Los Angeles Lawyer

The Magazine of the Los Angeles County Bar Association

MCLE Article: Advice And Counsel

By Kyle Kveton

Kyle Kveton is a member of Robie & Matthai, APC. One of his primary practice areas is the defense of attorneys in legal malpractice litigation.

By reading this article and answering the accompanying test questions, you can earn one MCLE legal ethics credit. To apply for credit, please follow the instructions on the test.

Diversification of services is not entirely new. For example, law firms have long encouraged their members to serve on the boards of directors of corporate clients. As one study noted, there are many legitimate reasons for a firm, through its attorneys handling the representation of the client, to involve itself with the client's business affairs: The involvement 1) strengthens the firm's ties to the client, 2) keeps the firm better informed of the client's business affairs, 3) improves the credibility of the attorneys with their client, 4) results in additional prestige for the attorneys and the firm, and 5) assists the attorneys in developing contacts other than the client, which may result in additional business for the firm.1 Offering nontraditional client services simply is another way to meet those objectives.

No good intention goes unpunished, however. There will inevitably be circumstances in which either the client or a third party claims it was harmed as a result of nonlegal advice. Malpractice lawsuits arising out of that advice raise several important questions that may affect dramatically the rights of a lawyer and a client:

• Does it matter whether a lawyer's advice is considered to be legal advice, business advice, or a hybrid? Stated differently, when can a lawyer be sued, if at all, for providing a client with nonlegal advice?

• If the advice in question cannot be classified as "legal advice," does the advice qualify as a privileged communication between the law firm and the client?

• Does the nature of the advice affect the standard of care or potential defenses?

• Can the law firm be liable to third parties?

• Will a firm's legal malpractice policy provide coverage for nonlegal advice?

The answers often are not simple, and there are few bright-line rules that can be applied. Some general principles, however, may provide some guidance.

Determining the Type of Advice

A useful starting point in the analysis involves determining whether or not the advice under scrutiny constitutes legal advice, either in whole or in part. The answer to this question is important because it provides the foundation for the subsequent layers of analysis on professional negligence, privilege, standard of care, liability to third parties, and coverage.

Traditionally, legal advice has been defined as advice or counsel given to a client by a lawyer who has been consulted for the purpose of providing that advice or counsel in his professional capacity.2 If the services were of a type that could be undertaken by someone who is not a lawyer, those services traditionally have been defined as being outside the scope of legal advice.3

In some instances, these definitions can be easily applied. If a client asks a lawyer for information on when a statute of limitations for a breach of contract claim runs, the advice given by the lawyer clearly falls within the scope of legal advice. Other scenarios are more complex. For example, a situation may occur in which an attorney's opinion is sought regarding the wisdom of locating a business in a particular neighborhood. If the attorney is offering advice as to whether a business location is desirable because of neighborhood demographics and the local economy, that advice does not fall cleanly within the definition of legal advice. More often, however, a lawyer's advice in this situation is sought not only on the question of whether the demographics are desirable but whether the proposed use complies with local zoning ordinances. Communications covering legal and nonlegal topics are commonly referred to as dual purpose communications. In this example, the lawyer gives advice not only for the purpose of furthering the attorney-client relationship by providing information about compliance with local regulations but also to further a business purpose by providing information about demographics. The question of whether a dual purpose communication constitutes legal advice requires an examination of whether the dominant purpose of the communication was the furtherance of the attorney-client relationship or something else. The question ultimately is one of fact.4

In 1995, a New York district judge eloquently described how difficult it can be to determine whether an attorney's communications constituted primarily business advice or legal advice. In Note Funding Corporation v. Bobian Investment Company, NV,5 the court was faced with motions to compel production of documents constituting communications between a law firm and a business client. To overcome the shield of the attorney-client privilege, the plaintiff seeking production argued that many of the communications concerned nonlegal business analysis and negotiation, even though the corporation's attorneys were participants in the communications. The court noted:

Assessment of this argument requires the court to tread an occasionally blurry line. In pursuing large and complex financial transactions, commercial entities often seek the assistance of attorneys who are well equipped both by training and by experience to assess the risks and advantages in alternative business strategies. When providing this assistance, counsel are not limited to offering their client purely abstract advice as to the rules of law that may apply to their situation. Of necessity, counsel will often be required to assess specific tactics in putting together transactions or shaping the terms of commercial agreements, and their evaluation of alternative approaches may well take into account not only the potential impact of applicable legal norms, but also the commercial needs of their client and the financial benefits or risks of these alternative strategies.

