Law firm in-house attorney-client privilege vis-a-vis current clients: courts should reconsider and limit the rule that in-house communications are not protected against current clients.

• Author: Barker, William T.

COURTS now recognize that a law firm may consult its own lawyers, as in-house counsel, and have the benefit of the attorney-client privilege for those communications. (1) But several cases have held that this privilege does not apply against a party who was, at the time the in-house lawyers were consulted, a current client of the firm. (2) This article examines and criticizes the latter cases.

THE CASES

1. Valente v. Pepsico

   The law firm cases all rely on a case involving corporate in-house counsel, Valente v. Pepsico Inc., (3) decided by the federal district court in Delaware. In February 1970, Pepsico had purchased 74 percent of the stock of Wilson Sporting Goods Co. It then considered and took various actions that led to a merger of the two companies under the Delaware short-form merger statute in December 1972. Minority shareholders and warrant holders of Wilson sued Pepsico and its officers, alleging misrepresentations, unfairness of the transactions, and violations of the securities laws. Prior to the merger, various Pepsico officers, including its general counsel, Peter DeLuca, sat on Wilson's board.

   In planning for a merger, Pepsico sought to optimize the tax consequences, both minimizing any immediate tax burden and preserving the favorable tax attributes of Wilson. The plaintiffs sought documents generated in this planning process, arguing that Pepsi had an obligation to share the tax benefits with them, at least by reflecting those benefits in the prices offered for their securities, and was obliged to disclose information about those benefits to permit them to consider that information in making decisions about the terms offered in the merger. The tax studies would reflect the price considerations used by Pepsico and the effect of the tax benefits in determining the price offered to the Wilson security holders.

   Pepsico claimed attorney-client privilege for some of those documents. In examining that claim, the Delaware court noted the holding of the Fifth Circuit in Garner v. Wolfinbarger, (4) that a corporation may be denied use of the privilege in litigation against its own shareholders. That principle was not directly applicable here, the court noted, because Pepsico was not being sued by its own shareholders. But the basis of the rule was "the understanding that a corporation is, at least in part, the association of its shareholders, and it owes to them a fiduciary obligation which is stronger than the societal policy favoring privileged communications." Moreover, both Pepsico (as majority shareholder) and general counsel DeLuca (as a Wilson director) owed a fiduciary duty to Wilson's minority shareholders, a duty protecting them from domination and overreaching by the controlling shareholder.

   As to documents reflecting the advice of DeLuca, the court stated that "he owed separate fiduciary duties to two separate entities and their interests. He could not subordinate fiduciary obligations which the owed to Wilson and minority shareholders of Wilson to those [owed] his client Pepsico." While he had no attorney-client relationship with Wilson, a lawyer-director's "knowledge in one capacity cannot be separated from the other, nor can his duties as a fiduciary be lessened or increased because of professional relationship."

   The court invoked the rule that there is no privilege between jointly represented clients, who have no expectation of confidentiality against one another. Nor can the attorney prefer one against the other. The court concluded that because "DeLuca owed fiduciary duties to both Wilson [and its shareholders] and to Pepsico," Pepsico could not now claim a privilege against the shareholders. Similar reasoning applied to outside counsel Frangos when he replaced DeLuca on the Wilson board. And his obligations were imputed to his law firm.

   The court's analysis errs in several respects. In no sense was there a joint...