Philadelphia’s Commerce Court Permits Discovery of In-House Counsel in Legal Malpractice Suit Against Outside Counsel

This case involves a legal malpractice suit, allegedly rooted in the defendants’ conflict of interest. The complaint alleges that at a time when the defendant lawyers were plaintiff’s counsel, they advised another party in connection with a lawsuit against plaintiff.

The defendant lawyers asserted an affirmative defense that plaintiff executed two engagement letters which included conflict waivers, and these waivers encompassed the alleged conflict at the heart of plaintiff’s claim. There was no dispute that plaintiff’s in-house counsel reviewed the two letters, but there was a vigorous dispute over in-house counsel’s knowledge as to what conflicts were waived.

Defendants assert that at the time of the first engagement letter plaintiff and in-house counsel were aware of a potential for conflict. They plead at the time of the second letter, two years later, plaintiff and in-house counsel were aware of any actual conflict. Plaintiff denied making any knowing and intentional waiver of the conflict when signing either letter, and disputed that its counsel knew of the alleged conflict.

The defendant lawyers sought discovery concerning the two engagement letters and their conflict waivers. This specifically included discovery directed at in-house counsel’s knowledge and communications. The plaintiff objected to producing any information concerning in-house counsel’s advice or work product, and defendants moved to compel.  Judge Nina Wright Padilla granted that motion. A full copy of her opinion in Towers Watson Delaware, Inc. v. Morgan, Lewis & Bockius, LLP, summarized below, is attached here.

The Court could not determine whether the conflict was non-waivable as a matter of law.

The court rejected the notion that the conflict was indisputably non-waivable and obviated the need for any discovery of in-house counsel. Rather, the court found that open issues of fact remained on the nature of any conflict of interest. Thus, determining whether the conflict could not be waived as a matter of law would only come after discovery or even trial.

Discovery was proper because in-house counsel’s knowledge was raised.

As stated, Judge Wright Padilla found discovery concerning in-house could proceed. She first examined defendants’ affirmative defenses, the specific factual allegations made in support of those defenses, and plaintiff’s specific factual responses to those affirmative defenses.

The key allegations are:

  1. The lawyer defendants alleged in-house counsel had knowledge of the potential or actual conflict in assenting to and approving the conflict waiver language in the two engagement letters.
  2. The lawyer defendants alleged plaintiff’s in-house attorneys understood that the lawyer defendants “regularly represented clients in a broad range of commercial matters and that there was a significant likelihood that the waiver would result in [their] engaging in one or more litigations or other legal matters that were adverse to [plaintiff].”
  3. The lawyer defendants alleged that at the time of the second engagement letter and conflict waiver, in-house counsel knew litigation was being contemplated against plaintiff by the defense counsel’s other client.
  4. Plaintiff denied these allegations in detail, among other things alleging that its in-house counsel was not aware of the threat of litigation against plaintiff by defendants’ other client until at least two years after the second engagement letter.

In analyzing these allegations, the court drew from various portions of the Restatement (Third) of the Law Governing Lawyers (2000). The court generally observed the Restatement “is replete with examples of instances where a lawyer is permitted to rely upon privileged materials in defending itself against a client who attempts to use the privilege as a sword rather than a shield….”

Judge Wright Padilla focused, however, on the point that the test for waiving the attorney-client privilege is not whether the client uses the privilege as a sword or a shield. Rather, the key question is whether the client chooses to engage in a dispute that cannot be determined without exploring its attorney’s knowledge and communications. Thus, “[t]he preferred approach is to require that the client either permit a fair presentation of the issues raised by the client or protect the right to keep privileged communications secret by not raising at all an issue whose fair exposition requires examining the communications.”

Applying these principles, Judge Wright Padilla concluded that because plaintiff “raised the issue of its in-house counsel’s (lack of) knowledge and consent in an attempt to defeat [the] defense of waiver, [the plaintiff] must permit its former attorneys … to examine through discovery … in-house counsel’s relevant communications in order to enable a ‘fair exposition’ and ‘fair presentation’ of the disputed issues of knowledge and consent.” In responding to the affirmative defense on the merits by asserting in-house counsel did not have the knowledge alleged, Judge Wright Padilla found it was plaintiff that raised the issue of its attorney’s knowledge, rather than the defendants raising the issue by asserting the affirmative defense to which plaintiff responded.

Thus, the court required plaintiff to answer defendants’ interrogatories and document requests on in-house counsel’s knowledge and communications. Judge Wright Padilla further ordered plaintiff to make in-house counsel available for depositions regarding the two engagement letters and counsel’s knowledge concerning the timing of the third party’s potential claims against plaintiff.

The case is Towers Watson Delaware, Inc. v. Morgan, Lewis & Bockius, LLP, Court of Common Pleas of Philadelphia, April Term 2017 No. 2096, 2019 Phila. Ct. Com. Pl. LEXIS 7 (Phila. Ct. C. P. Jan. 22, 2019) (Wright Padilla, J.)

This decision is currently on appeal to the Superior Court of Pennsylvania, Case No. 2352 EDA 2018.