Court Protects Internal Law Firm Email from Disclosure to Former Clients

American Bar Litigation News–In a recent decision further clarifying the definition of documents “intended for internal law office review and use” under New York law, the U.S. District Court for the Southern District of New York held that such communications are subject to a common law “privilege.” Krys v. Sugrue. The district court held that where a former client sued a law firm for malpractice, certain internal firm communications still may be protected from discovery because “the need for lawyers to be able to set down their thoughts privately in order to assure effective and appropriate representation warrants keeping such documents secret from the client involved.”

Background

Multiple lawsuits have arisen from the bankruptcy of Refco, Inc., a New York-based commodities and futures broker. These lawsuits were consolidated in the Southern District of New York under multidistrict litigation (MDL) rules. The Krys plaintiffs are successors to the SPhinX Funds and their investment manager, PlusFunds Group, Inc. They sued their former law firm, Gibson Dunn & Crutcher LLP, for malpractice relating to Refco bankruptcy proceedings. Although the case was originally consolidated into the MDL proceedings, the district court referred the plaintiffs’ claims to arbitration. Gibson Dunn was not otherwise a party to the MDL.

Before the district court referred the case to arbitration, the plaintiffs issued a subpoena to Gibson Dunn. In response, Gibson Dunn produced more than 137,000 pages of documents, including a three-page October 2005 email that consisted of a series of internal communications among Gibson Dunn partners. In the email, according to the district court, “the partners share their preliminary thoughts concerning Gibson Dunn’s representation of SPhinX and PlusFunds in various matters, including the Refco bankruptcy proceedings.”

Although Gibson Dunn notified the plaintiffs that the email had been inadvertently produced, and the plaintiffs certified that they destroyed all copies, the plaintiffs argued before the MDL special master that Gibson Dunn was required to produce the email. The special master agreed and directed Gibson Dunn to produce the email to the plaintiffs.

District Court Reverses

The district court reversed on two grounds. First, the court found that the email had no relevance to the MDL proceedings, in which Gibson Dunn was no longer a party. In fact, the court found that “the true purpose of the Krys Plaintiffs’ request for the E-mail is to bolster claims in the arbitration, and nothing else.” Thus, the documents were not discoverable in the MDL.

Second, finding New York law applied to the issue, the court held that “the E-mail is privileged under the doctrine of Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn LLP.” Specifically, the court observed that there is a protection for “documents intended for internal law office review and use.”

The Sage Realty “Privilege”

In 1997, in Sage Realty, New York’s highest court, the New York Court of Appeals, recognized a “general right of the client to the contents of the attorney’s file, upon termination of the attorney client relationship,” subject to narrow exceptions. In the first exception, the law firm “should not be required to disclose documents which might violate a duty of nondisclosure owed to a third party, or otherwise imposed by law.”

And further, “nonaccess would be permissible as to firm documents intended for internal law office review and use.” Such documents might include “documents containing a firm attorney’s general or other assessment of the client, or tentative preliminary impressions of the legal or factual issues presented in the representation, recorded primarily for the purpose of giving internal direction to facilitate performance of the legal services entailed in that representation.” The New York Court of Appeals carved out this second exception because such documents “presumably are unlikely to be of any significant usefulness to the client or to a successor attorney.”

Exception to the Exception

In its decision in Krys, the district court applied the second exception to the rule in Sage Realty, holding that the disputed email contained “internal conversations among law firm partners setting forth their ‘preliminary impressions of the legal or factual issues presented in the representation.’” Therefore, the documents were nondiscoverable. In doing so, the court rejected the plaintiffs’ argument that the court should apply an “exception to Sage Realty’s exception.” In cases interpreting Sage Realty, New York courts have held that “when the interests of the client and the attorney clash . . . it is the client’s interest that will prevail,” and “what may be withheld turns upon the needs of the client.” Here, the plaintiffs argued that the disputed email demonstrated Gibson Dunn’s knowledge that it had a conflict of interest at the time that it counseled the various plaintiffs.

The district court rejected the plaintiffs’ argument, however, distinguishing the cases cited by the plaintiffs because these were “legal malpractice cases in which the documents were found relevant to those actions.” In the case before it, by contrast, the district court stated, “[l]egal malpractice claims are not before the Court, as they have been referred to arbitration.” The court then noted that “to the extent the exception to Sage Realty’s exception applies in this case, it applies only to the legal malpractice claims currently in arbitration.”

Analysis

“It seems pretty clear that the plaintiffs were attempting to use a subpoena in one action to obtain documents irrelevant to that action,” says Ian H. Fisher, Chicago, cochair of the ABA Section of Litigation’s Pretrial Practice and Discovery Committee. Although he believes the district court decided correctly, Fisher also believes that “the court’s opinion may have gone further than necessary.” “If the subpoenaed documents were irrelevant, it properly quashed the subpoena,” he notes. “The court did not need to get into the issues raised by Sage Realty,” Fisher says.

“The court was really holding that you haven’t demonstrated a need to get these documents because they’re not relevant,” says James A. Brown, New Orleans, cochair of the Section of Litigation’s Professional Liability Litigation Committee. Brown cautions that the protection in Sage Realty is “a very narrow exception.” But, “if the client cannot demonstrate need, it’s appropriate to deny it access to these internal law firm communications.”

Fisher takes issue with referring to the doctrine in Sage Realty as a “privilege,” because “the analysis seems more like a form of work product protection.” The protection created in Sage Realty arises “from the policy of allowing lawyers to freely set down their initial thoughts,” he says, but “the right is qualified and can be overcome by the client’s showing of need.”

Lessons

Fisher sees an ironic twist to the case, in that the plaintiffs may now have some trouble if they seek to obtain these materials in the arbitration, as there is now a decision suggesting a privilege may apply. “The plaintiffs are in a worse position by having caused the federal court to say that the email is subject to the Sage Realty privilege,” he says. “I don’t know if the court intended to hold that the document is protected in the legal malpractice claim, but to the extent the arbitrator feels bound by the federal court’s decision, one could say the plaintiffs caused the wrong decision maker to decide the protection.”

Brown believes there is a lesson for law firms as well. “Generally, law firms should assume that in malpractice cases, what they put in writing about their clients is going to be discoverable.” He says the Sage Realty protection “is narrow and not uniformly accepted,” so law firms “ought not put your views of clients in emails.”