No legal professional privilege for in-house counsel communications in competition investigations
17 May 2010
In this case, Advocate General Kokott (AG) gave an opinion on the appeals brought by Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd against a General Court (previously the "European Court of First Instance") judgment that denied the application of Legal Professional Privilege (LPP) to communications with in-house lawyers in the competition context.
In 2003, the European Commission and UK Office of Fair Trading carried out dawn raids on the premises of the defendant organisations. Amongst the documents seized were preparatory notes, including an internal memorandum prepared by a general manager of Akcros for the purpose of obtaining external legal advice in connection with a competition law compliance programme, as well as emails to Akzo's in-house competition lawyer. The defendants argued that the documents in question were protected by LPP.
First Instance decision
The General Court had held that the Commission should not (as it did in this case) take a cursory look at disputed documents in order to determine whether or not they are privileged, but rather should place the documents in a sealed envelope and await the outcome of judicial proceedings (if necessary) to determine the issue. On the question of preparatory documents, the General Court held that such documents are capable of attracting privilege in certain circumstances. The test articulated by the General Court was whether or not the document in question was “drawn up exclusively for the purpose of seeking legal advice …”.
The issue with the most significant ramifications was whether the General Court was willing to extend the concept of privilege to communications to and from in-house lawyers. The decision of the European Court of Justice (ECJ) in AM&S ( ECR 1575 (AM&S) that communications to and from in-house lawyers in the competition context are not capable of attracting privilege has long been controversial. The rationale behind that decision has always been that in-house lawyers, bound by the employment relationship, lack the independence that is the necessary cornerstone of privilege. Numerous professional associations, including the IBA and Council of Bars and Law Societies of the EU, were granted permission to intervene in the proceedings, making powerful submissions that the regime unfairly discriminates against in-house lawyers, and fails to recognise the evolution of the business world and legal profession during the last 25 years.
Notwithstanding these arguments, the General Court upheld the ECJ’s decision in AM&S, noting that "an examination of the laws of the Member States shows that, even though it is the case … that specific recognition of the role of in-house lawyers and the protection of communications with such lawyers under LPP is relatively more common today than when the judgment in AM&S was handed down, it is not possible, nevertheless, to identify tendencies which are uniform or have clear majority support in that regard in the laws of the Member States".
At the appeal stage of the proceedings, only two of the disputed documents remained of interest. These were printouts of emails between the general manager of Akcros and Akzo’s in-house competition lawyer, who was also a member of the Netherlands Bar.
The defendant organisations claimed, in essence, that the General Court was wrong to refuse their claim for LPP in respect of internal correspondence with the Akzo group’s enrolled in-house lawyer. A critical issue was whether and, if so, to what extent, internal company or group communications with enrolled in-house lawyers are covered by the protective scope of LPP.
In-house lawyers not "independent"
Akzo and Akcros contended that the General Court misconstrued the scope of LPP as established in AM&S. They argued that the criterion of the independence of the lawyer concerned must not be interpreted negatively so as to exclude enrolled in-house lawyers but positively, by reference to the professional and ethical obligations to which lawyers admitted to a Bar or Law Society are generally subject. They submitted that, because of the professional ethical obligations applicable to an in-house lawyer as a member of a Bar or Law Society, the lawyer should automatically enjoy the same independence as an external lawyer who pursues his profession on a self-employed basis or as an employee of a law firm.
The AG rejected these arguments and found that:
- Concept of independence determined positively and negatively : following AM&S, the concept of the independence of lawyers is determined not only positively, by reference to professional ethical obligations, but also negatively, by reference to the absence of an employment relationship. It is only where an in-house lawyer is subject, as a member of a Bar or Law Society, to the professional ethical obligations commonly applicable in the European Union and, furthermore, is not in an employment relationship with his client that communications between the two are protected by LPP under EU law.
