Teleglobe Communications Corp. was in big trouble. When the dot-com bubble burst in 2001, the company's $6 billion network build-out suddenly looked like a disastrous folly. And in April 2002, Teleglobe's parent company, BCE Inc., decided it was time to pull the plug on funding for the subsidiary. Within a month, Teleglobe filed for bankruptcy protection.

When BCE announced the decision to cut Teleglobe off, the company's chief legal officer notified Teleglobe that BCE's legal staff could no longer provide counsel to Teleglobe or its subsidiaries. BCE arranged independent legal counsel for Teleglobe, and the case proceeded as a fairly typical bankruptcy proceeding until July 2002, when Teleglobe sued BCE and its officers and directors for breach of contract and fiduciary duty.

In the discovery phase of that litigation, Teleglobe's U.S. subsidiaries asked what BCE's inside and outside attorneys were telling the company in weeks and months leading up to the separation.

BCE asserted attorney-client privilege over about 1,000 documents the company said attorneys prepared for the parent company's eyes only. The subsidiary cried foul, and Delaware District Judge Sue L. Robinson sided with Teleglobe. She ruled BCE's privilege claim was “eviscerated” because the parent company's in-house attorneys had jointly represented BCE and Teleglobe on matters related to Teleglobe's restructuring.

BCE appealed to the 3rd Circuit (Teleglobe Communications Corp. v. BCE Inc.). The outcome of the case will have important ramifications for in-house counsel serving parent companies and their subsidiaries.

“This may be one of those tip-of-the-iceberg issues,” says Susan Hackett, general counsel for the Association of Corporate Counsel. “If the court is saying lawyers shouldn't operate across entity lines for affiliated companies, there will be a huge backlash.”

Blurred Lines

Privilege assertions can raise thorny questions in any case, but such questions become more complex when the privilege involves jointly represented clients.

“The way common-interest law works, there is no privilege vis-a-vis entities that are part of the common interest,” says Daniel Capra, a professor at Fordham Law School in New York. “But once the common interest is gone, each party is entitled to privilege over anything that comes out of that former relationship.”

In this case, however, BCE asserted privilege over documents related to Teleglobe's impending insolvency that were prepared between Nov. 1, 2005, and April 23, 2002, when BCE cut off funding to Teleglobe. BCE argued the documents were privileged despite the joint representation because they were meant solely for the parent company and its board members, not Teleglobe.

The Delaware district court appointed a special master, Collins J. Seitz Jr., to determine whether BCE's privilege assertions were valid. In February 2006, after reviewing some 1,000 documents, Seitz decided attorney-client privilege didn't apply, because BCE and Teleglobe indeed shared joint legal representation on matters of common interest, namely Teleglobe's restructuring, right up until April 23.

“Counsel did not attempt, until late in the game, to clarify who was ?? 1/2 representing whom and on what subject matter,” Seitz stated. “In the heat of the restructuring debate, and with so many attorneys responding to so many issues, the lines of representation were unclear.”

Seitz found some documents appeared to be directed solely at BCE, but some portions appeared to be directed to both BCE and Teleglobe–such as a slide in a draft presentation to BCE's board. Because BCE attorneys who were jointly representing both the parent and the subsidiary saw the documents, BCE must produce them all.

“It should come as no surprise to BCE that information channeled through its in-house counsel would have to be disclosed to Teleglobe,” Judge Sue Robinson wrote.

Conflicting Duties

In its appeal, BCE might raise an argument not discussed in the district-court case–namely, that its right to privilege supersedes the duty of its conflicted attorneys to make the right ethical choice in withdrawing counsel as soon as the interests of its jointly represented clients diverged.

“[T]he lawyer may have a conflict between the duty of confidentiality and to inform once having received the information,” wrote Stephen Gillers, a professor at New York University Law School, who served as an expert witness for BCE. “But a lawyer's conflict does not translate into a client's loss of the protection that the law otherwise grants to communications with its lawyer.”

If the appeals court accepts this reasoning, it would be both good and bad news for in-house counsel. The good news: privilege survives a bad ethical choice on the attorney's part. The bad: attorneys are on the hook to identify the precise moment interests diverge and a conflict is born, and then recuse themselves from representing both parties accordingly. This could be difficult or impossible for many corporations whose legal departments provide counsel to a wide range of subsidiaries.

“The district court's order leads to the anomalous result that a corporation's general counsel cannot provide advice to a parent company about its relationships with subsidiaries with the expectation that it will remain privileged,” wrote a group of five Canadian companies in an amicus brief.

The 3rd Circuit's decisions could have disturbing implications for corporations. In-house attorneys might need to begin paying closer attention to the potential for conflicts between jointly represented clients–and what those conflicts imply for their privilege and disclosure duties.

“It's an important question in the post-Sarbanes era,” Hackett notes. “Companies are doing everything they can to protect shareholders and keep the corporation running. The court shouldn't create disincentives for in-house attorneys to practice across lines of business.”