Tuesday, 22 February 2011

No privilege for in-house counsel

Introduction
In September 2010, the European Court of Justice decided that communications between a company and its in-house lawyer are not covered by legal professional privilege. The decision in this case must be considered quite out of step with the law in many other jurisdictions, including Australia. It may also cause some practical difficulties where multinational corporations seek to use in-house lawyers outside the European Union on global mergers.

Background

Akzo Nobel Chemicals Ltd v Commission involved an appeal by Akzo against the judgement of the Court of First instance of the European Communities, which rejected their claim of legal professional privilege in respect of two e-mail messages between the company and its in-house lawyer. These two e-mails had been seized by the European Commission during a raid of Akzo’s premises in 2003.

During the raid of Akzo’s premises, a large number of documents were seized by European Commission officials. A dispute arose in relation to a small number of documents which Akzo claimed were protected by legal professional privilege.

After some discussion, it was agreed that the Commission officials would examine the relevant documents to determine whether the documents should be privileged. This narrowed the range of documents in dispute to five documents.

After examining these remaining five documents, the Commission officials formed the view that three of those documents were definitely not privileged. Accordingly, the officials took copies of these documents and then placed copies of these documents in a sealed envelope.

The Commission subsequently invited submissions from Akzo as to why these documents should be subject to a claim of legal professional privilege.

The three documents at issue consisted of:

  • handwritten notes made by the general manager during discussions with employees and used for the purpose of preparing a typewritten memorandum; and 
  • two e-mails between the general manager and Akzo’s coordinator for competition law, who was enrolled as a lawyer in the Netherlands bar and was also member of Azko’s legal department 
European Court of Justice decision
As stated above, Azko appealed the first instance decision not to grant legal professional privilege status to the two e-mails.

Azko was joined in its appeal by a number of legal associations, including the International Bar Association, as well as the governments of the United Kingdom, Northern Ireland and the Netherlands.

It was also noted in the case, that the Commission had subsequently finalised the substantive investigation into Akzo during which the two e-mails were seized. In relation to this investigation, the Commission imposed fines against Akzo for a cartel in the supply of heat stabilisers. It was also common ground that two emails which were the subject of the appeal had not played a part in the successful conclusion of the Commissions substantive investigation.

The Commission’s main argument was that the relevant documents did not qualify for legal professional privilege as they did not meet the relevant test as established in Case 155/79 AM&S Europe v Commission (1982) ECR 1575. The test established in this case was that legal advice must be requested by the client and given for the purposes of the client’s right of defence. The Commission argued that the first e-mail was merely a request for comments on a draft letter, while the second e-mail only contained further drafting changes.

The Court held that in order to claim legal professional privilege in relation to communications with in house counsel two conditions must be met:
  • that the exchange with the lawyer must be connected to the client’s right of defence and 
  • that the exchange must emanate from independent lawyers, that is to say lawyers who are not bound to the client by a relationship of employment. 
The second requirement of independence meant that the there must be an absence of any employment relationship between the lawyer and the client. In other words, legal professional privilege will not cover exchanges within a company or group with in-house lawyers.

The Court held that the concept of independence must be determined both positively and negatively:
  • positively, by reference to the professional ethical obligations the lawyer; but also 
  • negatively, by the absence of any employment relationship. 
The Court observed that despite a lawyer’s membership of a Bar Association or Law Society and the professional ethical obligations that they are subject to, they clearly do not enjoy the same degree of independence from their employer as a lawyer working in an external firm.

Consequently, the Court concluded that in-house lawyers are less able to deal effectively with conflicts of interest between their professional obligations and their employer and as such, legal professional privilege was not available.

Conclusions
While commentators on European union competition law did not see this case as an unexpected development, it does provide a strong indication that courts are looking to restrict the scope of legal professional privilege in relation to in-house lawyers.

The case is likely to create added complexities for multinational corporations which operate in the European Union and in other jurisdictions where claims of legal professional privilege can be made in relation to communications with in-house lawyers.

Such corporations will have to avoid situations where communications which they believe are protected in one jurisdiction, may subsequently lose this protection because the communication relates to a transaction or conduct which is the subject of an investigation by the European Commission.

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