United States: Ethical Issues Of Concern To In-House Counsel

Article by Steven J. Fram, Esquire¹

Because in-house counsel are not just attorneys -- they are also employees and sometimes hold non-legal officer positions -- the degree to which attorney ethics rules apply to them is not always clear. Moreover, different jurisdictions have adopted varying versions of the Rules of Professional Responsibility and have taken different approaches to disputes between in-house attorneys and their employers. As a consequence, the rights and responsibilities of in-house attorneys can vary significantly from jurisdiction to jurisdiction. This article will briefly summarize four ethics issues that can adversely impact unwary in-house attorneys and their employers. Its primary focus will be on the professional responsibilities of in-house attorneys under New Jersey law. The article will also suggest some steps that can be taken to avoid problems arising from the ethical issues it notes.

What Communications are Privileged? In-house attorneys need to bear in mind that their communications with other company employees are not necessarily protected by the attorney-client privilege. This is because the courts have recognized that in-house attorneys sometimes play dual roles as both attorneys and business-people. The lawyer-client privilege, however, only applies to communications between attorneys and their clients "in the course of that relationship and in professional confidence...." N.J. Evid. R. 504.

Where in-house attorneys give advice that is predominantly business in nature, the courts have held that the communications are not covered by the attorney-client privilege. This is so even if some of the advice given is legal. As one court has noted: "The mere fact that a communication is made directly to an attorney, or an attorney is copied in or on a memorandum does not mean that the communication is necessarily privileged.... There is no privilege for corporate counsel who has given, or corporate employees who are seeking, predominantly business advice as opposed to legal advice."²

Attempts to distinguish business advice from legal advice can be particularly difficult for in-house attorneys who wear more than one "hat" by holding other, non-legal officer positions.³ The process of judicial line-drawing between legal advice and business advice will typically require the submission of the communications to a judicial officer for in camera review.⁴ In United Jersey Bank v. Wolosoff,⁵ for example, the court held that a determination of the discoverability of documents withheld under the attorney-client privilege required that the documents "be carefully reviewed" by the trial court in camera "to determine their nature and content":

To maximize the chances that communications intended to be privileged will be maintained as such, in-house attorneys are well advised to take a number of precautions. When an attorney provides legal advice, she should be explicit. Thus, an internal memorandum or email might begin: "I am writing in response to your request that I provide legal advice concerning...." In addition, communications intended to be privileged should have a conspicuous legend to that effect, such as: "ATTORNEY-CLIENT COMMUNICATION, CONTAINS PRIVILEGED LEGAL ADVICE." Such precautions will improve, although not guarantee, the likelihood that a court will find the communications were for the purposes of providing legal advice and that the intent was for them to be confidential.

Revealing Attorney-Client Communications. A related, and often particularly difficult, issue concerns the circumstances in which a lawyer may -- or must -- reveal information that would otherwise be confidential. ABA Model RPC 1.6 provides that a lawyer "may" reveal otherwise privileged information "to prevent reasonably certain death or substantial bodily harm." The ABA Rule does not require disclosure under any circumstances.

New Jersey's version of RPC 1.6, in contrast, is significantly broader in important respects. It provides that a lawyer "shall" disclose otherwise privileged information "as soon as, and to the extent the lawyer reasonably believes necessary," to prevent a client or another person (1) "from committing a criminal, illegal or fraudulent act that the lawyer reasonably believes is likely to result in death or substantial bodily harm or substantial injury to the financial interest or property of another"; and (2) "from committing a criminal, illegal or fraudulent act that the lawyer reasonably believes is likely to perpetrate a fraud upon a tribunal."

The exceptions to the attorney-client privilege contained in New Jersey RPC 1.6(b) do more than merely codify the "crime-fraud" exception to the attorney-client privilege that has long been recognized by the federal courts and the courts of other jurisdictions.⁷ Instead, unlike the RPCs in most other jurisdictions, which permit the disclosure of privileged communications, New Jersey law affirmatively requires an attorney to promptly reveal crime-fraud information.⁸ Moreover, for the purposes of disclosure, the New Jersey courts have required that the concept of "fraud" be given a broad interpretation to include virtually all kinds of deception and deceit, even if the conduct might not otherwise warrant criminal or civil sanctions.⁹

This means that an in-house attorney subject to New Jersey's version of RPC 1.6 has an affirmative obligation to "blow the whistle" on her employer both in cases of potential bodily injury or death and in situations threatening financial harm. The scope of New Jersey's version of RPC 1.6 therefore means that it applies to in-house attorneys in a wide range of businesses. Moreover, it is possible that attorneys who fail to comply with their affirmative responsibilities of disclosure under RPC 1.6 may be subject not only to professional discipline, but also to civil liability.¹⁰

