Sharing Confidential Information with a new Firm Can Create Risks
An increasingly common problem for partners considering departing a law firm and joining another is whether and to what extent the partner can share confidential business information about the lawyer’s practice with the new firm without violating legal and ethical obligations. It is difficult to imagine any law firm agreeing to bring in a lateral partner or group of lawyers without reviewing detailed information about the prospective practice, including financial information like revenue and profitability details, client details, staffing considerations, and related business information. But for a partner at a firm, disclosing any of these categories of information to a new firm in negotiations can implicate the partner’s duties to the old firm and to clients.
California’s Rules of Professional Conduct include some of the strictest client confidentiality requirements in the country, making this issue especially relevant for California partners. What are the risks of disclosing information in negotiations with a potential new firm? In summary, there are several:
- Potentially violating your fiduciary duties, duties of confidentiality, and similar obligations to your firm and violating other partnership agreement provisions;
- Potentially violating your ethical obligations of client confidentiality and loyalty; and
- Potentially revealing your departure planning just by accessing the confidential information at your firm.
You can mitigate these risks, but it requires detailed advance effort and practical planning. You need to know the rules governing these potential disclosures and develop a specific strategy to navigate them.
California Supreme Court Approves Major Revisions to Ethics Rules
The California Supreme Court yesterday approved a significant overhaul of California’s legal ethics rules, moving California’s rules closer to the structure of the ABA’s Model Rules for the first time. The Court’s Order approved 27 rules as submitted last year by the State Bar’s Commission for the Revision of the Rules of Professional Conduct, 42 rules as revised by the Court, and denied approval of one proposed rule (regarding a lawyer’s obligations representing a client with diminished capacity). The revised rules, effective November 1, 2018, change the numbering and format of California’s rules. Substantively, the revised rules relate to personal relationships with clients, conflicts imputed through a law firm, attorney advertising, and attorney’s fees, and represent a years-long effort to simplify and to update the rules that govern California lawyers.
Navigating California’s Narrowing Attorney-Client Privilege
Two recent cases suggest that the attorney-client privilege in California is narrowing from its traditional robust scope. In LA County Board of Supervisors v. Superior Court (ACLU), the California Supreme Court held that law firm invoices are not categorically privileged, and may be subject to disclosure depending on the content of the invoices, and the active status of the underlying matters. In Wadler v. Bio-Rad Laboratories, a Magistrate Judge in the Northern District of California held, among other things, that the Sarbanes-Oxley Act preempts California’s rules regarding attorney-client privilege.
Neither of these cases, in and of itself, redefines the scope of California’s attorney-client privilege. Either case could be limited to its own facts or procedure, which are quite distinct situations. But taken together these cases suggest that California lawyers and firms need to be aware of the significant potential limitations on the attorney-client privilege, and how it may continue to evolve:
- Law Firm invoices are not automatically privileged. It is a not a departure from established rules and cases to say that communications are not automatically protected from disclosure based on the attorney-client privilege. The privilege is not a blanket protection that captures everything that lawyers send to their clients. The fact that law firm invoices are not themselves categorically protected shines a new light on the limitations of privilege, however. Most lawyers and law firms do not anticipate that the information in their invoices to clients could be subject to disclosure, and they act accordingly. Based on the ACLU case, it is a good idea to evaluate what information you convey on invoices and whether it would be privileged. Don’t draft client invoices with the expectation that they are categorically privileged.
- Not everything in a law firm invoice is privileged. It stands to reason that not everything on a law firm invoice is privileged. It is hard to see, for example, how the ZIP code for your office is privileged. It’s also not clear why the amount you pay for copies would be privileged, for example. But information about what you are copying would tend to suggest your legal strategy and tactics, your case staffing, and even your cost limitations, all of which likely would be, or at least arguably, should be, privileged. The Court in ACLU asserted that the privilege still would protect information that “lies in the heartland of the attorney-client privilege,” whatever that means. But gone are the days when lawyers could bill clients with a generic reference like “For legal services rendered.” Today, by client demand, invoices tend to be extremely detailed. Don’t draft client invoices with the expectation that each of those details will be privileged.
