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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.