The revelation of internal communications that evidence fraudulent activities or that might otherwise be embarrassing to a company sometimes arises in situations where in-house attorneys and their companies become involved in employment termination disputes.¹¹ Such disputes invariably put at issue the nature and quality of the legal work performed by the attorney, and thus the substance of privileged communications, sometimes raising issues about allegedly fraudulent activity. The courts have taken widely varying approaches in their attempts to deal with such disputes. In Parker v. M&T Chem. Inc.,¹² the New Jersey Appellate Division rejected an argument that an employment claim by an in-house attorney should be barred because it threatened to expose privileged communications with his former employer-client. Parker held that an attorney, in his capacity as an employee, could pursue claims under the New Jersey Conscientious Employee Protection Act, ruling such claims were not barred by RPC 1.16, which generally allows a client to discharge a lawyer unconditionally. Although Parker acknowledged that RPC 1.16 was adopted pursuant to the Supreme Court's power to oversee attorneys, it found that "[t]he State Constitution does not grant [the Supreme Court] the responsibility of control for the sake of control alone."¹³ Instead of reading the RPC literally, the Parker court determined that allowing the attorney to recover under CEPA did not interfere with the Supreme Court's jurisdiction but rather reinforced the integrity of the profession.¹⁴

Other jurisdictions have disagreed with this approach. Some courts have held that actions by in-house attorneys against their employer-clients are barred as a matter of law.¹⁵ Other jurisdictions have taken a middle ground and allow retaliatory discharge claims by in-house counsel but only to the extent those claims do not rely upon the disclosure of privileged information; however, claims that are based upon privileged communications are barred.¹⁶

In situations where retaliatory discharge lawsuits by in-house attorneys are permitted to proceed, such lawsuits are complex and difficult to pursue, because much of the discovery process revolves around the issue of how to handle privileged communications. Such cases require active judicial involvement and are not popular with judges.¹⁷

Nobody benefits from the embarrassment and expense that result when in-house attorneys become embroiled in litigation with their employers – except the outside litigation attorneys. One way to avoid the unnecessary disclosure of privileged communications is for in-house attorneys to have written employment agreements that provide for confidential arbitration in the event of disputes. In order to avoid disputes about the jurisdiction whose ethical and legal principles apply where the employer has a presence in multiple jurisdictions, the parties may also desire at the outset of employment to agree on what law applies.

Compensation Disputes. Disputes between in-house attorneys and their employer-clients will often involve compensation issues. The question arises as to whether the compensation arrangements between in-house attorneys and their employer-clients are subject to the RPCs. RPC 1.5(b) provides that where an attorney has not regularly represented a client, "the basis or rate for the fee shall be communicated in writing to the client...." It appears that RPC 1.5 does not apply to in-house attorneys who are employees. This means that where an in-house attorney is compensated solely through the payment of money, a written contract is probably not necessary.

Matters become more complex when attorneys receive compensation in the form of equity or other business interests. RPC 1.8(a) provides that a lawyer shall not enter into a "business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client" unless the lawyer demonstrates, among other things, that the "client" was advised in writing to seek "independent" counsel and that the transaction was fair to the client. The degree to which RPC 1.8(a) applies to in-house attorneys is unclear. In 2001, just before New Jersey adopted RPC 1.8(a) in its current form, the ABA published a report analyzing the implications of lawyers entering into business transactions with their clients.¹⁸ Addressing the provision of equity compensation to in-house counsel, the report found that:

The report explained that the granting of such equity interests should not be deemed "adverse" to the client-employer, and consequently should not be subject to RPC 1.8:

Despite the findings of this report, at least one trial court in New Jersey, in an unpublished decision, has held that RPC 1.8 did apply to an in-house attorney who received ownership interests, along with other corporate executives, in various real estate development entities. In the aftermath of a falling out between the attorney and his employer, the employer's litigation counsel claimed that the granting of the interests was void under RPC 1.8(a).²¹

If RPC 1.8 does apply to in-house attorneys, an in-house attorney desiring to receive an equity or other interest in her company would have to recommend in writing that the company seek independent legal counsel and give "informed consent" in a signed writing. As a result, in order to avoid a claim that RPC 1.8(a) has been violated, where an attorney is granted an equity interest in her employer or an ownership interest in a related entity, consideration should be given to the preparation of a written agreement which recites that the employer was advised to consult with independent counsel and which summarizes the consideration for and the fairness of the event.

