The Attorney-Client Privilege and Why It Really Really Matters When Doing Business Internationally, Especially in China These Days

Way back in 2007, we did a post on attorney ethics in China, entitled, China Lawyer Ethics — Perils And Pitfalls For Foreign Companies. In that post, we discussed a blog post entitled, Time to Raise The Professional Ethics Bar for Lawyers in China?  In that post, American lawyer Brad Luo  noted that China’s ethical rules for lawyers have a “bright line” rule forbidding them from representing both sides in the same conflict, but they go little beyond that. Brad wrote how he was troubled by how China does not require lawyer loyalty to former clients and how this means lawyers can turn on their own clients without offending their duty of confidentiality to either of them.

In  a subsequent post, Time to Raise The Professional Ethics Bar for Lawyers in China? (II), Brad rightfully describes “confidentiality” as “the bedrock of an open and trusting relationship between a lawyers and clients” and notes that American lawyers must keep client confidences “strictly confidential and secret.” Chinese lawyers, on the other hand, are prohibited from divulging only “’national secrets, clients’ trade secrets, and privacy of parties’ learned by the lawyer during representation.” “Personal privacy is not defined and Brad sees it as being fairly limited and he concludes that the “duty of confidentiality as stated in [China’s] Current Lawyer’s Law and Ethics does not provide sufficient protection to clients.

Brad concludes this post by saying “if I were a client, I’d hesitate talking about certain things, not even with my Chinese lawyer.” Brad is dead on with this advice and foreign companies using Chinese lawyers must be cognizant of this and this is something our China lawyers constantly have to explain to our somewhat disbelieving American clients. The following are some concrete examples where companies have paid a stiff price by not accounting for how lawyer-client issues differ across borders.

Many years ago, a couple of our international lawyers were meeting with in-house legal counsel for a very large Korean company, or chaebol. We were  there representing the chaebol on a matter, but the in-house counsel wanted to use our meeting as an opportunity to “pick our brains” about another fairly small, but somewhat complicated, multi-party case on which he was working. The other case involved an alleged breach of contract and a number of American high tech companies. The case was pending in a Korean court and settlement talks had just begun. The in-house lawyer spent maybe ten minutes explaining the facts of the case and the various players to us and once we had reached a point where we felt we understood its overall outline, the in-house lawyer handed us a two page letter to review.

The letter was written by an American attorney, on behalf of his American client, to the Korean lawyer representing the American company in Korea. The letter talked about how the American company wanted to settle the case for a million dollars, but it would be willing to take $600,000. The letter then instructed the Korean attorney to start settlement negotiations at $1.4 million.

Seeing as how my client had a copy of this letter, I initially assumed the American company whose settlement strategy was revealed in the letter was on the same side in the Korean case as our Korean client, and we read the letter accordingly. We then read the letter again and then we read it a third time. We were really confused and we confessed as much to the Korean in-house lawyer. We told him we had thought the American company whose settlement strategies were being discussed was the American company suing the chaebol, but we obviously must have misunderstood the facts. The Korean in-house lawyer (who had an American legal degree) smiled and then explained.

The American company in the letter was on the opposite side of the chaebol in the case and the letter setting forth the innermost workings of the American company’s settlement strategy directly involved the American company’s efforts to settle with the chaebol. Our Korean client had been given this letter by the American company’s Korean attorney because this Korean lawyer had attended the same Korean law school as the in-house lawyer and had started law school a year or two later, making the in-house Korean lawyer his “big brother.” The opposing Korean lawyer would golf once or twice a year with the in-house Korean lawyer and had been trying to secure legal work from this chaebol for some time.

We have since then learned of multiple instances where Western companies (it is always Western companies and Northern European and Australian companies seem particularly susceptible to this) have overpaid or been cheated from having their own lawyers reveal confidences to the other side. We have seen/heard of this happening in all sorts of deals, but most commonly in joint venture deals and in large procurement deals. In the end, this form of cheating is essentially the same as your standard run of the mill kickback deal, but involving your own lawyer.

