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Federal Judge Sets Aside Magistrate’s Controversial Corporate Attorney-Client Privilege Ruling

January 11, 2011

Lawyers for the Profession® Alert

Gucci America, Inc. v. Guess?, Inc., No. 09 Civ. 4373, 2011 WL 9375 (S.D.N.Y. Jan. 3, 2011)

Brief Summary

The U.S. District Court for the Southern District of New York set aside a magistrate judge’s controversial corporate attorney-client privilege ruling, and held that a corporate client’s communications with its in-house lawyer are privileged even though the attorney was not actively licensed at the time of the communications.

Complete Summary

Judge Shira A. Scheindlin of the U.S. District Court for the Southern District of New York set aside a controversial ruling by a magistrate judge regarding the corporate attorney-client privilege. The magistrate judge had held in June 2010 that a corporate party’s communications with an in-house lawyer were not privileged because the attorney was not actively licensed at the time of the communication. See Gucci America, Inc. v. Guess?, Inc., No. 09 Civ. 4373 (S.D.N.Y. June 29, 2010). Judge Scheindlin held that this ruling was clearly erroneous.

Under federal common law, the attorney-client privilege generally only will attach to communications with a member of the Bar of a court. Judge Scheindlin held that although the lawyer was on inactive status as a member of the Bar in California, he was a member of at least one federal court Bar, and therefore was an attorney for purposes of invoking the privilege. In reaching this conclusion, Judge Scheindlin further held, contrary to the magistrate judge’s ruling, that privileged communications need not be made to a person who is actually authorized to practice law.

Judge Scheindlin further held that the communications at issue were privileged because the client had a reasonable belief that it was communicating with an attorney. This holding effectively set aside two of the magistrate judge’s rulings. First, it did so by indicating that the rule which has long applied to individual clients—that the client’s reasonable belief in the existence of an attorney-client relationship effectively creates such a relationship and protects the client’s communications accordingly—also applies to corporate clients. Second, corporate clients have no heightened duty to perform due diligence and ensure that their in-house counsel are actively licensed attorneys. Such a duty, Judge Scheindlin held, would place an unfair burden on corporate entities because “the sins of the attorney must not be visited on the client so long as the client has acted reasonably in its belief that its counsel is, in fact, an attorney.”

Finally, in finding the client’s belief reasonable as a factual matter, Judge Scheindlin focused on the client’s knowledge that its counsel had a law degree, the fact that the client paid the counsel’s California Bar membership fees, and the fact that the individual had handled a variety of legal matters competently over a number of years.

Significance of Opinion

This opinion is exceptionally important, setting aside one of the most controversial and troubling rulings from any court in the nation in 2010 in the area of attorney-client privilege. It is likely to be widely accepted and should return a degree of normalcy to internal corporate affairs in this area. Pursuant to this decision, corporations may communicate freely with in-house lawyers without having to constantly monitor each attorney’s Bar membership status, so long as there is some reasonable factual basis for a belief that the lawyer is an active licensed member of a Bar.

On a more conceptual level, the decision also reinforces the important general principle that domestic corporate clients are no less entitled to protection than individual clients with respect to their relationships with their lawyers when the entity is engaged in seeking and obtaining legal advice.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. 

New York High Court Declines to Broaden Liability of Third-Party Professionals for Client Fraud

Kirschner v. KPMG LLP, ___ N.E.2d ___, 2010 WL 4116609 (N.Y. 2010)


Under New York law, the fraud of corporate insiders will be imputed to the corporate entity regardless of the insiders’ intent or the degree to which the corporation benefited from the fraud. There is a limited exception to this rule when the fraud is against the corporation itself. In cases where fraud is imputed, the corporation is barred by the doctrine of in pari delicto from shifting responsibility for the fraud to third-party agents such as law firms or accounting firms.

New York Bar Allows Online Storage of Confidential Client Information With Third Parties

  

November 10, 2010

Lawyers for the Profession® Alert

New York State Bar Committee on Professional Ethics, Opinion 842 (2010)

Brief Summary
A lawyer may store confidential client information online with third parties, provided that he or she stays abreast of relevant changes in the law and technology, and ensures that the third party storage provider also stays abreast of changes in technology.

Complete Summary
The New York State Bar Committee on Professional Ethics opined that lawyers may store confidential client information online with third parties so long as certain precautions are taken. Those precautions include taking measures to protect confidentiality and staying abreast of changes in both technology and relevant law.

Although lawyers need not guarantee that information is secure from unauthorized access, they must exercise reasonable care to prevent such access; this requirement applies to the supervision of third parties. The Committee noted that “reasonable care” may include:

  1. Ensuring that the online data storage provider has an enforceable obligation to preserve confidentiality and security, and that the provider will notify the lawyer if served with process requiring the production of client information;
  2. Investigating the online data storage provider’s security measures, policies, recoverability methods, and other procedures to determine if they are adequate under the circumstances;
  3. Employing available technology to guard against reasonably foreseeable attempts to infiltrate the data that is stored; and/or
  4. Investigating the storage provider’s ability to purge and wipe any copies of the data, and to move the data to a different host, if the lawyer becomes dissatisfied with the storage provider or for other reasons changes storage providers.

The Committee noted that changes in technology could require lawyers to reassess some of these criteria periodically. It also stated that attorneys should monitor the law relevant to online storage systems to ensure, inter alia, that the use of certain technology does not waive an otherwise applicable privilege.

In the event that a lawyer learns of a security breach of online information, the Committee noted, he or she must investigate whether any client confidences have been revealed, notify any affected clients, and stop using the online storage service until he or she is assured that any security issues have been fixed.

Significance of Opinion
This opinion is consistent with the majority of jurisdictions which have addressed this specific issue. Further, the practical implications of this opinion are notable because online storage with third parties is beneficial in terms of both freeing up storage space within the firm and providing a backup in case something happens to the firm’s own information system. But with these benefits comes the added burden of overseeing a third party.

This alert has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.

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