Ethics

LEF readers may remember Andy's post with the excellent title, "Irate at Irell."  The post linked to a district court decision from the C.D. Cal. excoriating Irell & Manella for breaching its duty of loyalty to a corporate officer during an internal investigation on behalf of the corporation of alleged stock-option backdating.  The case was recently argued in the 9th Circuit and the court of appeals has invited outside parties to submit amicus briefs.  While I'm not volunteering to draft a brief, I would join a brief arguing that the district court got the attorney-client privilege issue badly wrong

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There's no doubt the law firm bungled the conflict of interest presented by representing the officer, Ruehle, in his individual capacity in two related actions (known as the Derivative Action and the Jin Action) while simultaneously representing the corporation, Broadcomm, in the internal investigation.  The firm needed to obtain Ruehle's informed consent to that representation and failed to do so.  I have no problem with the court's conclusion that this was a breach of the duty of loyalty to Ruehle.  But the court wrongly excluded from the criminal trial of Ruehle statements that he made to Broadcomm's lawyers concerning the stock-options backdating, concluding that those statements were covered by an attorney-client privilege that Ruehle could assert personally (as opposed to being within Broadcomm's privilege, which it could and did waive).

It doesn't follow from the simultaneous representation that the statements made by Ruehle to Irell lawyers was covered by an individual attorney-client privilege.  Even if Ruehle believed that the firm was representing him individually in the internal investigation, the information he communicated with respect to the stock options backdating was within the scope of his duties as an officer of Broadcomm.  Thus, there is no expectation of confidentiality in the communication with Broadcomm's counsel. 

The Restatement (Third) of Agency § 8.11(1) provides as follows:

An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know when . . . subject to any manifestation by the principal, the agent knows or has reason to know that the principal would wish to have the facts or the facts are material to the agent's duties to the principal;

Information about Broadcomm?s stock option granting practices would certainly be material to Ruehle?s duties owed to Broadcomm as the corporation?s chief financial officer.  Ruehle is duty-bound to communicate all of this information to Broadcomm and therefore has no expectation of confidentiality when he communicates on the same subject matter with counsel for the corporation.  As a result, any privilege arising from communication between a corporate officer and the corporation?s lawyers, on matters withinthe scope of the officer?s duties to the corporation, belongs to the corporation itself and not to the officer.

This conclusion is in line with decisions in the 2d, 3d, and 10th Circuits, which hold that a corporate officer may be able to assert a personal attorney-client privilege, but only to the extent that the officer ?discusses his or her personal liability, legal rights, or actions, as distinguished from the corporation?s rights and responsibilities.?  Grand Jury Proceedings v. United States, 156 F.3d 1038, 1041-42 (10th Cir. 1998).  These courts use a five-factor test to determine when officers can claim a personal privilege with respect to communications with corporate counsel:

First, they must show that they approached [the corporation?s lawyer] for the purpose of seeking legal advice.  Second, they must demonstrate that when they approached [the corporation?s lawyer] they made it clear that they were seeking legal advice in their individual rather than in their representative capacities.  Third, they must demonstrate that the [corporation?s lawyer] saw fit to communicate with them in their individual capacities, knowing that a possible conflict might arise.  Fourth, they must prove that their conversations with [corporate counsel] were confidential.  And, fifth, they must show that the substance of their conversations with [corporate counsel] did not concern matters within the company or the general affairs of the company.

In re Bevill, Bresler & Schulman Asset Mgmt. Corp., 805 F.2d 120, 123 (3d Cir. 1986; See also United States v. International Bhd. of Teamsters, 119 F.3d 210 (2d Cir. 1997); Grand Jury Proceedings v. U.S., 156 F.3d 1038, 1041 (10th Cir. 1998); In re Grand Jury Subpoena, 274 F.3d 563 (1st Cir. 2001). The first and fourth elements of this test simply restate requirements for any attorney-client privilege to exist, namely a communication in confidence for the purpose of seeking legal advice.  The second, third, and fifth elements are therefore the key to the Bevill test, and in essence they simply reiterate the principle from the Restatement of Agency quoted above:  if an agent communicates with the lawyer for the principal, on a matter concerning the legal rights and duties of the principal, the information ?belongs? to the principal, not the agent. 

That's what the court missed in the Irell & Manella case -- although the firm may have violated its duty of loyalty to Ruehle, it does not follow that the communication was covered by an individual attorney-client privilege and therefore should be excluded from Ruehle's criminal trial.