United States: California District Court Recommends Disciplinary Action Against Law Firm For Disclosing Privileged Statements and Failing to Get Conflict Consent

Originally published April 7, 2008

Keywords: attorney-client privilege, privileged statements, evidence, outside counsel, conflict of interest

The Central District of California has ruled that statements made by an executive to his company's outside counsel must be suppressed in the criminal trial against him because the outside counsel failed to properly inform the executive that they represented the company and not the executive individually, and also because the statements were disclosed to the government without the executive's consent. United States v. Nicholas, 2009 WL 890633 (C.D. Calif. 2009).

In May 2006, Irell & Manella LLP ("Irell") was retained to represent Broadcom Corp. in connection with the company's internal investigation into its stock option granting practices. At the same time, Irell also represented William Ruehle (now-ex Broadcom CFO) in two shareholder lawsuits filed against him regarding the stock option granting practices.

In June 2006, Ruehle met with Irell lawyers to discuss Broadcom's stock option granting practices and his role in them. At no time before, during, or after the interview did the Irell attorneys inform Ruehle that: (1) they were only representing Broadcom at the meeting and not Ruehle individually, and therefore he may want to consult his own attorney; or (2) whatever statements he made could be used against him by Broadcom; or (3) Broadcom had the right and may choose to disclose his statements to third parties, including the government.

In August 2006, without Ruehle's consent, Broadcom directed Irell to disclose the substance of Ruehle's statements to its outside auditors, the Securities and Exchange Commission, and the United States Attorney's Office. The government sought to use Ruehle's statements in the criminal trial against him.  The court sided with Ruehle and held that the statements had to be suppressed.

After first finding that Ruehle's statements were clearly attorney-client communications, the court relied on the California Rules of Professional Conduct to hold that Ruehle's statements had to be suppressed.  According to the court, Irell committed three egregious violations of an attorney's duty of loyalty to a client.  First, Irell failed to obtain Ruehle's informed written consent as required by California's rules of conduct to Irell's simultaneous representation of Ruehle in the shareholder lawsuits and Broadcom in the internal investigation, even though Irell should have known that the interests of the two clients likely were adverse.  Second, Irell "interrogated" one client (Ruehle) for the benefit of another client (Irell) absent the required written informed consent.  Third, Irell disclosed Ruehle's privileged statements to third parties without his consent.  In addition to suppressing the statements, the court found that Irell's actions were so troubling that the court referred Irell to the state bar for disciplinary action.

The Nicholas opinion is a cautionary tale as to the importance of the clearly informing employees and executives of the exact nature of outside counsel's representation and that anything the employee or executive says may be disclosed to others, including the government.  Moreover, it demonstrates that counsel (inside and outside) need to be aware of the local rules of professional conduct when conducting interviews of company employees, particularly where potential conflict situations exist.

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