The fact that an attorney's advice encompasses commercial as well as legal considerations does not vitiate the privilege. If the attorney's advice is sought, at least in part, because of his legal expertise and the advice rests "predominantly" on his assessments of the requirements imposed, or the opportunities offered, by applicable rules of law, he is performing the function of a lawyer.6 [Citations omitted.]

This rule, although couched in terms of privilege analysis, affects professional negligence and legal malpractice issues as well.

At the outset, both attorney and client should consider carefully what advice is being sought, and for what purpose the advice is being given--and both should revisit the issue during the course of the representation. This is important not only for determining whether or not the advice constitutes legal advice but also because California courts have imposed obligations on attorneys to volunteer legal opinions when necessary to further the client's objectives.7 Making sure that the lawyer and the client fully understand the scope of the requested advice before the advice is given may minimize disagreements between the attorney and the client later on and will ensure that the client's expectations are considered properly.

The Lawyer as Defendant

Despite a lawyer's best efforts, it is always possible that a particular piece of advice will not result in a favorable outcome for the client, and the client may sue the lawyer. The initial determination of whether the advice was legal advice or business advice can have substantial ramifications for the lawyer defendant.

First, there is the question of whether the lawsuit is truly a legal malpractice lawsuit. A lawyer may be subject to liability for legal malpractice when the lawyer's negligent advice, investigation, or conduct relating to the client's affairs results in the loss of a meritorious claim or right.8 An action for legal malpractice requires proof of 1) the duty of an attorney to use the skill, prudence, and diligence that members of the profession commonly possess, 2) a breach of that duty, 3) a causal connection between the breach and the resulting injury, and 4) actual loss or damage. The first element--the attorney's duty--presupposes that the advice provided by the lawyer is legal advice, and the attorney's conduct is measured by comparison to other lawyers practicing within the same community.9

Traditional definitions of "legal malpractice" generally encompass claims arising from the provision of legal services: "The test to distinguish malpractice from other wrongs is whether the claim primarily concerns the quality of legal services."10 As a stark example of the distinction between legal malpractice and other attorney misconduct, "actual fraud by an attorney would not be legal malpractice since such conduct is not unique to the legal profession, nor does it necessarily concern the quality of professional services any more than does dishonesty by a lay person."11

The court in Wasmann v. Seidenberg offers another distinction between conduct constituting ordinary negligence and conduct constituting legal malpractice.12 The Wasmann case centered on the expected consummation of a settlement agreement. In order to achieve that result, an attorney was supposed to hold a deed of trust until his client paid $70,000 to her former husband. Without the lawyer's knowledge or permission, however, the client obtained the deed from the lawyer's office and recorded it without making the settlement payment. The ex-husband sued the ex-wife's lawyer for allowing the ex-wife to get the deed of trust without having first made the settlement payment.

The ex-husband brought claims against the attorney for legal malpractice and constructive fraud. The trial court sustained a demurrer to all causes of action. The court of appeal reversed, holding that a cause of action for ordinary negligence was appropriate, but a malpractice claim was not:

These allegations of negligence, however, are not the stuff of which legal malpractice claims are made. An attorney's failure to prevent a client's unauthorized seizure and recordation of a document held in escrow is not negligent lawyering: "The situation required no professional 'skill, prudence and diligence.'" It simply called for the exercise of ordinary care.13 [Citation omitted.]

California courts often rely on medical malpractice cases to assist in the analysis of claims of professional negligence against attorneys. The determination of whether a claim constitutes ordinary negligence or professional malpractice and the appropriate standard of care to be applied is no exception. Wasmann relied in part on a hospital injury case, Gopaul v. Herrick Memorial Hospital.14 In Flowers v. Torrance Memorial Hospital Medical Center,15 a hospital case that overruled Gopaul, a patient brought a professional negligence action against a hospital and a nurse for injuries sustained in a fall from a gurney allegedly caused by the nurse's failure to put up a guardrail. The trial court granted summary judgment. The court of appeal reversed, agreeing that while the defendants had negated any claim of professional negligence, the pleadings were broad enough to encompass a theory of ordinary negligence since a placement of a guardrail did not implicate professional services requiring specialized knowledge or skill.