Who do you represent? A fourth problematic area in which in-house counsel can be entangled arises when there are disagreements among the principals of an entity. Because in-house attorneys, particularly those who are employed at smaller companies, may be called upon to provide personal legal services to corporate officers, they can get caught in the middle of disputes between the principals of the company or between the company and one or more principals.

Such situations can result in thorny conflict issues. If an in-house attorney has represented both the company and one of its principals, in the event of a dispute between the two the in-house attorney might be ethically prohibited from acting as counsel for the employer. If the in-house attorney still represents the individual, there would be a concurrent conflict under RPC 1.7 regardless of the nature of the representation, including matters completely unrelated to the business of the entity, such as the purchase or sale of real estate. If the in-house attorney no longer represents the individual, a conflict could exist under RPC 1.9, which relates to duties to former clients, if the prior matter is "substantially related" to the dispute which has arisen between the individual and the entity.

RPC 1.13 provides that the engagement of an attorney to represent an organization does not mean that the attorney also represents those affiliated with the entity: "A lawyer employed or retained to represent an organization represents the organization as distinct from its directors, officers, employees, members, shareholders or other constituents."²² Although RPC 1.13 provides that an attorney does not automatically represent individuals affiliated with an entity, it does not, however, prohibit an attorney from also representing such an individual.

In evaluating whether an attorney who represents an entity also represents a director, officer or other person affiliated with the entity, the courts have considered a number of factors, including: (1) whether the individual was separately represented by other counsel; (2) whether the attorney's services were billed to and paid by the corporation or the individual; (3) whether the attorney previously represented the shareholder individually; and (4) whether the individual relied upon the attorney as his or her individual counsel.²³

The New Jersey Appellate Division considered these issues in Petit-Clair v. Nelson,²⁴ a case that did not involve an in-house attorney, in holding that an attorney who represented a small company had violated RPC 1.8(a) by taking a mortgage on a property owned by an individual officer of the company. In evaluating the "substance of the relationship" between the individual and the attorney for the corporation, the court examined whether the individual had obtained separate counsel, the fee agreement with the corporation, the attorney's prior representation of the individual in an unrelated matter, and the attorney's personal interaction with the individual.²⁵ The court held that these factors demonstrated that the attorney and individual "related to each other as attorney and client" and that RPC 1.8(a) applied.²⁶

In order to avoid the conflict and disqualification issues that arise from claims of multiple representation, in-house attorneys who perform legal services for individual directors or officers of their employer should insist that those individuals provide written waiver agreements so that, in the event of a later conflict, their employers are not deprived of their services.

Summary. In-house counsel are not simply attorneys; they are also employees and in many cases business-people. As a consequence of these multiple roles and responsibilities, the manner in which the rules of attorney ethics apply to in-house attorneys is not always clear. Careful planning and extra attention to documentation, as suggested above, can assist in avoiding or minimizing certain of the disputes in which in-house attorneys become involved.

Footnotes

^{1 The author is the Chairman of the Commercial Litigation Practice Group at Archer & Greiner, P.C. He has extensive experience in representing attorneys in litigation and frequently writes and speaks about issues of attorney ethics.}

^{2 ABB Kent-Taylor, Inc. v. Stallings & Co., 172 F.R.D. 53, 57-58 (W.D.N.Y. 1996). See also Hardy v. New York News, Inc., 114 F.R.D. 633, 643-44 (S.D.N.Y. 1987) ("when the ultimate corporate decision is based on both a business policy and a legal evaluation, the business aspects of the decision are not protected simply because the legal considerations are also involved"); North Pacifica, LLC v. City of Pacifica, 274 F. Supp. 2d 1118, 1127 (N.D. Cal. 2003) ("legal advice must predominate for the communication to be protected. When the legal advice is merely incidental to business advice, the privilege does not apply").}

^{3 See, e.g., Brookshire Brothers Holding, Inc. v. Total Containment, Inc., 2006 U.S. Dist. Lexis 22510 (W.D. La. March 30, 2006) (attorney was both general counsel and chief administrative officer; party urging privilege protection for certain communications failed to demonstrate that they were sent to him in his legal rather than his administrative capacity); TVT Records v. Island Def Jam Music Group, 214 F.R.D. 143, 144 (S.D.N.Y. 2003) ("Application of this doctrine is complicated in situations where communications claimed to be privileged involved in-house as opposed to outside counsel because 'in-house attorneys are more likely to mix legal and business functions'"); Santa Fe Pacific Gold Corp. v. United Nuclear Corp., 175 P.3d 309, 319 (N.M. 2007) ("Application of the privilege can be difficult when the client is a corporation seeking legal advice regarding a business transaction and when the client's attorney is in-house counsel who wears 'two hats' by performing a dual role of legal advisor and business advisor").}

