Australia: No Privilege to be an In-House Lawyer in the European Union

On 14 September 2010, the European Court of Justice (ECJ) refused to extend legal professional privilege (LPP) to internal company communications with in-house lawyers in the case of Akzo Nobel Chemicals and Akcros Chemicals v Commission and Others (C-550/07 P, 14 September 2010).

The ECJ's decision confirms communications between a company and its in-house lawyers are not protected by LPP in relation to certain investigations carried out by organs of the European Union. Currently, the scope of the decision is limited to litigation arising from the Treaty of the European Union, and the common law position in European Union member states is not affected. Companies that do business in Europe will be affected by the decision if they receive a notice from the European Commission regarding anti-competitive issues.

Background

In 2003, Akzo Nobel Chemicals Limited (Akzo) and Ackros Chemicals Limited (Ackros) became the subject of an investigation by the European Commission on cartel conduct. The investigation was carried out by Commission officials assisted by representatives of the British Office of Fair Trading at the companies' headquarters in the UK.

During the course of the investigation the Commission seized a number of documents, including two emails exchanged between the Director General of Ackros and Akzo's coordinator for competition law (i.e. a member of Akzo's in-house team) referred to as "Mr S" in the judgment. Mr S, in addition to being employed as a lawyer in the legal department of Akzo, was also enrolled as a member of the Netherlands Bar.

In May 2003, the Commission rejected a claim made by Akzo and Ackros that the emails were subject to LPP. The companies appealed to the General Court of the European Union, which dismissed their claim in September 2007. Subsequently, Akzo and Ackros appealed to the ECJ.

Legal Professional Privilege in the European Union

The test for LPP within the European Union as set out in Case 155/79 AM & S Europe v Commission [1982] ECR 1575 consists of the following two elements:

1. legal advice must be requested and given for the purposes of the "client's rights of defence" i.e. it must be related to actual or anticipated litigation; and
2. the exchange must emanate from "independent lawyers," that is to say "lawyers who are not bound to the client by a relationship of employment."

Arguments advanced by Ackros and Akzo

The arguments advanced by Ackros and Akzo and the ECJ's responses can be summarised as follows.

1. The Court had wrongly applied the second part of the LPP test in holding that the relationship of employment prima facie excluded any document from the protection of LPP. Mr S' contract of employment made clear that "the company was to respect the lawyer's freedom to perform his functions independently and to refrain from any act which might affect that task". The contract specifically authorised Mr S to comply with all the professional obligations imposed by the Netherlands Bar.
2. Legislation within the Netherlands treats in-house lawyers in the same way as external lawyers, and also includes within its legal professional regulations "additional guarantees aiming to resolve in an impartial manner any differences of opinion between the undertaking and its in-house lawyer." Accordingly, the companies submitted that the decision of the Court in refusing to apply LPP violated the principle of equal treatment.
3. The Court should have re-interpreted the test for LPP to reflect the emerging trend in European Union member states that communications with in-house lawyers should be afforded LPP in certain circumstances. Particularly, the companies noted that the modernisation of the procedural rules in relation to cartel investigations increased the need for in-house legal advice, as in-house lawyers are often in the unique position of having intimate knowledge of the company they work for and its activities.
4. The finding of the Court undermined the principle of legal certainty, as the cartel provisions of the Treaty for the European Union are often applied in parallel with corresponding national cartel laws. In member states which maintain that LPP can apply to communications with in-house counsel, certain communications will be privileged within the national jurisdiction, but not within the jurisdiction of the European Union.

Ruling of the ECJ

The ECJ held that overall, "in-house lawyers and external lawyers are clearly in very different situations," and an in-house lawyer's employment by a company prevents them from ignoring the commercial strategies pursued by their employer.

With regards to the fact that the in-house lawyer may be subject to the same national practice rules as an external lawyer, the ECJ noted that

The ECJ also noted that under the terms of their contract of employment, in-house lawyers are often required to carry out tasks other than the provision of legal advice. In the present case, Mr S was appointed as the "competition law coordinator", which "may have an effect on the commercial policy of the undertaking." The principle of equal treatment between in-house and external lawyers was held to apply only insofar as the formal act of admitting an in-house lawyer to a Bar or Law Society and the professional ethical obligations incumbent on them.

In responding to the argument that the test for LPP should be amended to reflect emerging trends within national frameworks to protect communications with in-house lawyers, the ECJ held it was not possible to identify tendencies which were sufficient to justify a change to the test outlined in AM & S Europe v Commission. The ECJ noted a considerable number of member states do not allow in-house lawyers to be admitted to a Bar or Law Society, and do not recognise them as having the same status as lawyers in private practice.

Finally, the ECJ held that the test for LPP did not undermine the principle of legal certainty. The European Commission's investigatory powers could be distinguished from enquiries which may be carried out at national level by government bodies. With respect to the competition law regulations that were the subject of the present proceedings, the ECJ noted that there was an agreed division of power between national and European Union competition authorities.

Accordingly, the ECJ held that companies are in a position to clearly determine when communications with in-house lawyers may be subject to a claim of LPP.

Considerations for local in-house counsel

Although Akzo Nobel is not binding in Australia, the decision is still significant for Australian in-house lawyers.

Specifically, Australian companies with business in the European Union must be careful when obtaining advice from in-house counsel in relation to activities in European Union member countries, as those communications may not attract LPP.

On a broader level, the decision prompts a re-evaluation of the importance of the independence requirement in the current test for LPP in the Australia. Privilege is considered to be a substantive right of the client. However, the ECJ's decision in Akzo Nobel completely removes the client's right to claim privilege, without exception, based on the employment relationship between in-house lawyers and their employer company.

Notwithstanding the limited impact of the of the ECJ's decision, restricted currently to competition investigations by the European Commission, the case may provide further impetus for a reconsideration of the independence requirement set out in Australian LPP cases such as Rich v Harrington [2007] FCA 1987 and Waterford v Commonwealth (1987) 163 CLR 54. In the recent Federal Court decision in Dye v Commonwealth Securities Ltd (No 5) [2010] FCA 950 (1 September 2010), Katzman J appeared to move away from a requirement of independence completely. Although ultimately Katzman J did not have to decide on the issue, she commented that the test enunciated by Branson J in Rich v Harrington could be defined without reference to a requirement of independence. Katzman J said:

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