- In-house lawyer cannot act independently : an enrolled in-house lawyer, despite his membership of a Bar or Law Society and the professional ethical obligations associated with such membership, does not enjoy the same degree of independence from his employer as a lawyer working in an external law firm does in relation to his clients. Consequently, an enrolled in-house lawyer is less able to deal effectively with any conflicts of interest between his professional obligations and the aims and wishes of his client than an external lawyer. Furthermore, as an employee, an in-house lawyer is often required to follow work-related instructions issued by his employer and is in any event part and parcel of the structures of the company or group by which he is employed.
- In-house lawyer economically dependent on employer : The degree to which enrolled in-house lawyers are economically dependent on their employer is usually far greater than the degree to which external lawyers are dependent on their clients. The fact that enrolled in-house lawyers are protected against dismissal under employment law does nothing to alter their economic dependence.
- In-house lawyers have a stronger personal identification with the undertaking for which they work : as well as with its corporate policy and corporate strategy than would be true of external lawyers in relation to the business activities of their clients.
All of these points indicated a lack of the independence required under EU law for LPP to apply.
Principle of equality
Akzo and Akcros claimed that the General Court infringed the principle of equality by treating in-house lawyers differently from external lawyers in relation to LPP.
The AG observed that, according to settled case-law, the general principle of equal treatment or non-discrimination requires that comparable situations (emphasis added) must not be treated differently and that different situations must not be treated in the same way unless such treatment is objectively justified.
However, in this case there was no "comparable situation" as, with regard to their respective degrees of independence when giving legal advice or providing representation in legal proceedings, there is a significant difference between a lawyer in private practice or employed by a law firm and an enrolled in-house lawyer.
The AG therefore found that it was on the basis of that very difference that the General Court concluded, without erring in law, that it is not appropriate to extend LPP to internal company or group communications with enrolled in-house lawyers. Consequently, the principle of equal treatment had not been infringed.
Need to extend the scope of LPP – modernisation of the "legal landscape"
Akzo and Akcros claimed that, in its determination of the scope of LPP, the General Court failed to take account of significant developments in the "legal landscape" which made it necessary to reconsider the case-law in AM&S, in order to avert the risk of infringement of the rights of defence and the principle of legal certainty.
All parties agreed that there was a difference in approach to LPP and in-house lawyers in most Member States, but that in a few Member States there was a move towards extending LPP to communications with in-house lawyers.
The AG set out at some length an analysis of when the ECJ may derive a general principle of EU law from the practice of only a minority of Member States, and found that there were no circumstances apparent which would support the proposition that EU law on LPP should be brought into line with the legal position in a "small minority" of Member States.
The AG also observed that:
- the European Union legislature has recently signalled that it is more opposed to, than in favour of, the idea of treating lawyers in private practice and enrolled in-house lawyers in the same way in relation to LPP (during the process of drawing up legislation to modernise European law governing antitrust proceedings (Regulation No 1/2003) and to revise the EC Merger Regulation (Regulation No 139/2004));
- neither of the two directives relating to the profession of lawyer militates in favour of extending legal professional privilege to enrolled in-house lawyers; and
- the provisions of EU law on the combating of money laundering and terrorist financing cannot be construed as providing a clear signal in favour of the proposition that LPP should be extended to enrolled in-house lawyers.
Modernisation of the law governing antitrust proceedings under Regulation No 1/2003
The appellants argued that that the modernisation of the law governing antitrust proceedings carried out by Regulation No 1/2003 leads to an increasing need for internal corporate legal advice, the role of which, in preventing infringements of competition law, cannot be underestimated. The legal advice given by enrolled in-house lawyers is particularly valuable in day-to-day business because it can be obtained more quickly and more economically and because it is based on an intimate knowledge of the undertaking concerned and its business. The effective provision of internal corporate legal advice and a successful compliance programme are dependent on the possibility of free and faithful internal company or group communications with enrolled in-house lawyers. Otherwise, the appellants submitted, the company’s management would be averse to disclosing sensitive information to an enrolled in-house lawyer, and the enrolled in-house lawyer would be inclined to give advice orally rather than in writing, thus compromising the quality and usefulness of the legal advice in question.
