Ruling Upholds Law Firm’s In-House Counsel Attorney-Client Privilege

August 12, 2016 | Professional Liability | Compliance, Investigations & White Collar | Directors & Officers Liability

In a hotly contested issue of first impression, the Appellate Division, First Department, has joined a multitude of jurisdictions and has ruled that attorneys who seek the advice of their own law firm’s in-house counsel on their ethical obligations in representing a current client of the firm may invoke the attorney-client privilege to resist subsequent disclosure to the client of those communications.

The First Department’s decision in Stock v. Schnader Harrison Segal & Lewis, 2016 N.Y. Slip Op. 05247 (1st Dept., June 30, 2016), unanimously reversed a December 2014 ruling by the Supreme Court, New York County, and is a hugely important development for lawyers and law firms in the state. Stock resolves the question of whether law firms should have the same right as other clients to protect confidential communications with in-house counsel. After hearing from the parties and amicus on both sides of the question, the First Department answered in the affirmative.


Schnader Harrison Segal & Lewis lawyer M. Christine Carty represented Keith Stock in connection with his separation agreement from his former employer, MasterCard International. Stock contended that his termination triggered the acceleration of the deadline to exercise vested stock options granted to him under MasterCard’s long-term incentive plan, but that Schnader Harrison had failed to negotiate an extension of the deadline to exercise those options.

Stock contended that he subsequently learned from Morgan Stanley Smith Barney (MSSB) that all of his vested stock options had expired as a result of the termination of his employment. Represented by Schnader Harrison attorneys Theodore Hecht and Cynthia Murray, Stock sued MasterCard and commenced a FINRA arbitration against MSSB.

Days before the arbitration was to begin, MSSB’s counsel gave notice that it intended to call Carty to testify as a fact witness. This prompted Carty, Hecht, and Murray to seek legal advice from Schnader Harrison’s in-house counsel, Wilbur Kipnes, regarding the ethical implications of, and the duties triggered by, MSSB’s demand for Carty’s testimony under the advocate-witness rule.

The arbitration and lawsuit concluded and Stock sued Schnader Harrison and Carty for alleged malpractice in connection with their advice relative to the termination of his employment by MasterCard. In response to Stock’s discovery demands, Schnader Harrison and Carty asserted that two dozen emails that had been exchanged among Carty, Hecht, and Murray with Kipnes in connection with the consultation were privileged.

Stock asked the trial court to compel disclosure of the emails. Disclosure was ordered, and the defendants appealed.

First Department’s Decision

The First Department reversed.

It first rejected the contention that disclosure of the emails could be ordered pursuant to the so-called “fiduciary exception” to the attorney-client privilege because the emails were written while the firm was representing Stock and related to that representation. The fiduciary exception provides that legal advice obtained by a fiduciary for a beneficiary’s benefit and at a beneficiary’s expense is not privileged from the beneficiary. Conversely, where the fiduciary and not the beneficiary is the “real client,” the privilege still applies.

The court reasoned that Kipnes’ “real clients” were the firm and the three Schnader Harrison attorneys who had sought his legal advice—not Stock—and, therefore, the communications seeking or rendering advice were not subject to the “fiduciary exception” and could be withheld as privileged. Critical to this determination was the fact that the law firm had never billed Stock for the consultation with in-house counsel and in-house counsel had never personally worked on Stock’s matters.

Moreover, the emails did not fall within the fiduciary exception even if the consultation encompassed possible malpractice liability—whether or not Stock or the firm had been threatening to sue the other at the time. The court reasoned that application of the privilege encourages lawyers to seek advice on their ethical responsibilities and potential civil liability to minimize damage to a client, and that this benefit would be lost if consultations were only privileged after the lawyer and client were in overtly adverse positions.

The First Department also refused to adopt what it characterized as the “rather draconian” exception to the attorney-client privilege known as the “current client exception.” This exception provides that a law firm cannot invoke the attorney-client privilege to withhold from a client internal firm communications relating to the client’s representation on a matter as to which the interests of the firm and client are not congruent because that advice, received during the representation, involves the firm in an impermissible conflict between its interests and its client’s interests.

Stock rejected the notion that a conflict was created under the circumstances as law firms, lawyers, and their clients have an interest in their lawyer’s full compliance with their ethical obligations. The court also held that even if a conflict existed, an ethical violation would not result in “abrogation of an otherwise valid evidentiary privilege” because the Rules of Professional Conduct cannot be used as a “procedural weapon,” and nothing in CPLR §4503 (which codified the attorney-client privilege) suggested otherwise.


The Stock decision is practical, equitable, and sound policy. From a practical point of view, when lawyers consult in-house counsel on their ethical obligations, they are doing so as clients on their own behalf. It is equitable to allow law firms to take on the role of client to seek out legal or ethics advice from in-house counsel in confidence—just like any other client.

Stock also represents sound policy as ethical problems or potential malpractice concerns do not improve with time and, by encouraging frank disclosure to in-house counsel at the earliest possible time, the likelihood that lawyers and law firms will promptly address ethical issues increases, thereby helping to avoid, or at least minimize, harm to clients, lawyers, and the firm. The Court of Appeals will, hopefully, agree with the Appellate Division’s well-reasoned analysis.

Reprinted with permission from the August 12, 2016 issue of the New York Law Journal. © ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.

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