- The scope of privilege may change when the active status changes. Perhaps the most potentially troubling aspect of the ACLU case is the concept that the privilege for law firm invoices can change, depending on whether the matter is active, dormant, or closed. The scope of this concept is not yet clear, but the problems it could create are evident. Assume that your firm defends a series of class actions of a particular type, say wage-and-hour cases, for a particular client. Based on the ACLU case, could a litigation opponent successfully request your invoices for past, closed cases? Those invoices to clients, even though for closed matters, likely lay out your strategy and tactics for defending that particular type of case for that particular client, or type of client, in great detail. It is not difficult to imagine a scenario where the concepts of the ACLU case become a tool to subvert the protections of the privilege, through closed cases, even for the “heartland” information.
- Privileges will be evaluated case-by-case. Both the ACLU and Bio-Rad cases function as good reminders that privilege determinations are quite situation-specific, and will be evaluated that way. Lawyers and law firms should not assume that any category of communication will be per se protected by the privilege.
- California’s rules may not govern the privilege analysis. The Bio-Rad case illustrates the important point that the scope of the attorney-client privilege may not be determined under California rules or California law. Federal privilege may apply, or the particular privilege considerations of the federal statute at issue, like the whistleblower statute in Bio-Rad, and generally may be less robust.
5 Law Firm Systems to Review for 2017
Properly managing a modern and profitable law firm in 2017 and beyond requires balancing vigilance and innovation. The legal headlines are full of emerging risks to law firms, including confidentiality breaches and technology disasters. The legal headlines are also full of competitive risks for law firms. Passive management of a law firm, even a successful one, is not a good strategy. You may not change, but the marketplace surely will.
January seems like the right time of year to face up to the things we should be doing, but aren’t. Here are 5 firm systems that you should review critically in 2017, and annually:
- Firm Management. Consider whether your Partnership Agreement or other organizing documents are up to date, with detailed compensation structures that incentivize partners and other attorneys at the firm to think about and comply with all ethical requirements. Analyze governance policies to ensure that you prioritize compliance with legal ethics requirements, and to ensure an appropriate response in the event of an ethics question or a potential ethics issue.
- Clients and Matters. Analyze technology systems for identifying and resolving client conflicts, protecting client confidentiality, and documenting each of the firm’s engagements. Any system is only as good as the information that goes into it and only works if it is used consistently and uniformly. Many conflict issues arise from latent conflicts (a subsidiary vs. parent conflict, for example) that may not be obvious on the face of a conflict search. Ensure that your systems are properly set up, and are being used, and used in the right way.
- Calendaring and Deadlines. A sophisticated calendaring system to monitor all firm deadlines is essential. Take advantage of new technology to integrate calendaring functions into attorney workflow, and to ensure accuracy. Ensure that your system is durable and can be accessed in the event of an emergency or significant disruption.
- Information Management. Client confidentiality in California is not a gray area: you must keep client information confidential. This means that your firm must have sufficient systems in place to ensure that information is secure. Analyze whether your information security policies are sufficient (what rules exist regarding laptop security, thumb drives, cloud data, for example). Analyze whether attorneys and staff are following the policies. Consider whether your firm’s technology is sufficient to prevent a breach, and/or to respond to one if it occurs.
- Financial Management. Review your trust accounting procedures and safeguards to ensure that client funds are handled properly. The rules are quite clear about what you can, and cannot, do with these funds. Ensure that your attorneys and staff are properly trained to identify appropriate issues and to handle these items properly. Separately, consider any alternative fee arrangement from an ethical perspective: does the arrangement place the client’s interest in conflict with yours? does the arrangement incentive something that could be an ethical concern (e.g., incentivizing attorneys to spend as little time as possible on a case)? is the arrangement properly documented, to avoid ambiguity when bills come due?
Protecting the Attorney-Client Privilege for In-Firm Ethics Communications
When a client matter raises a legal ethics issue or, in the worst-case scenario, when a client accuses you of malpractice, it’s a good idea seek the advice of other lawyers at your firm. But maintaining the privilege of those communications within your firm, related to legal ethics issues or malpractice, is more difficult than it may seem at first glance. Until relatively recently, California cases suggested that the attorney-client privilege for attorneys seeking legal ethics advice within their own firm regarding ethics issues about current clients necessarily gave way to the firm’s fiduciary duties to its client.
This generally meant that when a lawyer sought in-firm legal advice from another attorney, even one designated as the firm’s general counsel, there would be no attorney-client privilege for those communications. This seemed an odd result, since we would expect courts to encourage attorneys to seek advice internally when an ethical issue, or a malpractice issue, arises. If those communications are not privileged, and beyond that, if you had an affirmative duty to disclose all of them to the clients, how likely would you be to seek that advice?
