Internal Law Firm Discussions About Potential Malpractice May Be Shielded From Client

One of my partners Roy Pulvers, from the Hinshaw Portland office, has prepared a brief summary on a significant recent case where a law firm’s internal loss prevention communications were ruled privileged from discovery by the firm’s client.

Another in Our Series of Hinshaw Lawyers for the Profession® Alerts

Tattletale Alarm Systems, Inc. v. Calfee, Halter & Griswold, LLP, et al., 2011 WL 382627 (S.D. Ohio 2011)

Brief Summary

The U.S. District Court for the Southern District of Ohio rendered an important decision in the area of law firm risk management and attorney-client privilege. The court held that when lawyers within a firm communicate internally regarding the firm’s potential malpractice in an existing client’s matter, those communications are protected from later discovery by the client under the attorney-client privilege unless the client can establish good cause for discovery.

Complete Summary

A law firm, upon failing to file a patent maintenance fee for an existing client, engaged in internal communications regarding whether the client might assert a malpractice claim and, if so, what loss prevention efforts could be made. The client eventually did bring a malpractice claim and sought to compel discovery of documents containing the firm’s loss prevention communications. The firm claimed that those documents were privileged. The client, however, argued that because the communications took place while the attorney-client relationship was still intact, privilege did not attach.

The U.S. District Court for the Southern District of Ohio, in an attempt to infer how the Ohio Supreme Court would address the issue, held that the loss prevention communications were privileged. The court first noted, contrary to the client’s position, that the attorney-client privilege attaches when one attorney seeks legal advice from another lawyer in the same firm. Therefore, in order for the client to prevail, the court would need to fashion an exception to the attorney-client privilege.

The court held that the loss prevention communications did not appear to fall into any existing category of exceptions to the attorney-client privilege. Under Ohio law, according to the court, exceptions to the attorney-client privilege generally exist in three situations: (1) when the underlying communications serve no societal value; (2) when application of the privilege would not further the policy goal of encouraging open communication between attorney and client; or (3) when application of the privilege would prevent a party from proving its case.

Addressing the first two types of exceptions, the court held that it is important for lawyers who may have erred in representing a client to be able to openly discuss loss prevention issues in order to obtain prompt advice regarding how to correct the error and to mitigate any harm to the client. Regarding the third, the court noted that it would be hard to conceive a case in which the client’s ability to prove legal malpractice turned on loss prevention communications.

Finally, the court addressed the client’s argument that an exception to the attorney-client privilege should be created because the firm had a conflict of interest when the loss prevention communications took place. Such reasoning, the court noted, had formed the bases for opinions from other jurisdictions holding that loss prevention communications are not privileged. Despite the prevalence of such opinions, the court indicated that their foundation was questionable.

The key decision in that line of cases involved a conflict, not between lawyer and client, but rather between two clients. And while that decision held that the clients could not assert privilege against one another, more recent ones have indicated that, even if two clients have a common interest, once that interest dissipates or becomes adverse, attorney-client communications arising thereafter may be privileged as between the clients.

Drawing from a balancing test articulated in one of those more recent decisions, the court held that the client could overcome the privilege here based on a showing of good cause. In determining whether the client had established good cause, the court analyzed factors such as: the extent to which a law firm’s conduct may have been either criminal or fraudulent, whether the privileged communications related to past or future conduct, and whether the client had other readily available sources of proof. Those factors, the court held, weighed in favor of the firm in this case.

Significance of Opinion

This opinion potentially marks a major shift in the application of the attorney-client privilege to internal law firm risk management communications that take place while the firm effectively has a personal interest conflict with the client. In addition to holding that such communications are privileged, the court’s reasoning largely undermines prior court decisions reaching the opposite conclusion. If the ultimate mark of acceptance is the quality of legal reasoning and the good policy sense inherent in the result, this decision clearly has the potential to provide the foundation for a continuing trend toward its conclusions.

