Risks of Having Unlicensed In-House Counsel On Staff: Privilege and Unauthorized Practice

Last summer, a magistrate judge in the Southern District of New York issued an opinion in Gucci America, Inc. v. Guess?, Inc., Case No. 09-CIV-4373-SAS-JLC, which introduced a new standard for determining whether corporations could reasonably rely on their in-house counsel to maintain their licenses to practice law. Fortunately, on January 3, 2011, the federal district court issued an opinion reversing the magistrate judge's decision.

Background

During the litigation, Guess sought discovery of documents from Gucci that included communications Gucci had with its in-house counsel, Jonathan Moss. Moss worked for Gucci in New York. Gucci sought a protective order preventing the disclosure of its communications with Moss. Although Moss was a member of the State Bar of California and had been admitted to practice before a federal district court in California, his California Bar membership was on "inactive" status, meaning that he was not authorized to practice law in California. Moss was not a member of the Bar of any other state.

The Magistrate Judge's Decision

In reaching his decision, the magistrate judge relied on statutory language protecting a client's communication as privileged if the communication is made to "a member of the bar of a state or federal court" with a membership "of a type that licenses one to practice law." Since Moss was not authorized to practice law in any jurisdiction, he did not meet this standard.

The magistrate judge recognized that Gucci's communications with Moss could also have been privileged if Gucci reasonably believed Moss to be an attorney. To determine whether Gucci reasonably believed that Moss was an attorney, the court applied a 3-part test typically used to answer that question: (1) did the person fraudulently hold himself out as an attorney; (2) did the client genuinely and reasonably believe him to be an attorney; and (3) pursuant to that belief, did the client engage in confidential communications with the person? The court held that, because Gucci never made any effort to confirm that Moss was a attorney, it did not reasonably believe him to be an attorney. Accordingly, the magistrate judge concluded that Gucci's communications with Moss were not privileged. See Gucci America, Inc. v. Guess?, Inc., 2010 WL 2720079 (S.D.N.Y. June 29, 2010).

The District Court's Decision

Gucci objected to the magistrate judge's order and, on January 3, 2011, Judge Scheindlin issued an order reversing the magistrate judge's decision. Gucci America, Inc. v. Guess?, Inc., 2011 WL 9375 (S.D.N.Y. Jan. 3, 2011). Applying "federal common law," the court concluded that (1) Moss was an attorney for the purposes of the attorney-client privilege; and (2) even if Moss were not an attorney, Gucci reasonably believed him to be one.

The court explained that, although Moss was not actually authorized to practice law in any jurisdiction, his deposition testimony indicated that he believed that he was authorized to practice in New York by virtue of his (inactive) membership in the State Bar of California. The court considered this belief reasonable. Further, the

"seminal case [on attorney-client privilege, United States v.] United Shoe [Machinery Corp., 89 F. Supp. 357 (D. Mass 1950)], directs only that the person be a 'a member of the bar of a court.' Moss clearly held that status. . . [Therefore,] Gucci should not be penalized because its attorney, a member of the bar in two jurisdictions, may not have been 'authorized to practice law' based on his 'inactive' status as a member of the California bar."

Although this conclusion would have resolved the privilege issue in favor of Gucci, the court then turned to the question of whether Gucci reasonably believed that Moss was its attorney. It concluded that Gucci's belief was reasonable. The court held that the magistrate judge had improperly applied a "due diligence" requirement, rather than a "reasonable belief" test. The court held that "there can be no real dispute that Gucci has proven that it had a reasonable belief that Moss was an attorney." It identified multiple factors supporting this conclusion:

• When Gucci hired Moss, it knew that he had a law degree.
• Gucci hired Moss to do legal work.
• Throughout his employment with Gucci, Moss provided various legal services to Gucci, including appearing before courts and administrative agencies, filing trademark applications, handling employment matters, and negotiating leases.
• Gucci paid Moss' California bar membership fees throughout his employment.
• Six current and former Gucci executives, and its outside counsel, submitted declarations stating that they considered Moss to be an attorney.

"This is more than sufficient evidence to support the conclusion that Gucci had a reasonable belief that Moss was its attorney throughout the relevant period; any other conclusion would be clearly erroneous."

Implication of the Gucci Decision on Communications with In-House Counsel

The magistrate judge's decision raised a great deal of concern, because it appeared to impose an affirmative duty on corporate clients to take steps to determine whether their attorneys are properly licensed to practice law. Had this decision been followed by other courts, it could have imposed a substantial burden on clients to investigate their attorneys' backgrounds. Further, it raised the specter that countless past communications clients believed were privileged at the time would be deemed not privileged.

Judge Scheindlin's opinion removes that concern and allows clients to rely on their attorneys to be licensed to practice law.

Of course, the fact that in-house counsel are licensed to practice somewhere does not automatically make them authorized to practice law in the state where they are located. The head of the company's in-house legal department should ensure that all corporate counsel are authorized to practice law in the state where they are located, whether by admission or registration. Failure to take these steps could mean not only that the unlicensed attorney could be disciplined for practicing without a license, but also that supervising attorneys could be liable for aiding and abetting the unauthorized practice of law. Each state's laws on these issues differ.

If you have questions about any of the issues raised in this alert, contact Pamela Phillips at 415.677.6333, Noah Rosenthal at 415.677.6426 or your usual Arnold & Porter attorney.