Attorney-Client Privilege for Transactional Attorneys

Attorney-Client privilege is a particularly tricky issue for attorneys who handle business transactions in Phoenix, as they so often have clients for both legal and non-legal services. A client who requires legal services is protected by quite strict attorney-client privilege ethics rules. However, a client who is provided strictly non-legal services cannot be protected by attorney-client privilege. The ambiguous part comes when a client uses both legal and non-legal services. Transactional attorneys repeatedly face this situation.

The Rules

• A lawyer may not act unfavorably to a current client.
• A lawyer may act unfavorably to a former client only if the new issue is clearly unrelated to the issue the lawyer previously handled.
• A conflict that affects one member of the firm affects all members in the firm.
• A client may waive conflicts if provided proper disclosure and consent. The court usually takes the client’s expected level of sophistication and understanding into account when judging the validity of waivers.

Legal vs. Non-Legal Services

If a lawyer advises on both legal and non-legal matters, it is important to establish what communications will be covered under attorney client privilege and what will not. Attorneys should discuss with the clients the nature of advice they are seeking and warn clients when discussions are not protected. Additionally, transactional attorneys should acquaint themselves with the particular provisions of privilege in their state, as these may differ.

For courts to consider communications privileged the “dominant purpose” of discussion must be about legal matters—and unable to be provided by a non-legal agent. As an example, advice on business strategies is not protected but questions on what structure to form that business would.

Accidental Clients

Transactional attorneys are much more likely to acquire “accidental” clients, who will also be covered by attorney-client privilege, making attorney-client privilege much more difficult to navigate.

The clients of transactional attorneys often represent not simply people but entities—corporations, trade associations and syndicates. Therefore, more than the single individual in contact with the lawyer may be harmed by a breach of attorney-client privilege. It is crucial for a transactional attorney to establish who is actually a client, and if they receive legal or non-legal services.

Please note: attorney-client relationship can be established without the presence of an engagement letter or a fee-paying arrangement. Simply providing legal advice, receiving confidential information or otherwise treating the entity as a client can establish that relationship.

To avoid accidental clients, a letter of engagement from the client stating both who is a client and who is excluded (such as affiliates, parents, subsidiaries etc.) limits the chance of a lawsuit. However, such a letter should be sent to the non-client entities to ensure their consent.

Joint Representation

Another grey area that transactional attorneys often find themselves in is the issue of joint representation. Transactional attorneys may represent multiple clients in the same legal matter. Each client is owed zealous representation so problems may arise where there is significant disagreement. While frank discussions may be expressed, where there is “fundamental antagonism” between clients, a lawyer must withdraw representation. It is the responsibility of the attorney to validate that the partners are in agreement of their goals. 

When times are good, clients rarely worry about violations of attorney-client privilege. However, when investors lose money, they are quick to blame their transactional attorney whether the financial loss was related with any ethical missteps on the part of the attorney or not. Taking the time to establish conflicts ahead will save transactional attorneys much heartache and financial problems. 

This article brought to you courtesy of the Phoenix business law firm of The Law Offices of Donald W. Hudspeth. To contact the Phoenix business transactions attorneys, call 866-696-2033

SYNOPSIS

 Attorney-Client privilege can be an issue for attorneys in business transactions in Phoenix. Business firms in Phoenix explain the ambiguity between both legal and non-legal services.

The Law Offices of Donald W. Hudspeth, P.C.

Business Law, Commercial Litigation & International Business Law

www.AZBUSLAW.com – 866-0696-2033 - TheFirm@azbuslaw.com

“The Business of Our Firm is Business”

10 Common Mistakes that Business Owners Make.pdf

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Phoenix, Arizona Business Lawyers 

The Law Offices of Donald W. Hudspeth, P.C.
Business Law, Commercial Litigation & International Business Law

www.AZBUSLAW.com 

"The Business of Our Firm is Business"

BIG CASES DON’T JUST HAPPEN TO BIG, BAD CLIENTS

I.  Size Does Not matter. 

            An understandable, but false, assumption of some potential law firm clients is that a small case will cost less than a big one. After all, if I buy a small coffee I expect to pay less than I would pay for a larger size, so why do legal fees not adjust to the size of the case? 

            Well, first of all, they do in some cases. Legal fees can track the size of the deal in transactional matters; that is, where the parties are negotiating a deal and entering into contracts re same. For example, if the transaction involved the sale of a radio or TV station then the complexity of the work and the downside risk compel the parties to retain experts and do work in a number of areas, e.g. federal and state licenses, legislative and government agency support, appraisal, etc. So, if you are buying or selling  a coffee house then you can expect the legal fees to be much less than if you are buying or selling a semi-conductor company.  But, the cases discussed in this article are not the transactional ones, but dispute and litigation matters. 

