advice or assistance. It does not protect business advice.26

To assert the privilege, corporations must clearly demonstrate the communications to be protected were given in a professional legal capacity and that they concern legal rather than business matters.27 However, corporate dealings are not made confidential merely by funneling them routinely through an attorney.

THE DUAL ROLES OF CORPORATE COUNSEL

Determining whether communications are protected by the attorney-client privilege can be extremely difficult for both corporations and their attorneys. As noted above, the privilege only protects "confidential" communications for the purpose of obtaining legal advice. This critical distinction creates special concerns for corporate attorneys who perform business functions for their employers.

Frequently, a corporate attorney's communications to his or her client are inextricably intertwined with facts, legal issues and other business matters.28 Consequently, such advice and communications are generally contained in documents, letters and memoranda that contain business as well as legal considerations.29

Courts have strived to formulate workable standards for determining when an attorney-business person renders advice as an attorney or as a business person. While, in the past, numerous courts have applied an "all or nothing approach," based on the relative time devoted to legal and nonlegal activities, 30 the preferred rule today is a case-by-case analysis, where courts evaluate the protection of each communication according to the nature of the advice sought by the client.31

Specifically, only legal advice is protected, while business or technical advice is not. A request for legal advice that is merely incidental to a request for business advice is not protected. 32 If, however, on balance, the legal advice was somewhat greater than the nonlegal advice, even if the nonlegal aspects were substantial, the standard would be met. In other words, for the privilege to apply, the legal aspects of the individual communication must be dominant over nonlegal purposes.

Notwithstanding this view, courts and legal scholars have differed greatly in their focus and analysis when determining the applicability of the privilege.33 Some courts focus on the behavior of the attorney irrespective of the actual advice or communication provided to the corporate client. Other jurisdictions examine the attorney's advice and its content to determine the applicability of the privilege. A substantial body of case law exists to guide (albeit not clearly) the dual-role in-house counsel in protecting the attorney-client privilege.

MINIMIZING RISK OR FORFEITING THE PRIVILEGE

• The following practical suggestions for in-house corporate counsel come from existing case law in this area
• Bifurcate legal advice and business advice wherever possible, preferably through separate communications. Where legal and business communications are intermixed, counsel should clearly identify legal theories and conclusions and distinguish them from general business advice;
• Make clear (and document, if possible) demarcations whenever the "business hat" comes off and the "legal hat" goes on;
• Top management should request in writing that counsel provide legal advice regarding particular matters, the purpose and nature of counsel's assignments should be documented, and all corporate legal responsibilities should be channeled through one person, namely the corporation's top in-house or outside counsel;
• All documents should be labeled appropriately to reflect their confidentiality, their privileged status, and the fact that their author is acting in his or her position as counsel for the client. In addition, the corporation should use legal titles (in addition to any other titles) for all legal personnel, and legal personnel should use letterhead that demonstrates their legal capacity;
• Counsel should take necessary steps to ensure the proper documentation and "logging" of legal communications;
• Procedures should be enacted for retaining the confidentiality of legal communications (including segregation, cabinet locks, computer passwords, access minimization, "no loose paper" policy, etc.);
• Procedures should be established for shredding early drafts and duplicates, and a retention schedule should be adopted and enforced after which ancient or outdated documents will be shredded or destroyed;
• Obtain information from the person with highest rank within management (under the Upjohn test applied by federal courts and the narrower control group test applied by many state courts, it is often not clear whether communications between counsel and middle- or lower-level employees are protected by the privilege); and
• All information collected by third parties should be done at the request of counsel or, at the very least, counsel should acknowledge (in writing) receipt of such information.

CONCLUSION

The controlling feature for the attorney-client privilege is the capacity in which the lawyer is asked to give advice. All confidential communications made to a client by a lawyer are protected if that lawyer has acted in a legal rather than a business capacity.

Ideally, if the lawyer was consulted strictly to obtain legal advice and that is all that was rendered, it should not matter whether the counsel employed was in-house or outside. The court in United Shoe found no reason to distinguish between the two types of counsel to determine whether the privilege applied. Similarly, the Supreme Court in Upjohn sustained the privilege not only for outside counsel but also for documents that concerned a factual investigation conducted by in-house counsel. The courts in these (and other) cases were restrictive only when counsel's advice was given for business instead of (or in addition to) legal purposes.

It is possible for counsel to utilize the privilege to maximize the amount of sensitive information to be protected, with careful planning and documentation. Moreover, attorneys can avoid compelled disclosure of documents and information that were once erroneously believed to be privileged. Hence, counsel can avoid embarrassing or even incriminating communications from being disclosed to the court, opposing counsel, or even a jury.

Serving in the dual capacity of corporate attorney and business person requires in-house counsel to be cognizant and mature enough to identify potential problems, and to carefully separate business and legal activities, responsibilities and communications - a task easier said than done, but essential nonetheless.