Nevertheless, the California Supreme Court reversed the appellate court and, in doing so, it more carefully explained the practical effect of distinguishing between ordinary and professional negligence. The supreme court identified two different issues that are directly affected by the distinction. First, the characterization of the claim might determine which statute of limitation applies.16 Second, the characterization would impact the burden of proof and the evidence needed to meet that burden. The standard for professional negligence is whether the defendant exercised the knowledge, skill, and care ordinarily possessed and employed by members of the profession in good standing.17

The determination of whether a case is one of ordinary or professional negligence may also affect the need for expert proof. In Flowers, the supreme court noted that "on numerous occasions" it had "articulated the general rule applicable in negligence cases arising out of the rendering of professional services." The court quoted the rule as it was set forth in the court's previous decisions:

"The standard of care against which the acts...are to be measured is a matter peculiarly within the knowledge of experts; it presents the basic issue in a malpractice action and can only be proved by their testimony..., unless the conduct required by their particular circumstances is within the common knowledge of the layman."18

This language regarding the standard of care and the need for expert testimony has been cited with approval in legal malpractice cases. Indeed, the supreme court did so in Flatt v. Superior Court.19

Whether a claim is characterized as ordinary or professional negligence will not only directly affect the type of proof necessary to substantiate the claim but also determine what defenses are available. For example, in providing legal advice, the lawyer is not held to a standard of professional perfection, and in cases involving disputed issues of law or legal strategy, the lawyer can assert a defense of qualified, or judgmental, immunity, should the advice turn out to be incorrect.20 But this type of immunity may not be available in a claim for something other than legal malpractice, in which ordinary negligence principles would apply. The Civil Jury Instructions adopted by the Judicial Council of California offer no professional perfection or qualified immunity instructions for ordinary negligence cases similar to those available in cases involving professional negligence.21

The applicable statute of limitations may differ as well. Under Code of Civil Procedure Section 340.6, a plaintiff must file an action against an attorney for a wrongful act or omission (other than actual fraud) arising in the performance of professional services within one year after the plaintiff discovers, or should have discovered through reasonable diligence, the facts constituting the wrongful act or omission.22 If the claim is not one for negligence in the rendering of professional services--that is, a claim regarding legal advice--the plaintiff may have a different period in which to commence suit. In cases involving other types of professional malpractice, longer statutes of limitation apply. For example, an action against an accountant for malpractice is governed by a two-year statute of limitations.23

The Attorney-Client Privilege and Work Product Doctrine

The diversification of legal services into the realm of nonlegal advice also raises issues of confidentiality and privilege. Nonlegal communications between a litigant and a person who just happens to be a lawyer may be critical to the outcome of the litigation, but it may be in the interest of one of the parties to the litigation to use the attorney-client privilege as a shield. Consider the case of a plaintiff who is suing his stockbroker for bad portfolio advice. If the plaintiff had previously received the exact same advice from his lawyer, thus calling into question whether the plaintiff really relied on the stockbroker's advice, the plaintiff may seek to hide behind the attorney-client privilege to prevent disclosure of this information.

Evidence Code Section 952 defines a confidential communication between the client and the lawyer as:

Information transmitted between a client and his or her lawyer in the course of that relationship and in confidence by a means which, so far as the client is aware, discloses the information to no third persons other than those who are present to further the interests of the client in the consultation or those to whom disclosure is reasonably necessary for the transmission of the information or the accomplishment of the purpose for which the lawyer is consulted, and includes a legal opinion formed and the advice given by the lawyer in the course of that relationship.

