In-House Counsel Beware: Your Software Audit Related Communications With Your Client May Not Be Privileged

By Pam Fulmer
 
In our software audit defense practice, we often see in-house counsel advising their client under audit for much of the audit process, without bringing in outside counsel skilled in software audit defense such as Tactical Law.  This decision to “go it alone” by Oracle customers in particular may be risky in the event Oracle sues the customer in federal court in California for breach of contract and copyright infringement arising out of an Oracle audit.  That is because most Oracle license agreements contain California dispute resolution provisions.  California is in the Ninth Circuit, and the Ninth Circuit’s law on when attorney-client privilege applies to in-house lawyers advising their clients is not very protective of the privilege, especially as compared to other circuits.  That is because the Ninth Circuit held in the In Re Grand Jury case that “the primary-purpose test applies to attorney-client privilege claims for dual- purpose communications” between in-house counsel and their clients.  So, in the Ninth Circuit in order for the privilege to apply to a communication from in-house counsel to a businessperson at the company, the primary purpose of the communication must be legal advice.  It is not enough that a purpose of the communication is legal advice.  What does this mean for Oracle licensee’s litigating against Oracle in federal court in California?
 
In the event of litigation, Oracle would most likely seek discovery on internal company communications regarding the audit and its findings, including in-house assessments as to the Oracle licensee’s view of its potential exposure, and any admissions of non-compliance.  If in-house counsel in advising her client has wrapped in with the legal advice, other related issues which could be viewed as purely business advice, then it is likely that a federal court applying In Re Grand Jury could find that the communication is not privileged, and order that the communication be produced.  This could be an absolute disaster of course, especially since Oracle licensees often opt to hire outside licensing consultants to assist with the audit, and Oracle may argue that communications with these consultants even where in house counsel are involved are not privileged because the in-house counsel was wearing their business and not their legal hats when they offered the advice.  And of course, any claim of privilege could be weakened even further if the consultants were hired by the business and not the law department.  So, the safest course by far is to hire outside counsel to advise on the audit, and allow outside counsel to retain expert consultants to assist in rendering legal advice and to advise the client on legal strategies to push back on audit findings.  Oracle auditors are very aggressive and commonly rely on their non-contractual VMware arguments based on Oracle’s Partitioning Policy (among other arguments) to inflate audit findings.  As a result, any Oracle customer under audit should anticipate that litigation is a real possibility, especially as Oracle will use hard ball tactics such as threats of license termination and actual breach notices to have its way with Oracle customers.
 
Oracle customers who follow this advice will be in the best position to push back on Oracle, because the Oracle Legal Department mostly advises the Oracle Business on audit related matters, and only rarely does it appear that they bring in outside counsel and usually only for the most contentious audits.  As a result, in the event of actual litigation, Oracle customers who protect themselves by hiring outside counsel early, are in the best position to use the Ninth Circuit In Re Grand Jury case against Oracle in discovery proceedings, and to argue that it is the Oracle communications around the audit that may not be privileged, as the Oracle lawyers were wearing their business and not their legal hats in rendering the advice to their client.  Oracle of course will resist such discovery, but Oracle does run a risk as their in-house lawyers appear to be intimately involved in the business advice, as well as the legal advice.
 
Recently, the Supreme Court of the United States has granted cert and has taken up the invitation by the U.S. Chamber of Commerce who filed an amicus brief asking the Court to resolve the circuit split involving what test should govern the privilege protections applying to dual purpose client communications with attorneys.  Right now, there are three circuit tests: Ninth, D.C., and Seventh Circuit.  The D.C. Circuit is the most lenient allowing protection where “a purpose” of the communication is to render legal advice.  As discussed above, the Ninth Circuit requires that “the purpose” of the communication be to render legal advice, and not simply "a purpose".  The Seventh Circuit is the most restrictive test, and finds that dual communications are not privileged as they do not involve purely legal advice.
 
Obviously, the implications of this split involve much more than software audit defense.  The split should be clarified, and one rule should govern, although hopefully not the Ninth Circuit rule.  Otherwise, in-house counsel and their clients are put in an impossible situation.  As the U.S. Chamber of Commerce noted in its brief:
 
Businesses often rely on their counsel to serve a variety of legal and non-legal roles. And predictability as to the confidentiality of communications with counsel is paramount to ensuring frank and open disclosure to, and proper legal advice from, counsel. Such predictability is especially critical for businesses that operate across jurisdictions and for small businesses that rely on a limited number of employees to perform a wide array of functions. The disagreement among the courts of appeals regarding the proper test for determining whether dual­purpose communications are privileged creates uncertainty. And this uncertainty hinders the business community's ability to operate effectively and efficiently.
 
I also thought that these passages really hit the nail on the head: 
 
The practical import of the Ninth Circuit's standard is that businesses and non-lawyers will be less likely to seek legal advice, especially from in-house counsel. Even when an employee with a clear purpose of seeking legal advice communicates with an attorney, if a court later determines that a non-legal purpose was predominant in the employee's mind, the communication will be discoverable. The same holds true if a lawyer responds with legal advice but also includes a greater amount of business advice. Given this cloud that hangs over dual-purpose communications under the Ninth Circuit's standard, the client may choose not to communicate with the attorney at all.
 
[T]he Ninth Circuit's single-purpose standard imposes additional costs on the business community. Only granting privilege protections to communications where legal advice was the primary purpose guarantees inefficiency. Communications with lawyers will need to become siloed, with information needlessly repeated or lost in the process. In-house counsel, whose responsibilities often include a multitude of non-legal tasks, will be marginalized and provide less value to their employers. [citations omitted]. Indeed, companies may decide to opt for the advice of outside counsel more frequently because they traditionally perform more discrete roles that are easier to cabin. [citations omitted]
 
In short, the Supreme Court should clarify the rule.  But until they do, for companies facing software audits and especially Oracle audits, the safest bet is to retain outside counsel to advise on the matter. 
 
Tactical Law advises companies across the United States in software audits, including those involving the licensing of Oracle software.