ENDNOTES

• In-House Lawyers Are Rising in Power and Pay," Forbes, Survey by Altman Weil Pensa. Law Department Functions and Expenditures Report, 1992.
• Id.
• "The Trophy Lawyers," Forbes, November 6, 1995, page 135.
• Id.
• United States v. Rockwell International, 897 F.2d 1255 (3rd Cir. 1990); McCaugherty v. Sifferman, 132 F.2d 234 (N.D. Cal. 1990); Teltron, Inc. v. Alexander, 132 F.R.D. 394 (E.D. Pa. 1990).
• Upjohn Co. v. United States, 449 U.S. 383 (1981); Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343 at 389, quoting Trammel v. United State, 445 U.S. 40, 51 (1980).
• Burroughs Wellcome Co. v. Barr Laboratories, Inc., 143 F.R.D. 611 (E.D. N.C. 1992); Teltro, cited in note 6.
• Upjohn, 449 U.S. at 389, quoting Trammel v. United States, 445 U.S. 40, 51 (1980).
• United States v. Davis, 131 F.R.D. 391, 401 (S.D. N.Y. 1990); Research Institute for Medicine and Chemistry, Inc. v. Wisconsin Alumni Research Foundation, 114 F.R.D. 672, 676 (W.D. Wis. 1987); SCM Corp. v. Xerox Corp, 70 F.R.D. 508 (D. Conn. 1976).
• United States v. United Shoe Machinery Corp., 89 F. Supp. 357 (D. Mass. 1950).
• Western Trails, Inc. v. Camp Coast to Coast, Inc., 139 F.R.D. 4, 8 (D. D.C. 1991); Weil v. Investment/Indicators, Research and Management, 647 F.2d 18, 25 (9th Cir. 1981); Fox v. California Sierra Financial Services, 120 F.R.D. 520, 525 (N.D. Cal. 1988).
• In re Horowitz, 482 F.2d 72, 81 (2nd Cir. 1973).
• Westinghouse Electric Corp. v. Republic of the Phillipines, 951 F.2d. 1414, 1424 (3rd Cir. 1991); Edens v. Goodyear Tire & Rubber Co., 858 F.2d 198 (4th Cir. 1988).
• Upjohn, 449 U.S. at 395.
• Diversified Industries, Inc. v. Meredith, 572 F.2d 596, 608 (8th Cir. 1978).
• Model Rules of Professional Conduct, Rule 1.13(a) (1994).
• Upjohn, 449 U.S. at 388. See generally Note, "The Attorney-Client Privilege and Corporate Client: Where Do We Go After Upjohn?," 81 Mich. L. Rev. 655 (1983).
• 449 U.S. at 383 (1981).
• Id.
• Id. at 396. Upjohn is predicated on Federal Rule of Evidence 501 and binds only federal courts deciding cases on federal law. Under Rule 501, a federal court looks to state law in deciding privilege issues that arise in actions grounded in state law.
• Id. at 396-97. Nevertheless, some state courts still utilize Upjohn as a guide when deciding attorney-client privilege issues under state law. See National Farmers Union Property & Casualty Co. v. District Court, 718 P.2d 1044 (Colo. 1986).
• Id. at 394-96. The Court noted: 1) Upjohn employees made the communications at the direction of corporate superiors, 2) the employees made the communications so that Upjohn could receive legal advice from counsel, 3) the communications concerned matters within the scope of the employees' duties, 4) the information about the employees' duties was not available from upper level directors, 5) the employees knew the purpose of the communication was to secure legal advice for the corporation, and 6) the communications were considered confidential when made.
• Id. at 394-96.
• Id. at 394.
• Fisher v. United States, 425 U.S. 391, 504-04 (1976). See also John H. Wigmore, Evidence in Trials at Common Law 2290, at 542-43 (McNaughton rev. 1961).
• In re Sealed Case, 737 F.2d 94 (D.C. Cir. 1984); Coleman v. American Broadcasting Cos., 106 F.R.D. 201, 205 (D. D.C. 1985).
• Shira A. Sheindlin, Legal/Business Dichotomy, N.Y. L.J., Aug. 5, 1993 at 7.
• Id. at 7.
• In re Fisher, 51 F.2d 424 (D.C. N.Y. 1931); United Shoe Machinery Corp., 89 F. Supp. At 360-61; In re Robinson, 125 N.Y.S. 193 (N.Y. App. Div. 1910).
• Hercules, Inc. v. Exxon Corp., 434 F. Supp. 136, 144 (D. Del. 1977); Zenith Radio Corp; v. Radio Corp. of America, 121 F. Supp. 792 (D. Del. 1954).
• United States v. International Business Machines Corp., 66 F.R.D. 206, 212 (S.D. N.Y. 1974).
• John W. Gergacz, Attorney-Corporate Client Privilege, pp. 3.02[a]-[b] (1987).
• November 6, 1995, cover.