The privilege attaches to those communications in which the client consults the attorney in the attorney's professional capacity. The privilege is held by the client or other persons who are statutorily defined as holding the privilege.24 The lawyer is obligated to preserve the confidences of the client "at his own peril."25

But the privilege does not cover every communication between lawyer and client. It is not enough that an attorney may have been a participant in the communication. A client cannot create a privilege for information or communications if they were, by definition, nonconfidential. The test for determining the applicability of the privilege involves an analysis of the dominant purpose of the communications. Therefore, communications that reflect "pure" or "predominantly" business advice between the lawyer and the client may not remain confidential.26

Thus, for parties who seek to shield information, such as the plaintiff who does not want to disclose prior communications with the lawyer in the suit involving the stockbroker, the analysis begins with determining what type of advice--legal or nonlegal--is predominant in those communications. The analysis is fact-driven and can be complex. It can also provide seemingly contradictory results. For example, in Montebello Rose Company v. Agricultural Labor Relations Board, this issue regarding legal or nonlegal advice arose in a situation involving labor negotiations that were being conducted by an attorney. The communications in question dealt with the progress of those negotiations and negotiating strategy. The court of appeal found no privilege because labor negotiations can be conducted by a nonattorney, and the client had not demonstrated that the dominant purpose of the communications was to secure or render legal advice. The court rejected the contention that, because some of the communications involved strategy decisions that may have "legal significance" with regard to future unfair labor practice claims, the dominant purpose of the communications was legal.27

The court also cited another policy reason for declining to allow the universal application of the attorney-client privilege to every communication between attorney and client. If all such communications were deemed privileged, organizations able to hire attorneys to negotiate on their behalf would have an advantage because their communications regarding the negotiations would be automatically protected. Conversely, if an organization could not afford to hire a lawyer, the identical types of communications would not be protected from disclosure. That result would be inherently unfair.

Nevertheless, in a wrongful death case, a trial court ordered a hospital to turn over confidential occurrence reports. The hospital had resisted producing the reports, claiming they were protected by the attorney-client privilege and the attorney work product doctrine and were privileged under Evidence Code Section 1157 as hospital peer reviews. The trial court initially determined that the reports were not privileged as peer review materials or as attorney work product. After allowing for further briefing and arguing, the court ruled that the reports did not fall under the attorney-client privilege either. The court found that the primary purpose of the reports and communications was loss prevention, since the reports contained mostly "observational" information and not "opinion" information. The hospital sought review by writ, and the court of appeal reversed, finding that the facts demonstrated that the reports were intended to be transmitted to an attorney in the course of the attorney-client relationship under circumstances in which the hospital expected confidentiality, and the reports would be used by lawyers for the purpose of providing legal advice, such as defending against lawsuits.28 Under the dominant-purpose test, the communications were considered privileged.

Likewise, a determination that work done by the attorney was not for the predominant purpose of providing legal advice can have an adverse impact on a claim of work product protection. The protection afforded to attorney work product is codified in Code of Civil Procedure Section 2018.29 The policy behind the creation of the work product doctrine is one of protecting the attorney's legal research, impressions, conclusions, or opinions from discovery by nonclients. The doctrine is not limited to writings created by a lawyer in a litigated matter or in anticipation of a lawsuit. It applies to writings created by the lawyer while acting in a nonlitigation capacity as well.30

A necessary component of work product protection, however, is that the writings must reflect an attorney's impressions, conclusions, opinions, or legal research. In order for the writings to be protected, they must reflect, in whole or in predominant part, legal advice as opposed to business (or nonlegal) advice. If a court finds that the predominant purpose of the writings was to transmit advice or information of a nonlegal nature, the work product doctrine may not apply, since the writings do not reflect the attorney's evaluation or interpretation of the law or its impact on the relevant facts under scrutiny.31 Thus, work product protection may not extend to business strategy or public relations plans that could have been prepared by nonlawyers.

So will the defendant stockbroker be permitted to learn about the lawyer's identical portfolio advice to the plaintiff client? The answer will undoubtedly depend on a more detailed factual analysis. If the advice was given over beers at a baseball game, the attorney-client privilege probably would not apply. But if the advice was provided in the context of estate planning services for which the client paid legal fees, it may be protected and not subject to disclosure.