The attorney-client privilege is a long-established principle in the United States (and generally in all of the Western world as well), recognized under English common law since at least 1576 (Berd v. Lovelace). The privilege fundamentally informs American company expectations of the legal profession, to a degree that creates dangerous assumptions when dealing with lawyers in jurisdictions outside the common-law tradition, where the privilege might not be as extensive—or may not exist at all.

By way of example, under Washington State law, “An attorney or counselor shall not, without the consent of his or her client, be examined as to any communication made by the client to him or her…” (RCW 5.60.060(2)(a)), while the bar rules hold that “A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent…” (RPC 1.6). According to the U.S. Supreme Court’s decision in Hunt v. Blackburn (1888), the privilege “is founded upon the necessity, in the interest and administration of justice, of the aid of persons having knowledge of the law and skilled in its practice, which assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure”

The Supreme Court’s reasoning seems compelling, but clearly its views are not universal. In China, for example, lawyers have a general duty of confidentiality (Art. 83, Law on Lawyers), but there is nothing to stop them from bearing witness against their clients in civil cases. And though Chinese criminal defense attorneys can choose to maintain confidentiality (Art. 46, Crim. P. Law) regarding their cases, the same discretion does not legally extend to other lawyers. Under this legal framework, an attorney defending someone accused of tax evasion could choose not to testify against their client, but the defendant’s tax attorneys would not be similarly protected.

In addition to these legal considerations, there are also practical ones. American lawyers are rightfully terrified of disciplinary action. Bar associations take complaints seriously and, for the majority of lawyers, disbarment would be a critical blow, both financially and reputationally. This is not to say that lawyers in China are not subject to disciplinary oversight from the government and bar authorities: they are. However, a study of disciplinary cases in Zhejiang found that only 11 out of 122 cases reviewed involved “some aspect of client protection”. Political concerns and the protection of law firms’ interests were usually the driving force.

It is hard to see how the average Chinese lawyer would be fearful of the consequences of revealing confidential information, especially if the affected client is a foreigner, even more so these days if it is an American company This means you are in a vulnerable situation if your Chinese lawyer stands to benefit by revealing information you provide. Perhaps your lawyer has another client who would just love to take a look at that new patent application of yours. Perhaps your law firm stands to benefit by tipping off your competitor before it files your trademark application. Or maybe it will be as simple as revealing that you told them that you would have paid $10 per widget, not just the $8 written in your contract. Worse yet, what if your lawyer is in hot water with governmental authorities and reporting the missteps of a foreign company will help them curry favor? Trust us when we say that all of these nightmare scenarios are real life possibilities.

Mindful of all this, savvy clients often take their China work to lawyers bound by the strict confidentiality rules of foreign countries. Of course, on occasion some information may need to be revealed to Chinese co-counsel, but it will be done in a careful, need-to-know basis. And of course there will also be times where using a Chinese lawyer is imperative.

Even in countries that do recognize some form of privilege, issues can still arise. For instance, in-house counsel cannot invoke attorney-client privilege in some jurisdictions. This is the case in France and Italy, where in-house lawyers are not considered members of the bar and are therefore not subject to rules of professional responsibility. Your CEO client needs to understand that conversations with the avocat d’entreprise at the company’s French subsidiary are not protected in the same way as chats with the general counsel back home. Sometimes, outside counsel will be brought in to participate in meetings to make the discussions confidential.

Needless to say, you do not want to find out that your communication is not privileged after you have disclosed confidential information. The best course of action will usually be to talk to your international lawyers in the United States and design appropriate strategies before engaging with lawyers abroad. These lawyer trust issues have been out there for a long time, but with the increasing tensions between China and the United States, they are and will continue coming to the fore and this has spurred us to write about this again.

Be careful out there. Like really careful. ​

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We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.