Troubling Decision Highlights the Risk of Representing Affiliated Corporations

September 13, 2006

Lawyers frequently represent most or all affiliated corporations that compose a corporate “family.” However, some lawyers do so without realizing the risk of a later “family feud.”

In Teleglobe Communications Corp. v. BCE, Inc. (In re Teleglobe Communications Corp.), Civ. No. 04-1266-SLR, 2005 U.S. Dist. LEXIS 48367 (D. Del. June 2, 2006), a law firm represented BCE (Canada’s largest communications company), and its wholly owned subsidiary Teleglobe. When Teleglobe’s United States subsidiaries declared bankruptcy, they and their Official Committee of Unsecured Creditors sued BCE, alleging that BCE caused the bankruptcy. The plaintiffs sought discovery of the law firm’s files. They also sought discovery of documents sent to or from other law firms (including Shearman & Sterling), which had represented only the parent BCE — noting that these communications were shared with BCE’s in-house lawyer “who jointly represented Teleglobe.” Id. at *7-8. The court granted all the discovery, despite acknowledging that the plaintiffs’ theory would force a company like BCE to “either forego the valuable advice of its in-house counsel, or forego the protection of the attorney-client privilege with its retained counsel.” Id. at *8. As the court explained it, the law is so clear that a lawyer representing two clients in a matter cannot withhold relevant information from either client that “it should come as no surprise to BCE that information channeled through its in-house counsel would have to be disclosed to Teleglobe.” Id. The court noted that BCE “had the opportunity to isolate its privileged communications with retained counsel from in-house counsel, or to clearly terminate the attorney-client relationship between its in-house counsel and Teleglobe.” Id.

The fact that this troubling decision comes from such a well-respected court should remind all lawyers — especially in-house lawyers — that jointly representing corporate affiliates creates an enormous risk should an affiliate become an adversary.