Insurance Coverage

Whether or not a firm is providing legal advice may also affect whether a lawsuit is covered under a firm's legal malpractice policy. Typically, coverage for professional liability is extended (assuming all other policy conditions are met) for claims arising out of professional services rendered by the insured or persons acting within the scope of their employment by the insured. "Professional services" is often a defined term under malpractice policies. One typical policy defines "professional services" as "all services rendered or which should have been rendered for others by the Insured in the Insured's capacity as a lawyer, notary, administrator of an estate, executor, guardian, trustee or in any similar fiduciary capacity in the conduct of the firm's business."32

Another policy defines "professional services" with some amplification:

[W]hen the Insured renders or fails to render services as an administrator, conservator, receiver, executor, guardian, trustee or in any similar fiduciary capacity, the Insured's acts and omissions in such capacities shall be deemed for the purpose of this section to be the performance of professional services for others in the Insured's capacity as a lawyer, provided that this coverage shall not apply to any losses sustained by the Insured as the beneficiary or distributee of any trust or estate....Services performed by the Insured in a lawyer-client relationship on behalf of one or more clients shall be deemed for the purpose of this section to be the performance of professional services for others in the Insured's capacity as a lawyer, although such services could be performed wholly or in part by non-lawyers.33

Depending on the applicable policy language, broader coverage may be afforded for nonlegal advice. Under some policies, if the services do not predominantly involve the provision of legal advice but rather involve business or strategic advice, the malpractice carrier may have a credible defense to coverage, because the complained of acts do not fall within the definition of professional services contained within the insuring agreement. Other policies offer broader language that may result in coverage for services that could be performed by nonlawyers, as long as the services were provided in the context of a lawyer-client relationship.34

Even if the carrier does not initially deny coverage when there is a question as to whether the advice was legal advice, business advice, or a hybrid, the carrier may elect to reserve its right to 1) withdraw a defense, 2) not indemnify against any eventual judgment if the damages sought are not covered, or 3) seek reimbursement for defense costs incurred for claims that were not potentially covered under the policy.35 Carefully defining the attorney's role and the client's expectations at the outset can help reduce the risk of uncertainty regarding coverage.

Liability to Nonclients

A lawyer providing legal advice to a client often is entitled to protection from suits by nonclients. Attorneys ordinarily have no duty to protect the interests of an adverse party or a party with whom the client is dealing with at arm's length. Such adverse parties generally are not the intended beneficiaries of the attorney's services, and to impose a duty on the attorney to protect the interests of a third party could adversely affect the attorney's duty of undivided loyalty to the client. For these reasons, courts have been reluctant to allow third parties to sue lawyers, even when the lawyer's advice encouraged the client to breach a contract with a third party.36

However, if a lawyer is not providing legal advice, the policy concerns of protecting the duty of undivided loyalty and the attorney-client relationship are not present. Therefore, the attorney may not only find that his or her communications and written work are discoverable. The attorney also could be named as a defendant in, for example, a suit alleging interference with economic advantage or inducing breach of contract if the client relied on the attorney's business advice and in so doing harmed a third party. The lawyer may also be in hot water if the work performed by the lawyer was not within the parameters of legal services. Under those circumstances, courts have permitted nonclients to assert claims against lawyers for ordinary negligence.37 Carefully defining and reevaluating the role of counsel can reduce the risk of potential exposure to nonclients.

There are a number of valid reasons why law firms can and will continue to provide nontraditional advice and consultation to clients. Counsel should, however, bear in mind the implications, both to the client and the firm, in providing those services. An understanding of the risks is fundamental to protecting the interests of clients and attorneys.