^{4. See Pressler, Current N.J. Court Rules, cmt. 6 on R. 4:10-2 ("[i]f a claim of privilege is disputed, an in camera review by the court of the allegedly privileged material is ordinarily the first step in determining the issue") (citing numerous cases).}

^{5. 196 N.J. Super. 553, 562-63 (App. Div. 1984).}

^{6. Id. at 563.}

^{7. See United States v. Zolin, 491 U.S. 554 (1989); In re Grand Jury Subpoena, 223 F.3d 213, 217 (3d Cir. 2000).}

^{8. See Michels, New Jersey Attorney Ethics §15:3-3 (Gann 2011) (discussing the history of New Jersey's version of RPC 1.6 and its intent).}

^{9 Biunno, Weissbard & Zegas, Current N.J. Rules of Evidence, cmt. 6 N.J.R.E. 504 (Gann 2011) (citing numerous cases).}

^{10 In Estate of Spencer v. Gavin, 400 N.J. Super. 220 (App. Div.), certif. denied, 196 N.J. 346 (2008), the New Jersey Appellate Division held that an attorney who had reason to know that another attorney was stealing from two estates, but who failed to "blow the whistle" as required by RPC 8.3, could be held liable for the financial losses of the estates. The court held that the imposition of a legal duty to report was appropriate as a matter of public policy because RPC 8.3 was designed to protect third-parties. Although this decision did not refer to the affirmative obligations of disclosure that exist under RPC 1.6, the same reasoning would support an argument under New Jersey's version of RPC 1.6 that an attorney with knowledge that her client was engaged in conduct that was likely to cause serious financial or bodily harm to a third-party would likewise have a legal duty to disclose and would be subject to civil exposure for failing to fulfill that duty.}

^{11 See, e.g., O'Brien v. Stolt-Nielsen Transportation Group, Ltd., 48 Conn. Super. 200, 838 A.2d 1076 (2003) (employment claims by former general counsel who resigned because company allegedly failed to recognize and rectify allegedly ongoing criminal conduct).}

^{12 236 N.J. Super. 451 (App. Div. 1989).}

13 Id. at 463.

14 Id. For a more recent wrongful discharge case brought by an in-house attorney and an example of the complexity of the issues that can arise in such cases, see Tartaglia v. UBS Painewebber Inc.,197 N.J. 81 (2008).

15 See, e.g., Balla v. Gambro, Inc., 145 Ill. 2d 492, 584 N.E. 2d 104 (1991).

16 See General Dynamics Corp. v. Superior Court, 7 Cal. 4th 1164, 32 Cal. Rptr.2d 1, 876 P. 2d 487 (1994).

17 See, e.g., Nesselrotte v. Allegheny Energy, Inc., 2008 WL 2858401 (W. D. Pa. 2008) (in-house attorney copied and removed hundreds of documents from employer between date of notice of termination and final day of employment; the court noted that for a period of "six months, the parties provided the Court with extensive briefing, the Court held two hearings, the Court referred the matter to a Special Master, the parties filed responses to said Master's Report and Recommendation, and the Court conducted its own in camera review, all culminating in the instant Memorandum Opinion and Order" addressing issue of privilege).

18 ABA Task Force on the Independent Lawyer, Lawyers Doing Business with Their Clients: Identifying and Avoiding Legal and Ethical Dangers (2001).

19 Id. at 58.

20 Id. See also The Decline in Lawyer Independence: Lawyer Equity Investments in Clients, 81 Tex. L. Rev. 405 (2002)(arguing that the policy underpinnings for RPC 1.8 do not apply to in-house attorneys).

21 The author represents the attorney involved in this dispute. The case is on appeal awaiting a ruling by the Appellate Division.

22 See also Restatement of the Law Governing Lawyers §14 cmt. f (2000) ("[T]he lawyer does not enter into a client-lawyer relationship with a person associated with an organizational client solely because the person communicates with the lawyer on matters relevant to the organization that are also relevant to the personal situation of the person").

23 See, e.g., Hopper v. Frank, 16 F.3d 92, 96 (5th Cir. 1994) (relying upon ABA Opinion 91-361); United States v. Edwards, 39 F. Supp. 2d 716 (M.D. La. 1999); Meyer v. Mulligan, 889 P.2d 509, 514 (Wyo. 1995).

24 344 N.J. Super. 538 (App. Div. 2001).

25 Id. at 543-44.

26 Id.

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