In 1999, 10-year-old Alexis Burns was awarded a judgment of approximately $2.5 million in a medical malpractice lawsuit in Massachusetts. Thereafter, together with her then-lawyer, she entered into an agreement with a law firm to create a trust for her benefit with the judgment proceeds to form the res of the trust. The law firm engaged its affiliate, an investment advisor firm, to manage the trust funds and appoint trustees to make distributions for the benefit of Alexis during her lifetime. Without ever executing a declaration of trust, the investment firm began distributing funds to Alexis’ father, the individual whom the firm intended to act as trustee. In fact, over the next four years, the firm distributed over $1.5 million to Alexis’ father.

Unsurprisingly, the plot thickened. In the spring of 2003, the investment firm learned that Alexis’ father was incarcerated. The trust had been depleted down to $640,000 and Alexis’ father hadn’t properly expended the funds he received.

Alexis sued the law firm and the affiliated investment firm in the U.S. District Court in Massachusetts. During the course of the litigation, Alexis sought documents and deposition testimony regarding an internal investigation that the law firm had conducted during the time period when it continued to manage her trust fund. The firm moved for nondisclosure of the documents and communications in question, arguing that the documents were prepared, and the communications made, in anticipation of a possible lawsuit by Alexis. Thus, their argument went, the documents in question were protected by the attorney-client privilege.

The court disagreed, holding that under Massachusetts law, because the firm owed a fiduciary duty to Alexis as the trust beneficiary, it shouldn’t be allowed to invoke the attorney-client privilege to withhold disclosure of information relevant to her claim. The court opined that the “purposes of the attorney-client privilege are threefold: 1) to encourage clients who might otherwise be deterred from seeking legal advice altogether, 2) to promote full disclosure by clients to their attorneys, and 3) to enable attorneys to act more effectively, justly, and expeditiously.”1 Finding that none of these purposes were served by applying the privilege in that case, the court granted Alexis’ motion to compel.

Withdrawal From Representation Approach

Courts around the country have generally come to the same conclusion: When a law firm seeks legal advice in anticipation of a possible lawsuit by one of its clients, but seeks the advice while continuing to represent that client, the communications aren’t privileged. The reasoning behind these decisions is essentially that a law firm owes a fiduciary duty to its clients and preparing for litigation adverse to a client while at the same time representing that client creates an impermissible conflict of interest that destroys the privilege normally afforded to that type of communication.

In Koen Book Distributors v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., et al., 2 the court recognized the predicament that firms face in these situations. It advised firms to promptly withdraw as counsel or, if the firm believes that it can continue representing the client while also potentially representing itself against the client, it suggested that the firm at least secure the client’s informed consent before doing so. In Koen Book Distributors, the defendant law firm sought to withhold internal emails regarding how to continue representing the client and how to respond to the client’s communications in light of a possible malpractice action. The central concern driving these communications was how best to position the firm in the event that the client filed suit. Finding a conflict of interest between the firm’s concurrent representation of the client and its own interests, the court found that the attorney-client privilege was inapplicable and the communications were discoverable.3

A New Approach

A recent decision out of the Southern District of Ohio takes a new and different approach, diverging from the general rule stated by courts across the country that had ruled before it on this issue. In TattleTale Alarm Sys., Inc. v. Calfee, Halter & Griswold, LLP,4 the court, applying Ohio law, held that a law firm’s internal loss prevention communications relating to the firm’s potential malpractice in a matter for an existing client are protected by the attorney-client privilege absent a showing of good cause by the client to justify disregarding the privilege.

In TattleTale, the court weighed several factors in determining that the privilege should be honored. For example, the court considered that the client in a legal malpractice action will often have other sources of proof obviating the necessity of disclosing the firm’s loss prevention communications. The court reasoned that it “is hard to conceive of a case where the only evidence of legal malpractice is found within the firm’s loss prevention communications.”5 For example, if a law firm missed an important filing deadline causing a client’s claim to be barred on statute of limitations grounds, the client would be able to point to the clear fact that the firm missed the deadline to prove its cause of action. Access to internal discussions about why it happened or when the firm realized its mistake wouldn’t likely make or break the client’s claim.

Additionally, the court noted that actions constituting malpractice if not alleged to be criminal, illegal or fraudulent, don’t evoke the crime-fraud exception to the attorney-client privilege.6 Finally, the TattleTale court emphasized that the “recognition of the privilege promotes the affected attorneys’ ability promptly to seek advice and to obtain it based on a complete disclosure of the circumstances which led them to believe that some loss prevention communication was warranted.”7 Weighing all of these factors together, the court was unwilling to disregard the privilege absent a showing of good cause.

It’s unclear under the TattleTale court’s analysis whether Alexis Burns would have been able to show good cause to justify disregarding the privilege protecting documents prepared by the firm in anticipation of her lawsuit. But a lawyer’s ability to seek internal advice from others within his firm at the first indication of potential malpractice will often benefit both the lawyer and the client if the lawyer is able to quickly and successfully rectify the mistake. The TattleTale court’s divergence from the majority rule of courts across the nation marks what may be the beginning of an important shift toward protecting law firm’s internal loss management efforts against disclosure to clients seeking retribution through the courts.

Endnotes

1. Burns ex rel. Office of Public Guardian v. Hale & Dorr LLP, et al., 242 F.R.D. 170, 173 (D. Mass. 2007).
2. Koen Book Distributors v. Powell, Trachtman, Logan, Carrle, Bowman & Lombardo, P.C., et al., 212 F.R.D. 283, 286 (E.D. Pa. 2002).
3. Ibid. at p. 286-87.
4. Tattletale Alarm Sys., Inc. v. Calfee, Halter & Griswold, LLP, No. 2:10-cv-226, 2011 WL 382627 (S.D. Ohio Feb. 3, 2011).
5. Ibid. at *6.
6. Ibid. at *9-10.
7. Ibid. at *10.