Law Firm Uses Attorney-Client Privilege As Shield In Derivative Suit

Nancy Wojtas at Cooley LLP recently brought an interesting ruling to my attention that involves the interplay between derivative litigation and the attorney-client privilege, IP Telesis Inc. v. Velocity Networks Inc., C.D. Cal. Case No.CV 11-09950 RGK (AJWx) (Nov. 5, 2012). The case involved a derivative suit against a law firm. The plaintiff charged the law firm with aiding, abetting and conspiring in a breach of fiduciary duties by the corporation. It seems that the corporation had approved a repurchase of shares held by two of its directors. After having been advised by the law firm that this would violate California law, the president (who was also a director) repurchased most of the shares and the corporation purchased the balance.

The defendant law firm moved to dismiss on the basis of the attorney-client privilege. Judge R. Gary Klausner ruled that under California law a “derivative suit against a corporation’s attorney may be dismissed where, in the absence of waiver by the corporate client, the attorney is effectively foreclosed from mounting any meaningful defense because attorney-client privilege bars disclosure of communications that would form the defense.” (footnote omitted) (citing McDermott, Will & Emery v. Super. Ct., 83 Cal. App. 4th 378, 385 (2000); Virtanen v. O’Connell, 140 Cal. App. 4th 688, 702 (2006)). Normally, the filing of a lawsuit against an attorney results in a waiver. Cal. Evid. Code § 958 (“There is no privilege under this article as to a communication relevant to an issue of breach, by the lawyer or by the client, of a duty arising out of the lawyer-client relationship.”) Judge Klausner, however, found that the corporation, not the plaintiff-shareholder, is the holder of the privilege “so the privilege is not waived by a shareholder filing a derivative claim against the attorney defendant.”

You can read Judge Klausner’s ruling here.

Μῆνιν ἄιδε, Θεά, Πηληιάδεω Ἀχιλῆοσ

If you want to read about a really extraordinary shield, check out Book 18 of The Iliad in which Homer gives a wonderful ekphrastic description of Achilles’ shield. If you would like to see a silver-gilt replica of the shield, The Huntington Library in San Marino, California used to display one the five shields fashioned in 1823 by the royal goldsmiths, Rundell, Bridge & Rundell. It’s been a while since I’ve visited the shield so I can’t say whether the library still has this remarkable work of art on display.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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