Endnotes

1 Robert P. Cummins & Megyn M. Kelly, The Conflicting Roles of Lawyer as Director, 23 Litigation 48 (1996); James H. Cheek III & Howard H. Lamar III, Lawyers as Directors of Clients: Conflicts of Interest Potential Liability and Other Pitfalls, 712 Practicing Law Institute 461 (1990). The American Bar Association issued a task force report on the issues presented when an attorney serves on a client's board of directors. John F.X. Piloso & Earl H. Warren, The Lawyer-Director: Implications for Independence, 1998 ABA Section on Litigation Task Force Report on the Independent Lawyer.
2 Evid. Code §§950-952.
3 Montebello Rose Co. v. Agricultural Labor Relations Bd., 119 Cal. App. 3d 1 (1981).
4 Holm v. Superior Court, 42 Cal. 2d 500, 507 (1954).
5 Note Funding Corp. v. Bobian Inv. Co., NV, 93 Civ. 7427, 1995 U.S. Dist. LEXIS 16605 (S.D. N.Y. Nov. 9, 1995).
6 Id. at *6-*7. The court analyzed the question of privileged communications under New York Civil Practice Law and Rules §4503. That section closely parallels Evidence Code §952.
7 See, e.g., Nichols v. Keller, 15 Cal. App. 4th 1672 (1993) and ABA Model Rules of Prof'l Conduct R. 2.1. The ABA Model Rules have not been adopted in California, but they may be looked upon for guidance to the extent they do not conflict with California public policy. See State Bar of California, Formal Op. 1983-71.
8 Stanley v. Richmond, 35 Cal. App. 4th 1070, 1092 (1995).
9 Judicial Council, Civil Jury Instructions (CACI) 600, 601.
10 1 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice §1.1, at 3 (2005 ed.) (hereinafter Mallen & Smith).
11 Id. at 4; Davis v. Parker, 58 F. 3d 183, 188 (1995) (quoting Mallen & Smith, id.).
12 Wasmann v. Seidenberg, 202 Cal. App. 3d 752 (1988).
13 Id. at 757.
14 Gopaul v. Herrick Memorial Hosp., 38 Cal. App. 3d 1002 (1974), overruled by Flowers v. Torrance Memorial Hosp. Med. Ctr., 8 Cal. 4th 992 (1994).
15 Flowers, 8 Cal. 4th 992.
16 Id. at 998-99.
17 Id. at 997-98. This standard is consistent with CACI 600.
18 Id. at 1001 (quoting Sinz v. Owens, 33 Cal. 2d 749, 753 (1949) (a medical malpractice case)).
19 Flatt v. Superior Court, 9 Cal. 4th 275, 293 (1994).
20 CACI 602, 603; Village Nurseries v. Greenbaum, 101 Cal. App. 4th 26, 36-37 (2002).
21 Compare CACI 401 with CACI 602, 603.
22 The statute also provides that in no event shall the time for commencement of legal action exceed four years, except that the period may be tolled during the period when any of four statutorily enumerated conditions exist. Code Civ. Proc. §340.6(a)(1)-(4).
23 Code Civ. Proc. §339(1); Apple Valley Unified Sch. Dist. v. Vavrinek, Trine, Day & Co., LLP, 98 Cal. App. 4th 934, 942 (2002).
24 Evid. Code §§953, 954.
25 Rules of Prof'l Conduct R. 3-100; Bus. & Prof. Code §6068(e).
26 San Francisco Unified Sch. Dist. v. Superior Court (Conner), 55 Cal. 2d 451, 456 (1961).
27 Montebello Rose Co. v. Agriculture Labor Relations Bd., 119 Cal. App. 3d 1, 31-32 (1981).
28 Scripps Health v. Superior Court of San Diego (Reynolds), 109 Cal. App. 4th 529, 532-35 (2003).
29 Attorney work product protection is technically not a privilege in California, since all privileges are statutorily defined in Evidence Code §§900 et seq. Work product protection is more appropriately referred to as a doctrine. Kizer v. Sulnick, 202 Cal. App. 3d 431, 436 (1988).
30 County of Los Angeles v. Superior Court (Axelrad), 82 Cal. App. 4th 819, 833 (2000). Cf. Fed. R. Civ. P. 26(b)(3) (Work product protection ordinarily applies to "documents and tangible things prepared in anticipation of litigation or for trial.").
31 Watt Indus. v. Superior Court, 115 Cal. App. 3d 802, 805 (1981). Watt was decided under former Code of Civil Procedure §2016(b). The court also noted that in cases in which legal and nonlegal work were "inextricably intertwined, the privilege will be sustained." Id. at 805 n.1.
32 Transamerica Ins. Co. v. Hill Sayble, 193 Cal. App. 3d 1562, 1566 (1987).
33 Id. at 1566.
34 See Ronald E. Mallen, Legal Malpractice: The Law Office Guide to Purchasing Legal Malpractice Insurance (2005 ed.). This guide contains charts comparing various policy features--including insurance agreement language, deductibles, exclusions, and notice provisions.
35 Buss v. Superior Court, 16 Cal. 4th 35 (1997).
36 Schick v. Bach, 193 Cal. App. 3d 1321 (1987).
37 Wasmann v. Seidenberg, 202 Cal. App. 3d 752 (1988).

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