Apple v Samsung—Legal Privilege and the In-House Lawyer

Apple Inc. v Samsung Electronics Co. Limited (No 2) [2012] FCA 1358 (10 December 2012)

According to an affidavit sworn by a senior legal counsel for Samsung, the number of potentially relevant documents collected by the company’s Australian solicitors, for possible disclosure to Apple in the ongoing litigation, is by now in excess of 500,000.  That is, there are over half a million documents produced by, or on behalf of, Samsung, which somebody has had to consider for the purposes of satisfying discovery notices issued by Apple!

So far Apple has identified 128 ‘categories’ of documents which, by agreement or court order, Samsung is required to produce.  It is generally up to Samsung and its lawyers to find all of the documents in their possession which fall into the specified categories.  Of the half million documents which have been collected for this purpose, over 3,000 have already been supplied to Apple.

As part of this process, a disagreement arose between Apple and Samsung over whether or not a particular selection of 154 documents was immune from production, on the basis that these documents are covered by the exclusion commonly known in Australia as legal professional privilege (sometimes also known as ‘client-solicitor privilege’, and in the US as attorney-client privilege).

This dispute has been adjudicated separately from the main litigation, by Justice Cowdroy in the Federal Court of Australia, who has inspected over half of the documents for himself in order to conclude that they are indeed protected by privilege.  However, there were also two documents, which have previously been tendered in redacted form by Samsung as evidence in the main proceeding, in respect of which Justice Cowdroy found that the privilege had therefore been waived.  Samsung is therefore now required to furnish these documents in full.

Quite aside from the general interest generated by any Apple/Samsung decision, Justice Cowdroy’s judgment should be essential reading for all in-house lawyers within companies operating in Australia.  Continuing a line of cases in which the assessment of privilege by in-house counsel has been treated as inherently suspect, Justice Cowdroy determined that sworn statements by a lawyer employed by Samsung could not be relied-upon for the purposes of determining whether or not they were properly the subject of privilege.  Fortunately for Samsung, however, he considered that there was sufficient reason to think that they might be privileged that it would be appropriate for him to take a look for himself before rendering judgement.

BACKGROUND – SAMSUNG’S SEP CLAIMS & APPLE’S FRAND DEFENCE

The background to the discovery dispute, set out at paragraphs [4]-[6] of the decision, provides some interesting insights into Samsung’s claim that Apple is infringing its mobile standards-essential patents (SEPs), and Apple’s defence that Samsung has acted in violation of its obligations to license on fair, reasonable and non-discriminatory (FRAND)terms, and contrary to competition (i.e. ‘anti-trust’) laws.

In particular:

Samsung claims Apple has used patents concerned with technology used in electronic equipment known as baseband chip sets without authorisation from Samsung. The equipment enables connectivity between electronic devices such as a mobile telephone or a tablet computer and allows these devices to communicate with a base station. Pursuant to the requirements of … the European Telecommunications Standards Institute (‘ETSI’) such patents are required to be licensed for use by mobile handset makers, because the patents are essential for the implementation of mobile telecommunication standards known as the 3GPP Universal Mobile Telecommunication Standards (‘UMTS’). Such standards must be incorporated in mobile handsets to enable them to operate on the UMTS 3G mobile networks, which are used extensively throughout Australia and the world. … Samsung has declared to ETSI that it will license the use of technology the subject of such patents on fair, reasonable and non-discriminatory (‘FRAND’) terms.

… In its cross-claim, Samsung seeks declarations of infringements of its patents. It also states that it is willing to license the patents, but that it has not yet reached an agreement with Apple upon the terms of such license. Apple denies patent infringement and claims that the patents are invalid on several grounds. Apple also alleges that Samsung is engaged in anticompetitive conduct contrary to provisions of the Competition and Consumer Act 2010 by refusing to licence the patents to Apple and thereby preventing it from selling three of its products, namely the iPhone 4, iPhone 4S and iPad 2. Apple further claims that an attempt by Samsung to give effect to an anticompetitive condition from its agreement between itself and a component supplier to Apple, namely Qualcomm (‘the Qualcomm agreement’), also constitutes a breach of that Act.