The AG was not swayed by these arguments, repeating the points made on in-house counsel's lack of independence (see above). The closeness of the relationship between an in-house counsel and the business which, the appellants had argued, made their advice so useful, was a "double-edged sword". The AG's view was that the advice given does not merit the protection afforded by LPP, no matter how often it is made, how highly significant it is or how useful it is to the undertaking.
Principle of legal certainty
The appellants argued that it is unacceptable that the protection of communications with enrolled in-house lawyers should depend on whether investigations are conducted by the EU Commission or by a national competition authority. An undertaking whose premises are searched by a competition authority as part of an antitrust investigation must know for certain whether it can rely on LPP in respect of internal company or group communications with enrolled in-house lawyers.
The AG rejected this argument, noting that it is always obvious whether it is the Commission or a national authority carrying out a search. If the Commission conducts an investigation, the rules governing that investigation are determined by EU law; if a national authority conducts an investigation, the rules governing that investigation are determined by national law, and this includes rules relating to LPP.
The appellants raised the concern that the protection of LPP at national level could be eroded by the system for the exchange of information between European competition authorities under Article 12 of Regulation No 1/2003. Whilst the AG noted that this point was not in issue in this appeal, the AG commented that Article 12 is open to an interpretation which, on the one hand is compatible with fundamental rights and on the other hand does not require any competition authority involved to do anything which would be at odds with the provisions applicable to it in respect of LPP.
Alternative claims relating to infringement of the right to unimpeded advice, the right to defence and representation, the right to property, the right to choose an occupation, and national competence to determine rules on LPP were also unsuccessful.
The AG recommended that the ECJ should dismiss the appeal in its entirety. Although the ECJ is not bound by the AG's opinion, its final rulings tend to follow the AG's analysis in a significant proportion of cases.
Karen Birch, Senior PSL, Litigation and Dispute Resolution, comments : The EU's stance on LPP is controversial in many jurisdictions, especially those where LPP is afforded to communications with in-house counsel. The appeals were supported by a variety of international legal professional bodies from the EU and US, including the UK.
The legal landscape has certainly changed since the AM&S case. Today, many businesses have large in-house legal departments staffed by experienced lawyers who are members of their respective Bars or Law Societies, and whose professional obligations take precedence over their obligations to their employer. This opinion, if followed by the ECJ, may well serve to undermine their role.
The precise ramifications of such a decision may take some time to become apparent. However, from an English law perspective, it seems that there is at least a risk that if, in accordance with the AG's opinion, a defendant discloses documents to the Commission on the basis that they are not protected by LPP as a matter of European law, this may prejudice the defendant's ability to claim the protection of LPP over those documents in litigation before national courts (such as in a follow on action before the English courts). A claimant to a follow on action could, for example, potentially run an argument that, by disclosing communications with in-house counsel to the Commission, the defendant has waived the privilege over those documents which would otherwise have existed as a matter of English law (perhaps on the basis that confidentiality has been lost as the documents have been seen by a third party ie the Commission and, potentially, the other undertakings that were subject to the Commission's investigation). The AG's opinion simply does not consider this issue.
Competition compliance is firmly on the boardroom risk agenda, with the increasing threats of private enforcement and criminal sanctions, and extradition for competition breaches. It is important, therefore, that those on the business side are aware that, if they draft communications to their in-house counsel on competition issues, those communications may not be protected by LPP. Obtaining competition compliance advice from external lawyers in multiple jurisdictions may be an unwanted and costly headache for global businesses. This opinion unfortunately suggests, however, that this is likely to remain the safest course of action at least for the foreseeable future.
This case summary is part of the Allen & Overy Litigation Review , a monthly update on interesting new cases and leglisation in commercial dispute resolution. For more information please contact Sarah Garvey email@example.com, or tel +44 (0)20 3088 3710.