California courts are now clearly moving in the direction of recognizing the attorney-client privilege for in-firm communications regarding legal ethics issues. Following similar trends in other jurisdictions, including New York, Massachusetts, and Georgia, recent California opinions suggest that courts will recognize the attorney-client privilege for in-firm ethics advice and communications. So you can assert and protect the attorney-client privilege for in-firm ethics advice, but successfully asserting the privilege in these situations requires advance planning.
Tracking Proposed Revisions to California’s Rules of Professional Responsibility
California’s Commission for the Revision of the Rules of Professional Responsibility has proposed 68 new and amended rules for attorneys, and is seeking public comment on the proposed rules. California is the only state that whose professional responsibility rules do not track the ABA Model Rules. The Commission has issued an Executive Summary detailing the proposed and amended rules, comments, and dissenting views. The Commission also issued a detailed list of rule revisions considered, but rejected. Among other things, the proposed rules include suggested revisions to rules related to personal relationships with clients, conflicts imputed through a law firm, attorney’s fees, and handling clients with diminished capacity. The public comment period expires September 27.
Connect with Caution: Don’t Let Social Media Indirectly Compromise Client Confidentiality
We frequently repeat the refrain that client confidentiality in California is not a gray area: you must keep client information confidential. Most attorneys (hopefully) by now know not to divulge confidential client information on social media. Some attorneys have learned the hard way that casual comments about clients or client matters on social media is perilous. But attorneys must also focus on the potential to reveal confidential client information indirectly on social media. You may be revealing a lot on social media even though you aren’t posting directly about clients or client matters. How so?More
5 Reasons to Seek Independent Outside Ethics Counsel
Attorneys tend to view ethics compliance as something very personal, and firms correctly views ethics issues as an internal matter. Attorneys would not hesitate to engage outside counsel if a legal malpractice claim arose, but many do not yet have dedicated outside ethics counsel to advise as part of ongoing daily firm operations. Increasingly, there are compelling reasons for attorneys and firms to engage outside independent ethics counsel, as a confidential resource in the event that an ethical issue arises, to advise on ethics compliance systems, and to help prevent ethics problems.More
5 Issues to Analyze When Your Law Firm is Considering a Merger
Law firm mergers are a fact of life for modern law practice. News of law firm mergers, or news of merger discussions, are a daily staple of practicing law. If your firm is considering a merger with another firm, you should independently analyze how the merger may impact your clients and your practice, and how to resolve any issues that arise. From a legal ethics perspective, law firm mergers are extremely complex, and fraught with inherent ethical dilemmas. These issues can, and often are, resolved; sometimes with beneficial effects on partners, sometimes not.
If you are not actively involved in the management of your firm, you may not know all of the details about the merger discussions, or even know about a proposed merger deal, until late in the process. Don’t rely on your firm’s analysis, or the other firm’s analysis. When you learn about merger discussions or about a proposed merger deal, you should independently analyze 5 issues regarding how to protect your clients during the merger discussions and how the merger would impact your clients, and your practice.More
The Limitations of Advance Conflict Waivers for Corporate Subsidiaries
In Lennar Mare Island, LLC v. Steadfast Insurance Company, a district court judge in the Eastern District of California granted a motion to disqualify defendant’s law firm, and illuminated the conflict analysis for advance waivers and corporate subsidiaries.
The case involved a dispute regarding environmental clean-up obligations for Mare Island, a former U.S. Navy base in Vallejo. In 2012, Lennar Mare Island, LLC (LMI) sued Steadfast Insurance Company alleging that it has wrongfully refused or delayed payments on its claim under an environmental insurance policy. Steadfast filed counterclaims against LMI and CH2M Hilll Constructors, Inc. (CCI), LMI’s subcontractor, seeking declaratory relief. Attorneys from Hogan Lovells US LLP (the Firm) associated as counsel as Steadfast in August 2014. In January 2015, CCI moved to disqualify the Firm as Steadfast’s counsel, asserting that the Firm had a conflict because it had represented CCI’s parent company, CH2M Hill Companies, Ltd. (CH2M).
Steadfast made three arguments in opposition to the motion to disqualify: (1) if any conflict exists, it was a successive conflict, not a concurrent conflict, and the prior matter was not substantially related to this one; (2) an advance waiver from CH2M applied and waived any conflict; and (3) CCI delayed bringing the motion, which showed that it was a tactic to disrupt Steadfast’s representation, and should be denied.More