            Litigation cases can be incredibly and aggravating “inelastic,” as to the size of the case, i.e. what is at stake. (“inelastic” is a term from economics price theory which means, ceteris paribas,[1] that a change in price will not cause a significant impact on sales. For example, automobile sales may be highly elastic to price changes while changes in the price of sale may not be. If your local car dealer lowered car price by 20% you might be motivated to buy – or try to – but 20% off the cost of salt, say, from $1.00 to 80 cents may not motivate the typical consumer.   

            Phoenix and Maricopa County Arizona – in fact the entire State of Arizona have a large number of small businesses with all types of cases, almost beyond imagination – especially the client’s imagination because the client does not deal with these problems all day-every day. The cases may vary from trying to get paid on an account, say, in the amount of $5,000.00 to comparatively esoteric and complex claims for breach of trade secrets statutes and, perhaps, even a Confidentiality and Non-CompetitionAgreement with key employees, which where enforceable (as they are in Arizona) are extremely valuable to the company and every small business with key employees should have one.[2]     

            Take a $5,000 collection case. In Arizona cases above $2,500 are too large for the  “Small Claims” division where  you have the “parties only” with no lawyers allowed (the “small claims court like the People’s Court). While, in Arizona, cases under $10,000 are still in Justice Court, therefore heard by a Justice of the Peace (which in Arizona may not have attended law school) upon the request of either party the Rules of Civil procedure and the Rules of Evidence may apply. We could write a whole article, if not a book, on the impact of these Rules on the dispute resolution process, but the short version is that applying the Rules of Civil Procedure means that a certain course of conduct must be followed work must be done in preparation of trial. This can include “disclosure statements’ deposition, etc., pre-trial memoranda, etc. etc.. and, applying the Rules of evidence means that a non-represented part can be “lawyered to death” due to the rules against hearsay, authentication of documents, etc. Generally, evidentiary rules require that the person who saw or has first-hand knowledge about the event or document must be in court and subject to cross-examination. This means witnesses may be called, subpoenas issued and discovery requests may be made resulting in more depositions, etc. 

            The point of the above hypothetical is to show that the cost of the case to the litigants is not  a function of the case, but its forum and the Rules that apply.  One can only imagine what happens to the cost of civil action where the case is more complex with many legal claims, parties, witnesses, and documents. 

            Conversely, a large case in terms of “dollar denomination” may be relatively inexpensive compared to a smaller but more complex action. For example, while as discussed, above a small case can get complex and expensive, the cost of a “million dollar” collection case to recover monies due on a promissory note (which can be difficult to defend) can be “inconsequential” (i.e. much, much less) compared to the fees necessary to enforce claims for “tortious interference with contract or businesses expectancy,” breach of fiduciary duty, or misrepresentation claims, etc. (“Claims”)[3] , which many business owners have not even heard of prior to the action.  

II. Conclusion.  

            As shown, the cost of litigation is not a factor of the size of the case but of the type of case, including the kind of Claims and the Rules that apply. So, somewhat counter-intuitively, a $100,000 breach of fiduciary duty case may cost less than a $1,000,000 collection case.

The Law Offices of Donald W. Hudspeth, P.C.
Business Law, Commercial Litigation & International Business Law www.AZBUSLAW.com – 866-696-2033 – TheFirm@azbuslaw.com
“The Business of Our Firm is Business”

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[1] “Ceteris Paribas” is econo-speak for “all other things being equal. You get a lot of ceteris paribas in economic studies. Of course the fact that all other things never are equal is a problem for the real world, not the professors. 

[2] I have written about the value of non-competition agreements in other articles, which are available upon request. 

[3] Roughly, tortious interference with contract or expectancy is the act of attempting to terminate an existing contract and make your own sale to the customer. Many sales persons do not even know this can be seriously unlawfully, with punitive damages awarded, especially where inside knowledge or special, targeted incentives  are offered, e.g. special offer of 20% to existing customers of XYZ company only using as mailing list a confidential customer list of the target company. Breach of fiduciary duty I the highest duty imposed at law, for example, the duty employees and partners owe the company and their partners to act with the highest standard of loyalty, honesty, trustworthiness and integrity.   Employees have this duty? Yep. Who knew?    

LEGAL EVENTS AND LEGAL DOCUMENTS

Over the years in my legal practice I have noticed that, much as I would wish, advise, and preach to the contrary, most of my business law clients come to the firm, not because they have recognized a need and seek to avoid or prevent some problem or event from happening, but in response to that problem or event after it has occurred.  In other words, the demand for our legal services is reactive, not preventative.

