How Far Does the In-House Zone of Silence Extend?

by Conduent
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How Far Does the In-House Zone of Silence Extend?In a recent case, a Massachusetts appellate court raised important questions about the scope of the work product doctrine for in-house lawyers. In Cahaly v. Benistar Property Exchange Trust Co., the plaintiffs sought sanctions against Merrill Lynch and its counsel, asserting that Merrill’s law firm failed to produce documents relevant to whether it knew Benistar, the defendant trust company, whose accounts it handled, was trading with third-party money.

The controversy arose when the plaintiffs moved for sanctions against defendant Merrill and its former counsel, who did not produce the documents at issue in a 2002 trial. When the court granted the plaintiffs a new trial, Merrill engaged different defense counsel who produced the documents in discovery, prompting the plaintiffs to file a motion seeking sanctions for the wrongful withholding of documents.

In the first case, Merrill’s outside counsel spoke with employees who handled the Benistar accounts and was told that no one knew of any third-party involvement with the funds; furthermore, no one had visited Benistar’s website, which revealed that the company served as an intermediary for third-party funds. Subsequently, outside counsel received a file containing documents that contradicted these representations from an in-house lawyer, who had collected the file from an options specialist in Merrill’s compliance department. The specialist had restricted Benistar’s trading after reviewing the webpages, discovering that Benistar was an intermediary, and becoming suspicious that “Benistar was trading other people’s money through its Merrill accounts.” Merrill’s outside counsel decided that the specialist had “operated under the umbrella of the office of general counsel,” “acted on occasion when litigation was anticipated,” and “was generally under the direction of attorneys.” Therefore, counsel decided to withhold the documents under the work-product doctrine.

In ruling on the plaintiffs’ motion for sanctions, the trial court found outside counsel acted in good faith in failing to disclose the evidence and in relying on it during the trial. However, the appellate court reversed, finding that work product “may be subject to disclosure upon a showing of a substantial need for the material and that its equivalent cannot be obtained by other means,” where, as here, the “work product at issue is central to the parties’ substantive claims.” In addition, the work product at issue involved facts rather than an opinion and thus should receive “far less protection.” Therefore, the firm’s outside counsel “lacked an adequate basis in law” to withhold the documents as work product, especially where Merrill “assert[ed] a defense claiming just the opposite.” In fact, the decision likely ran afoul of the lawyer’s ethical duty to avoid making false statements of material fact or law to the court, given his reliance on these facts in a summary judgment brief (submitted before he received the file), joint pretrial memorandum, and closing argument. The appellate court remanded the case to the trial court for further findings and millions of dollars in potential sanctions.

It is unclear why Merrill and its counsel persisted in this defense despite the existence of the contradictory evidence; the link between the specialist and in-house counsel seems tenuous at best. At the very least, counsel should have contacted an ethics expert to determine the applicability of any privilege or work-product protection. Furthermore, the omission of the evidence occurred in the first trial, which took place in 2002; if the parties had access to advanced e-discovery technology, the documents—or the lack thereof—probably would have come to light sooner and changed the entire tenor of the case. With tools such as technology-assisted review, parties on both sides of the aisle have many more ways to mine voluminous document collections and productions for hidden evidence.

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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