Are You Hiring in Texas? New Screening Rules for Nonlawyer Employees or You May Be DQ’d

Screening of Nonlawyer Employees Requires Formal Institutionalized Measures in Texas

Another in Our Series of Hinshaw Lawyers for the Profession® Alerts

In re Columbia Valley Healthcare, 2010 WL 3366007, 53 Tex. Sup. Ct. J. 1106 (Tex. 2010)

Brief Summary
The Texas Supreme Court disqualified a law firm based on a conflict imputed from a nonlawyer employee. The firm’s screening procedure was inadequate, the Court held, because it was not formal and institutionalized.

Complete Summary
During this medical malpractice action, a nonlawyer employee who initially worked for defense counsel changed employers and began to work for plaintiffs’ counsel. Defendants moved to disqualify plaintiffs’ counsel, but the trial court denied this motion. Defendants ultimately petitioned the Texas Supreme Court for mandamus relief.

The Supreme Court held that the trial court abused its discretion in refusing to disqualify plaintiffs’ firm. In Texas there is a nonrebuttable presumption that both lawyers and nonlawyer employees who worked on a matter at a prior firm received confidential information. But nonlawyer employees, unlike lawyers, can rebut the presumption that such confidences have been shared with the new firm. This presumption can be rebutted by establishing that (1) the nonlawyer was instructed not to work on the matter at the new firm, and (2) the new firm took other reasonable steps to prevent the assistant from working on the matter.

There was no dispute that the nonlawyer had been instructed to avoid working on the underlying matter; the firm had even threatened her with termination for working on the matter. But the Court held that the firm failed to take “other reasonable steps” to screen the employee. The Court indicated that such steps include formal institutionalized screening measures such as removing the file from the employee’s access and distributing a written policy about conflicts of interest. The Court further held that even if such measures are implemented, the presumption that the employee has shared confidences becomes conclusive if, as in this case, the employee actually works on the matter at the direction of a lawyer who should have known about the conflict of interest.

Significance of Opinion
This opinion marks the Texas Supreme Court’s first discussion of which “other reasonable steps” are necessary for screening nonlawyer employees. Notably, screening and imputation rules pertaining to nonlawyers (and lawyers) vary widely from state to state.

Common EQs #1: Using Security Interests to Avoid Involuntary Pro Bono Work

I definitely believe it is a good idea for lawyers to do pro bono work — but, as is often said around here, it is better to do voluntary pro bono work (for clients for whom you never intend to be paid) rather than involuntary pro bono work (because you have to write off fees for existing or past clients).

But unfortunately, most lawyers will at one time or another have to face a client who claims to be unable to pay his or her bill. There are alternatives to just writing off the fees; and many lawyers consider securing fees earned (or to be earned) by taking a security interest in client property.

Subject to a couple exceptions, ABA Model Rule 1.8(i) states the general rule that a lawyer should not take an interest in property which is the subject of the litigation. (According to the comments, the rule has its roots in common law champerty and maintenance — I bet many of you haven’t heard those terms since you studied for the bar!)  Washington Informal Opinion 2042 (2003) provides a useful (if minor) discussion in the context of a divorce proceeding.

For property that is not the subject of the representation, see the following for guidance:

1. Washington Informal Opinion 1044 (1986): Law firm received a deed of trust and promissory note to secure legal fees for future representation. The opinion states: “if it were a security interest, you must then comply with the requirements of RPC 1.8(a).”
2. Colorado Ethics Opinion 110 (2002): Stating that a lawyer may take a security interest in client property for the payment of fees so long as the lawyer complies with Colorado RPC 1.8(a).
3. An article from the Minnesota Lawyer discussing the use of mortgages to secure fees.
4. ABA Formal Ethics Opinion  02-427: stating that a lawyer “who acquires a contractual security interest in a client’s property to secure payment of fees earned or to be earned must comply with Model Rule 1.8(a).”

Politics and Positional Conflicts

I always get a little giddy when a new Supreme Court nominee is being chosen. I know. I said it. Giddy. I’m curious who is going to get picked, where he or she is from and why that person — above all the other immensely qualified candidates — is receiving the nod.

