For four years in-house counsel in the European Union eagerly awaited what they hoped would be a groundbreaking ruling in Akzo Nobel. On Sept. 17 their hopes were dashed.

The case began in 2003 when officials investigating antitrust allegations conducted a dawn raid to retrieve key documents from two chemical companies. One of the documents they found was a memo from a general manager at one of the companies. The memo contained information the manager had collected from employees in order to obtain outside legal advice on its compliance programs. Officials also retrieved correspondence between the manager and the company’s in-house counsel regarding the memo.

The chemical company asserted the documents were privileged because its in-house lawyer, who is based in the Netherlands, is afforded this protection under Dutch law. It was the first real challenge to EU courts, which had repeatedly ruled that EU law didn’t afford in-house lawyers attorney-client privilege. Many European in-house lawyers saw this case as their chance to be on equal footing with their outside counterparts. Five European bar associations–including the American Corporate Counsel Association’s European Chapter and the International Bar Association–lent their support to the accused.

Despite the backing of thousands of European lawyers, the European Court of First Instance refused to reverse the long-standing precedent–a precedent that was set 25 years ago in a cement cartel case.

Not all was lost. The court granted some favorable clarifications on murky aspects of the law, but overall it left European counsel deflated and U.S. in-house counsel with operations in Europe exposed.

“This is clearly an unhelpful, unsatisfactory decision,” says Bill Batchelor, partner at Baker & McKenzie in Brussels. “There’s no question that in-house counsel act as the police in an organization, and they need to be able to get a full statement from business people to comply with the law. Saying that only external attorneys have protections makes it more expensive to comply.”

Untrusted Advisers
Whereas some member states recognize privilege for in-house counsel, this right does not extend to the EU courts. The reason goes back 25 years to AM&S. In this case, judges granted privilege to outside counsel but withheld it from European and foreign in-house counsel, including U.S. in-house counsel. Their ruling has served as precedent ever since.

“Back then nobody really knew what they were talking about, but the court decided the European Commission could not take documents consisting of legal advice, provided that the lawyer is independent and not employed by the company on trial,” says Julian Joshua, partner at Howrey in Brussels and a former European Commission official.

This view is drastically different than that of U.S. courts.

“The mindset in Europe is that in-house counsel act as co-accomplices to fraud and illegal activities when they occur,” says Paul de Jonge, a member of the European Company Lawyers Association’s (ECLA) executive board. ECLA, which filed as a third-party intervenor in Akzo, is a European association of in-house counsel with more than 20,000 members. “In the U.S. the Department of Justice views in-house counsel much more as a needed sheriff that helps police noncompliance within the organization.”

It was this perception of in-house counsel, one that legal organizations throughout Europe felt was antiquated, that led to the fervent rally to use Akzo as the catalyst to change the status quo.

Fight for Change
When it came time to make their argument before the Court of First Instance, Europe’s leading legal associations argued that in-house counsel have gained more responsibility, not just as internal legal advisers, but also as internal auditors charged with ensuring compliance.

“It was thought that this heavier burden to carry out self-assessments would be reason enough to grant them the benefit of legal privilege,” says Suzanne Innes-Stubb, associate at White & Case in Brussels.

They also argued that the EU courts should grant privilege to any in-house lawyer who is a member of a national bar association. This was to address the EU court’s concern that in-house lawyers can’t be trusted because they are employees of the company. The legal associations argued that the national bars would ensure these attorneys adhered to their strict ethical standards. The problem with the argument, however, is that not all EU states allow in-house lawyers to join the bar association.

“These groups were focusing their energies on the wrong argument,” Joshua says. “Because some member states don’t even allow employed counsel to be members of the bar, you could have a case where one counsel is protected by privilege and the other isn’t, which would be absurd. It shouldn’t be a question of whether a lawyer is a member of the bar, but rather whether the lawyer is giving confidential legal advice. That’s basically the test U.S. courts apply.”

In the end those arguments failed to sway the court. “The court felt with respect to internal lawyers, who wear a commercial hat and have a duty to protect the company, that they’re different than external counsel,” Batchelor says. “That’s just a semantic distinction that has no real bearing.”

Battle Wounds
The ruling in Akzo didn’t just leave European in-house counsel vulnerable. It also opens up U.S. in-house counsel to legal risks, and the U.S. in-house bar has kept a close eye on the decision.

“You could have a situation where documents considered privileged in the U.S. are handed over to the commission, and without contesting you might have waived privilege in the U.S. That’s a big issue,” Joshua says.

Although defeated, Europe’s legal associations aren’t done fighting. De Jonge vows that ECLA will appeal the decision to the European Court of Justice. Experts believe that if there’s a chance for the AM&S precedent to be overturned, it’s before the EU’s highest court.

“I doubt an appeal will lead to a change in policy, but it’s possible, because ECJ is more likely to overturn the previous ruling,” Innes-Stubb says.