As a consequence the issues arising in the principal proceedings will concern, amongst other things, Samsung’s purpose or strategy in engaging in the conduct complained of; whether Samsung was genuine in its attempts to reach agreement on FRAND terms with Apple, and why Samsung took steps to give effect to the Qualcomm agreement.

Of course, the only direct evidence of Samsung’s intent in relation to these matters would be found in internal Samsung documents, hence the need for discovery.  (Before anybody asks, the consequence of failing to comply fully with a discovery order is the possibility of being found in contempt of court, which is an offence for which substantial fines, and even jail terms, may be imposed.  And yes, as with anything, people who try to ‘cheat’ do sometimes get caught!)

LEGAL PROFESSIONAL PRIVILEGE

Not every document that might fall within the scope of a discovery order is discoverable.  In particular, certain communications between a client and their lawyers are exempt, under the rule of legal professional privilege.  The existence of this privilege is generally considered to be vital to the fair and effective functioning of the legal system.  Without it, clients would not be able safely to provide their lawyers with all of the information necessary to obtain sound legal advice, and lawyers would not be able safely to provide full and frank advice to the client.  Legal professional privilege:

1. encourages full disclosure of information by a client to a lawyer;
2. promotes compliance with the law by enabling lawyers to give full and considered advice on a client's legal obligations;
3. discourages litigation and encourages alternative dispute resolution, because properly-advised parties have a better view of the likely outcome of litigation;
4. protects the client's privacy; and
5. protects access to justice.

There are two categories of privilege: advice privilege, as the name suggests, protects communications relating to legal advice provided to a client; and litigation privilege protects communications which are made for the purpose of existing or reasonably contemplated judicial or quasi-judicial proceedings.  The Apple/Samsung case concerns the second kind.

Samsung’s claim to privilege in the contentious documents was based on an affidavit sworn by Mr Jae-Hwan Kim, a senior legal counsel for Samsung.  According to Mr Kim’s affidavit:

The documents … are principally internal Samsung communications and documents concerning Samsung’s dispute with Apple which were created after Apple threatened litigation against Samsung, and for the greater part after Apple commenced that litigation on 15 April 2011. I did not myself create or request the creation of all of the documents, which have numerous authors. Aside from specific information which I identify below, my views as to the purposes of them being created are based on my direct involvement in the dispute between Samsung and Apple … and on enquiries I have made of my colleagues involved in the global litigation with Apple. These documents have been created for the purpose of:

1. providing legal advice to Samsung’s senior management, including in relation to the litigation with Apple;
2. briefing in-house and external lawyers in relation to the litigation; or
3. use in the litigation.

THE CHALLENGE OF PRIVILEGE FOR IN-HOUSE COUNSEL

Assessments by in-house legal advisors have for some time been considered suspect by Australian courts.  The issue arose in Seven Network Limited v News Limited [2005] FCA 142, where Justice Tamberlin was unable to rely upon affidavits sworn by employees of News Limited, and was compelled to examine the documents himself in order to conclude that only five of 22 properly attracted privilege.

In Telstra Corporation Limited v Minister for Communications, Information Technology and the Arts (No 2) [2007] FCA 1445, Justice Graham stated (at [35]):

In my opinion, an in-house lawyer will lack the requisite measure of independence if his advice is at risk of being compromised by virtue of the nature of his employment relationship with his employer. On the other hand, if the personal loyalties, duties and interests of the in-house lawyer do not influence the professional legal advice which he gives, the requirement for independence will be satisfied.

In the High Court of Australia, Justice Brennan in Waterford v Commonwealth of Australia [1987] HCA 25 observed that:

The disincentive of sanctions which professional disciplinary tribunals may impose for breaches of ethical rules is diminished when the breach is committed in the interests of an employer and the security and environment of employment tend to insulate a salaried lawyer from the chief disciplinary influence of the profession - the opinion of one's professional peers. I am therefore unable to accept the notion that salaried lawyers are generally to be assimilated to the position of the independent legal profession for the purpose of determining the availability of legal professional privilege. Although this view may seem to give insufficient acknowledgment to the personal integrity, as well as the competence, of many salaried lawyers, we are concerned with a general legal rule which is framed not with regard to the characteristics of individuals but with regard to the influences that naturally attend the relationship of employer and employee.

