NC Supreme Court Issues Notable Attorney-Client Privilege Opinion in the Corporate Context

The North Carolina Supreme Court’s recent opinion in Howard v. IOMAXIS, LLC, 2023 WL 4037483 (June 16, 2023), provides valuable guidance to in-house and outside counsel regarding the attorney-client privilege when communicating with corporate officers and employees, as well as the attorney-client privilege in joint representations.

Communications with Corporate Constituents: Endorsement of the Bevill Doctrine

An organizational client can communicate with corporate counsel only through the organization’s constituents — that is, only through its officers, directors and employees. Because the company is the client, the attorney-client privilege protecting those communications belongs to the company. Under the North Carolina ethics rules, corporate counsel may also form an attorney-client relationship with a company’s constituent. N.C. Rule of Professional Conduct 1.13(g). When an individual employee, officer or director seeks personal legal advice from corporate counsel, it is possible that a separate attorney-client relationship could be formed between the lawyer and the individual. Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). It can frustrate a company’s goals when the company seeks to disclose certain communications, but an individual objects and asserts the attorney-client privilege on his own behalf. Also, if, as a result of communications with an individual constituent, corporate counsel learns information that gives rise to a conflict of interest, counsel could be conflicted from continuing to represent the organization.

In the IOMAXIS decision, the North Carolina Supreme Court, for the first time, explicitly endorsed the Bevill doctrine created by In re Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120 (3d Cir. 1986). The Bevill doctrine clarifies how the privilege operates in the corporate context and instructs how organizational clients and their corporate counsel can create, or avoid creating, a separate attorney-client privilege belonging to corporate constituents.

Under Bevill, to assert a separate attorney-client privilege successfully, a corporate officer or employee must show that: (1) the individual initiated contact with corporate counsel with the purpose of seeking legal advice; (2) the individual made it clear that she was seeking legal advice in an individual, rather than representative, capacity when approaching corporate counsel; (3) corporate counsel “saw fit” to communicate with the individual in her personal capacity, knowing that a possible conflict of interest could arise; (4) the communications were confidential; and (5) the substance of the communications with counsel did not “concern matters within the company or the general affairs of the company.” Bevill, 805 F.2d at 123. Although the IOMAXIS court wholly endorsed the Bevill doctrine, it found the test inapplicable to the facts before it. This case, however, is instructive for in-house and outside counsel.

As a matter of best practice, corporate counsel who seek to avoid an inadvertent attorney-client relationship with an individual employee, officer or director must remain attentive to requests from those constituents for legal advice and respond with care. Depending on the circumstances, a polite but clear statement of counsel’s role as company counsel may suffice; in other circumstances, a corporate “Miranda warning” may be necessary. Counsel should also remain mindful that Rule 1.13(f) and Rule 4.3 of the N.C. Rules of Professional Conduct require a lawyer to explain the identity of her client when the lawyer reasonably should know that the organization’s interests are adverse to those of the constituent or the unrepresented constituent misunderstands the lawyer’s role in a matter. Documenting company counsel’s communications on these points may prove useful if a future dispute arises.

Attorney-Client Privilege in Joint Representations

The North Carolina Supreme Court concluded in IOMAXIS that, once a dispute arose among a group of clients who were previously jointly represented by the same counsel, one client can waive the attorney-client privilege for joint attorney-client communications. Acknowledging that a fact-specific analysis was necessary, the Court concluded that competent evidence existed to support the following findings: (1) outside counsel jointly represented IOMAXIS and four individuals in defending certain litigation; (2) the communications at issue – a recorded call – related to the joint representation; and (3) counsel’s “very messy” disclaimer that he represented the company’s interests was ineffective when he continued to provide personal advice to the individuals on the call. As a result, one individual was entitled to unilaterally waive the attorney-client privilege and use the recorded call with corporate counsel in the individual’s dispute with IOMAXIS and the others. This outcome, which is consistent with the Comment 30 to Rule 1.7 of the N.C. Rules of Professional Conduct, is now the law of North Carolina. 

The Court noted that the law firm’s engagement agreement for the joint representation informed the clients that “in the unlikely event of a disagreement among you, the attorney-client privilege will not protect information you share with us.” Similar language is commonplace in joint engagement agreements because Comments 30 and 31 to Rule 1.7 instruct that clients should be informed of how a joint representation affects the treatment of confidential information and the application of the privilege.

In IOMAXIS, the law firm that was engaged as joint litigation counsel for the company and four individuals had previously been engaged by IOMAXIS alone as corporate counsel. These two engagements proceeded in parallel. IOMAXIS asserted the attorney-client privilege to protect the contents of the recorded call, arguing that the call related to the corporate-counsel representation rather than the joint litigation defense. The Court disagreed and offered two suggestions to guide outside counsel in avoiding controversy regarding the scope of the privilege in parallel engagements:

1. Outside counsel can specify in engagement agreements which particular firm attorneys will handle the corporate counseling and which will handle the joint litigation defense, and inform the jointly represented individuals that legal advice from the corporate attorneys is solely for the benefit of the company. The firm will need to maintain these designations and roles, and update them when team members join or leave.
2. When speaking with corporate constituents, counsel representing the company alone can provide a clear disclaimer of representation of the individuals, describing the lawyer’s client as the company, explaining that the communication is subject to the attorney-client privilege held solely by the company, and that each individual must consult his own counsel for personal legal advice. Although the Court did not cite Upjohn, these suggestions track the long-standing guidance provided by that decision. 

For in-house counsel managing outside counsel in joint representations, it is important to confirm that each engagement agreement properly documents the engagement terms. In-house counsel can provide clarity for officers or other constituents about the role of outside counsel. Of course, in-house counsel should likewise make clear their role as counsel to the company and correct any confusion that may exist for employees or others.

Please contact author Kate Maynard or any member of the firm’s litigation department to discuss the implications of this development in the law.