The nomination of Sonia Sotomayor is no exception. The national discussion is not as loud as it could be considering that Congress and the President share the same party, but there is still some interesting fodder out there.

As an example, I read a piece today on Salon that discussed Manuel Miranda, the former aide to Bill Frist, who is organizing some conservative opposition to the nomination. In fact, the New York Times reports that the conservative group has even signed a letter calling on Senate Republicans to filibuster the nomination. A copy of the letter was obtained by The New York Times.

But what caught my eye is that Miranda is the same person who, according to Salon, spent most of 2005 “insisting that Senate Republicans had to force through rule changes that would make it impossible to filibuster judicial nominees.” Looking at his website, he acknowledges that in 2005, he formed the National Coalition to End Judicial Filibusters.

And — Miranda is a lawyer. Which got me thinking about positional or issue conflicts, which arise when a lawyer’s position in one case could be detrimental to the position taken in another case. The potential harm to clients is real — but what I find interesting, in both Miranda’s situation and positional conflicts in general, is the effect that this has on lawyer credibility.

Seems to me the quesiton that arises is: how much stock can be put in a lawyer who changes his position on substantive issues with the flip of a coin — or more appropriately, with the change in political winds?

Conflicts: New York Judge Prohibits Defense Firm’s Representation of All of Defendant’s Former Employees

Rivera v. Lutheran Medical Center, __N.Y.S. 2d __, 2008 WL 4635476 (2008)

This summary is a reprint from Hinshaw’s “Lawyers’ Professional Liability Update”. Let us know if you would like to be placed on the mailing list to receive future LPL updates.

In summary, the court held that counsel for the corporate defendant would not be permitted to represent four current or former employees of the corporate defendant who were merely fact witnesses because doing so would prevent plaintiff from obtaining informal discovery.

Rivera sued defendants Lutheran Medical Center and one of its vice presidents(collectively “Lutheran Medical”) for retaliatory and discriminatory discharge. The law firm of Morgan Lewis & Bockius, LLP (Morgan Lewis) represented Lutheran Medical. Thereafter, Morgan Lewis contacted four current or former employees, who were merely fact witnesses and who had no personal risk or exposure in the case, and offered free representation to them. All four accepted the offer.

Rivera then sought to disqualify Morgan Lewis from representing those four individuals on the ground that the actions of Lutheran Medical and Morgan Lewis denied Rivera the potential benefits of informal discovery. Rivera asserted in part that there was a conflict of interest between Morgan Lewis’ various clients under New York DR 5-105.The court rejected this argument on the ground that no conflict had been shown.

Rivera also sought disqualification under New York DR 2-103(A)(1), a part of New York’s advertising and solicitation rules. The court cited to and quoted this rule but plainly believed that the vice here was not in the law firm’s procurement of additional clients for monetary gain but rather in the potential for tactical advantage that Lutheran Medical would gain by foreclosing Rivera’s informal access to these witnesses. In so holding, the court relied substantially upon U.S. v. Occidental Chemical Corp.,606 F. Supp. 1470, 1478 (W.D.N.Y. 1985), in which the court stated that it was “unwilling to provide unnecessary encouragement for a method of obtaining legal work which results in one side gaining even a minor tactical advantage.”

The court ordered Morgan Lewis to cease its representation of the fact witness employees. Because defense counsel often represent a defendant’s current or former employees at deposition, this decision will come as a surprise to many lawyers. It also remains to be seen whether this holding will be reversed on appeal and/or followed in other jurisdictions. Nonetheless, the court has raised an interesting question about the extent to which the prohibition in New York DR 7-104 against communications with represented parties (the equivalent to ABA Model Rule 4.2) can be used to prevent informal discovery through the expedient of an express undertaking to represent “mere” fact witnesses given that the “mere” representation of the entity itself does not place those fact witnesses off limits.This new payment protocol may encourage doctors to avoid accepting some of the sickest or highest risk patients. Additionally, professional liability carriers may change their contracts to exclude coverage for never events.