In Rich v Harrington [2007] FCA 1987, Justice Branson referred to Justice Graham’s words in Seven Network yet made no determination whether it was sufficient for an in-house counsel to prepare an affidavit of discovery, but allowed (at [56]) that:

It may be that as in-house lawyers, including corporate counsel, play an increasingly important role in advising and providing other legal services to their employers and firms, the common law has come to accept that the requisite independence can be ensured by [appropriate] measures…

Justice Cowdroy appears to have been willing to allow a little more respect even than Justice Branson for the work of in-house counsel, stating (at [66]):

The Court considers that it would be unnecessarily restrictive to hold that a claim for privilege cannot be maintained merely because the lawyer verifying such claim is an in-house lawyer. To so hold would cast an unnecessary qualification upon the integrity of that person. In this respect the Court does not follow the observations of Graham J. The Court observes however, that this factor may prove to be a consideration to be taken into account in determining whether, having considered all of the evidence, such claim should be upheld.

Even so, in the circumstances on this occasion Mr Kim’s affidavit did not rise to the necessary standard to persuade the court of its reliability.  On the other hand, however, Justice Cowdroy was careful to avoid any adverse conclusions with regard to Mr Kim, stating (at [67]):

This is not to suggest that Mr Kim’s affidavit may not be correct, and the Court notes that Apple does not suggest any impropriety whatsoever in Mr Kim’s claims. However because of Mr Kim’s employment with Samsung, the statements made in the affidavit, particularly when he does not himself state that he has inspected the documents, severely undermines confidence in the reliability of the claim to privilege in the documents.

WERE SAMSUNG’S DOCUMENTS PRIVILEGED?

Even though the court did not find Samsung’s evidence of privilege persuasive, it did find that it was circumstantially quite possible that the documents in question may be privileged, based largely on the timing of their creation.  It was on this basis – in addition to the fact that there is relevant precedent – that Justice Cowdroy determined that it would be appropriate for him to review the documents for himself (at [69]):

Despite the shortcomings in Samsung’s privilege claims, the Court considers that the documents claimed to be privileged might properly attract such protection. The Court is so minded since the majority of the documents were brought into existence after Samsung claimed litigation was reasonably contemplated (July 2010). Further, Samsung has urged the Court, in case of doubt, to inspect the documents, a course which has been adopted previously by the Court in cases of doubt…

As a practical matter, only a representative sample of the documents was reviewed – although this sample comprised more than half of the total number – resulting in the following conclusion (at [70]):

From such inspection the Court has satisfied itself that those documents were prepared in anticipation of litigation at a time when litigation was reasonably contemplated, or prepared after the commencement of litigation for the purpose of assisting in the preparation of the litigation: …. It could not be said that such documents were prepared for a commercial or other purpose, as anticipated by Apple.

CONCLUSION

It is clear from this decision that companies employing in-house counsel face substantial hurdles in establishing that internal communications relating to advice provided by employee lawyers are privileged under Australian law.

The ‘gold standard’ appears to be to have all documents evaluated by independent external counsel – yet another cost for those involved in litigation or, on another view, an opportunity for external law firms!

However, there is some encouragement in Justice Cowdroy’s refusal to dismiss verifications of privilege by in-house counsel, regardless of the circumstances.  We might conclude from this judgment that in-house counsel would need to assess each document individually, and not make assumptions (as here) based upon the general circumstances in which the documents came into being.  Furthermore, some level of reasoning in relation to the conclusion in each case is likely to be required – a court seems unlikely to accept a bare assertion that ‘I reviewed the document, and concluded that it was privileged’.

Tags: Apple-v-Samsung, In-house counsel, Litigation, Privileged communications