This response-based, as opposed to prevention-based, approach to legal services has several consequences to and for the firm and the client:

1. Legal matters are handled at the dispute level rather than the transaction level.

2. The cause of the dispute is often due to the lack, or legal inadequacy of, the underlying business formational or transactional documents. And now that the event has occurred the client has at least three problems. 

A. The loss of merits, advantage, even remedy, caused by bad documentation,

B.  The exponentially greater cost of “cure” versus “prevention,” and

C.  Fixing the bad documentation so the problem will not arise again.

Loss of Merits, Advantage or Remedy.

Just a few of many examples of the loss of merits, advantage or remedy are: 

A.  The failure to have a well drafted key person employee confidentiality and non-competition agreement (in states like Arizona which allow same). The consequences or benefits of having same can be huge, e.g. my printing company client who weathered the Great Recession only to have his six year star sales person leave and do $1,116,000.00 in business in six months with the business clients because the company had an expired, do-in-yourself confidentiality agreement (only).[1]

B. Potential liability under a defective software program for lost profits of $1.5 million when by law the consequential damages remedy could have been limited to the cost of the software, $139.95.  

C.  Business owner termination and separation disputes, known in the trade as “partnership disputes” (although the owners may be in fact corporate shareholders or LLC members) which can last a year and cost, say, $50-100,000.00 to litigate whether a buy out of the existing “partner” will occur at all and another six months to a year, and $50-$100,000.00 more to hire experts and litigate the price.  And this agony can be easily and cheaply avoided by having a “shareholders agreement” (for corporations) or “buy-sell agreement (in general) that deals with dissociation issues (typical causes for buy-out would be divorce (purchase from ex-spouse), disability, death, and sometimes termination of employment). Our firm typically charges $1250-$1500 base fee for such documents. Many law firms with bigger clients may charge $5,000 and up, but at anywhere near these prices the documentation is a much better bargain than the event.  

Litigation versus Prevention.

As noted in the above examples, the cost of bad documentation can be extreme, especially if the cost of litigation is added to the loss. For example, in the case of the expired confidentiality agreement, we tried to “bootstrap” that agreement into a non-competition agreement by focusing on the statutorily as well as contract protected customer list and proprietary information, but this argument failed at the trial level – after the client spent more than $100,000.00 in attorneys’ fees, and to my knowledge the client lost on appeal by an appellate firm. The point here is that some problems just cannot be fixed after the fact and the cost to attempt to do so can be astronomical.

This is not to say that good documentation prevents or eliminates bad events or “misconduct.” An employee or partner or other contract party who is going to “act out” may do so regardless of what the contract says. However, this firm reviews and advises employees, business owners and contract parties before they leave or take a certain action under a contract so they can know what to expect. Sometimes this changes the outcome.   In any case, good documentation creates or adds to clarity and certainty which can bring the matter to a close more quickly at less cost. So, good documentation may not only prevent the harm but reduce the cost of dealing with the harm.

Fixing the Organizational or Contract Problem.  

As we have been discussing, it is a much better idea “to close the barn door before the cows get out.” This is such common sense that it is difficult, frustrating and “saddening” to me as a business lawyer to see the great harm and costs that could have been prevented. But, in the event a negative incident occurs the client should not stop or limit the law firm representation to just the matter at hand, but also should have the firm fix the underlying documentation problem; that is deal with both the event and the documents –put yet another way to fix the problem and its cause. 

“Overstating and oversimplifying…” (if you meet with me you will hear me say that a lot) most small business, and many national business documents are crap, either in general or under Arizona law. Clients often go Online to obtain legal advice and legal forms, or just as often use their old employers’ or someone else’s form. (but “Who says the document is good just because they use it?)  Overstating and oversimplifying again, they typically get neither advice nor good documents. They do not get “advice” because advice must be tailored to specific client facts and needs (one fact can change everything) and they do not get a good contract because, among other things, the law varies from state to state. In the attempt to make one size fit all, it may not fit any client well.[2]  

Conclusion.    

You can save your business and yourself time, money and aggravation by thinking proactively. Now, when you don’t have legal problems is the time to have your legal “audit,” “check-up,” or “review” – whatever you want to call it.  Planning for security and growth is fun; dealing with problems aggravated by poor planning is not.  This is particularly important in the predatory world we live in today, where competitors, contract parties, and customers may want you to make mistakes so that they can capitalize on your errors and omissions. 

So, call us. Let’s get your legal house in order.

The Law Offices of Donald W. Hudspeth, P.C.
Business Law, Commercial Litigation & International Business Law
www.AZBUSLAW.com – 866-696-2033 – TheFirm@azbuslaw.com
“The Business of Our Firm is Business”

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[1] Clients appear to think that because law is in English that they know what they are doing. They almost never do and lose great benefits, both proactive and protective. 

[2] I have written on this topic in my article on “Dos and Don’t’s on Using Google for Legal Matters.