The privilege of being in-house

On a February night in 2003, the European Commission, the executive arm of the European Union, sent its competition officials to raid the offices of an international chemical company in Manchester, England. Aided by their U.K. colleagues, they were investigating alleged anti-competitive behaviour. But when the officials stumbled on five documents — two dealing with communications with external counsel and three with the company’s Dutch general counsel — they stopped and made a judgment call. The EU officials sealed the external counsel communications in a bag, as these documents are protected by litigation privilege in the European Union, but decided the in-house communications were fair game in their investigation — a practice that was seen as valid among many of the 25-member bloc’s civil law countries.

The regulators’ decision to use the in-house counsel communications in their case, challenged by the company all the way to the EU’s highest court — the European Court of Justice in Luxembourg — would ultimately officially strip all EU in-house lawyers of the right to have privileged communications with their companies.
But beyond Europe, last September’s decision by the European Court of Justice in Akzo Nobel Chemicals Ltd. and Akcros Chemicals Ltd. v. European Commission caused concern among in-house lawyers everywhere, including Canada, where solicitor-client privilege, regardless of whether it is in-house or external, is seen as a key pillar of the legal system. The European case highlighted how much rules can differ from one jurisdiction to the next. But it also pushed many Canadian corporate lawyers to look at their own practices.

In a sense, Canadian in-house counsel have it far easier than their colleagues across the pond. Every Canadian lawyer InHouse approached for this story said the same thing — what happened in Europe would never happen here. No one in Canada would challenge the privilege of communication between in-house counsel and the companies they work for, as long as the conversation is about legal issues. “Canadian courts have consistently held that there is no distinction between in-house counsel, acting in their capacity as lawyers, and external counsel regarding the legal privilege . . . [in] their communications. Provincial law society rules are to the same effect,” says Pascale Elharrar, associate general counsel at BMO Financial Group.
But any challenge to privilege anywhere in the world is seen by the legal community as undermining the core aspect of the solicitor-client relationship, adds Elharrar. “While the decision does not threaten or challenge the status quo of legal privilege in Canada, it has sparked discussion and concern amongst Canadian legal counsel, both in-house and outside counsel, in the same way that positions taken by some Canadian authorities that solicitor-client privilege should be ignored or waived give rise to concern.”
In Luxembourg, the European judges backed their ruling, noting in-house counsel could not be independent enough from their employer to be afforded privilege. “[T]he in-house lawyer’s economic dependence and the close ties with his employer” mean “he does not enjoy a level of professional independence comparable to that of an external lawyer,” the panel of 11 ECJ judges noted in their decision. “An in-house lawyer cannot, whatever guarantees he has in the exercise of his profession, be treated in the same way as an external lawyer, because he occupies the position of an employee which, by its very nature, does not allow him to ignore the commercial strategies pursued by his employer, and thereby affects his ability to exercise professional independence.”
Deanne MacLeod, a partner at Stewart McKelvey in Halifax, says the ECJ decision will not lead to major changes in Canada. “It is unlikely that this decision will have any direct implications on Canadian law, as privilege in this country is well known, understood, and applied,” she says. “However, companies with operations in Europe must take note of this decision and take appropriate steps to ensure that material they wish to be confidential remains privileged under EU law.”
That’s key, because many Canadian companies’ international interests extend beyond North America. Trade with the EU, Canada’s second-largest trading partner, is currently worth $55 billion a year. And it is projected to grow further should a free trade deal currently being negotiated go through, according to Canada’s International Trade Minister Peter Van Loan. A Canada-EU joint economic study released in October 2008 shows a comprehensive economic and trade agreement could boost Canadian gross domestic product by $12 billion annually, and two-way trade with Europe could increase by 20 per cent.

Although the application of the ECJ decision for the purpose of Canadian in-house is limited to dealings with European counterparts and businesses, its impact is likely to increase. “However limited, though, the impact is important and Canadian counsel need to reconsider the nature and extent of their dealings with in-house EU counsel,” says Elharrar. “Companies with operations or business dealings in Europe would do well to establish best practices for protecting privilege in their communications with European parties. For example, joint defence agreements and other situations where common interest privilege may arise should be crafted with this ruling in mind to maximize protection of privilege.”

In addition, due to the international nature of most EU competition cases and the fact that it is common for Canadian companies to work with EU-based counsel and vice versa, the ruling leaves Canadian companies and their in-house counsel in Europe in jeopardy, says Randy Hughes, a partner and head of the competition group at McCarthy Tétrault LLP. “Companies and their counsel need to be prudent in their communications under these circumstances.”

Advocates of protecting privilege say authorities’ efforts to chip away at protections on communications between in-house lawyers and company executives will simply drive those communications underground and off the record, which is not helpful to any parties and makes the work of corporate counsel far harder.

It is also important to note that in Canada communications between in-house counsel and their employers enjoy the same privilege protections as communications between lawyers in private practice and their clients only when the communications are legal in nature. If you are just dealing with business advice, there is no privilege afforded to the conversation. MacLeod says in Pritchard v. Ontario (Human Rights Commission), for example, the Supreme Court of Canada determined the process for deciding whether privilege exists where in-house lawyers are involved. That process asks whether the advice is legal in nature. In this context, legal advice has been defined very broadly and can include both advice as to the state of the law, as well as advice regarding what should be done in a relevant legal context.

In Europe, in-house counsel are still fuming about the decision. The Association of Corporate Counsel, which represents more than 26,000 in-house counsel around the world, says the decision reflects an antiquated view of the in-house legal counsel and would have “the perverse effect of undermining the efficacy of corporate compliance in multinational companies.” When the decision was released, Susan Hackett, ACC’s general counsel, said the ACC was “dismayed that the ECJ did not seize the opportunity to recognize the independent judgment and value of the in-house profession. Since in-house counsel play such a vital role in assuring that their companies comply with the law, the ECJ should be promoting — not demoting — their capacities.”

The Akzo Nobel decision and its implementation are a harder pill to swallow for lawyers in the United Kingdom, where solicitor-client privilege was a fully recognized concept just as it is in Canada and the U.S. But many other EU countries do not traditionally extend the same privilege to in-house lawyers. “In-house lawyers are the front-line guarantor of compliance. It is sad that while the EU strives to legislate for higher standards of corporate governance and risk management, the decision of the court, in effect, rejects this key tool in achieving this aim,” Law Society of England and Wales chief executive Desmond Hudson said following the release of the ECJ ruling.

Across the Atlantic, Canadian corporate counsel are counting their blessings, but still view the events in Europe with concern. “Even though the decision is not binding upon Canadian lawyers or courts, it casts a chill upon full and frank communications between in-house counsel and their clients,” says Elharrar. “The European Court of Justice had an opportunity to set things right for the legal community and reverse long-standing case law that communications with in-house counsel are not protected by privilege under European law. That the ECJ did not seize it is disappointing, as the decision could serve to constrain the communications of Canadian counsel when they are dealing with EU in-house counsel.”

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