GPSOLO July/August 2007
Who Is the Client? Confidentiality When Representing Organizations
Lawyers have a duty to maintain the confidence and preserve the secrets of their clients. A lawyer’s duty of confidentiality regarding client information is crucial to the lawyer-client relationship: It encourages the client to seek legal counsel and to communicate openly with the lawyer. Moreover, a lawyer’s ability to represent the client effectively may be hampered without full and honest disclosure of information. Despite its critical importance, the practical application of the duty of confidentiality, as well as the attorney-client privilege, remains a difficult one for lawyers and clients. It is not always obvious in every situation who the client is, whom the lawyer owes the duty of confidentiality, and when disclosure between co-clients or other parties is required. Determining the identity of the client can be more difficult in the context of the representation of organizations.
Representing an Organization or Entity
When a lawyer is representing an organization, the general rule is that the client is the organization itself. However, the organization necessarily acts through its authorized officers, employees, or other constituents who oversee the particular engagement. It is apparent that from the beginning of the representation, the needs and interests of the organization are defined and communicated to the lawyer by one or more individuals acting on behalf of the entity. Although this may seem obvious in theory, the line between the organization and the individuals can sometimes be easily blurred in practice.
When representing an entity, lawyers can easily fall into the trap of assuming that the interests of the client (i.e., the organization) are the same as the interests of the individual officer or employee. Normally this is true-but not always. In fact, what the officer or employee claims to be best may not actually be in the best interest of the lawyer’s client-the entity. Even when the officer or employee shares common interests with the entity at the outset of the representation, these interests may not stay aligned through- out the representation. In fact, what began as common interests may develop into conflicting ones as the representation continues.
Despite these potential difficulties, it is the lawyer’s responsibility to put the client’s interests first, even when it means taking actions that are not in the interest of the individuals acting on behalf of the organization. In light of this responsibility, it is helpful for the lawyer to provide guidance and set the expectations of the various individuals that make up the organization.
Dealing with the Entity’s Agents
Given the practical dilemma faced by lawyers in dealing with entity clients, the rules of professional conduct attempt to provide guidance to practitioners. For example, Rule 3-600 of the Rules of Professional Conduct of the State Bar of California ("California Ethical Rules" or "California Rules of Professional Conduct") sets forth various guidelines relating to entity representation.
In dealing with an agent of the entity who intends to act in a manner that is or may be a violation of law reasonably imputable to the organization or that is likely to result in substantial injury to the entity, Rule 3-600 states that the lawyer may take such actions that he or she believes to be in the best lawful interest of the entity. Such actions may include among others: (1) urging the agent to reconsider the matter while explaining its likely consequences to the entity or (2) referring the matter to the next higher authority in the entity, including, if warranted by the seriousness of the matter, referral to the highest internal authority that can act on behalf of the organization.
If, despite the lawyer’s actions, the highest authority that can act on behalf of the organization insists on action that is a violation of law and the act is likely to result in substantial injury to the entity, the lawyer’s response is limited to resigning as the entity’s lawyer. Thus, despite the threat of unlawful action, Rule 3-600 expressly prohibits the lawyer from violating his or her duty to protect all confidential information.
The ABA Model Rules of Professional Conduct, which serve as models for ethics rules of most states, also address this issue of dealing with a client entity’s constituents. If the lawyer knows that an officer, employee, or other person associated with the entity is engaged in action or intends to act in a matter related to the representation that is a violation of a legal obligation to the entity, or a violation of law that reasonably might be imputed to the entity, and that is likely to result in substantial injury to the entity, Rule 1.13 requires the lawyer to do what is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessarily in the best interest of the entity, the lawyer shall refer the matter to a higher authority in the organization, including, if warranted by the circumstances, to the highest authority that can act on behalf of the organization as determined by applicable law.
Contrary to the California ethical rule, however, the ABA Model Rules allow the lawyer to reveal confidential information if the lawyer’s efforts to prevent the harmful action fail. Rule 1.13(c) states that, if despite the lawyer’s efforts, the highest authority that can act on behalf of the entity insists on the action that is clearly a violation of law that is likely to result in substantial injury to the entity, the lawyer may reveal information relating to the representation, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the entity. This provision, however, shall not apply to information relating to the lawyer’s representation to investigate an alleged violation of law, or to defend the entity (or its constituents) against a claim arising out of an alleged violation of law.
Dealing with an Entity’s Employees
In dealing with an entity’s directors, officers, employees, members, shareholders, or other constituents, whenever it becomes apparent that the entity’s interests may be adverse to those of the constituents with whom the lawyer is dealing, it is the lawyer’s duty to explain that the entity is the client. Rule 3-600(D) of the California Rules of Professional Conduct states that the lawyer should make clear that he or she is acting on behalf of the entity, not the individual constituents. The lawyer cannot mislead such a constituent into believing that the constituent may communicate confidentially in a way that will not be used in the entity’s interest if it is adverse to the constituent.
The ABA Model Rules impose the same responsibility on lawyers. Rule 1.13(f) requires the lawyer to explain the identity of the client when the lawyer knows or reasonably should know that the entity’s interests are adverse to those of the constituents with whom the lawyer is dealing. In short, in certain cases it is the lawyer’s responsibility to make sure the constituents of the entity client understand this issue.
Although separating the interests of the individuals and the entity client is important to ensure that the lawyer places the best interests of the entity first, dual representation of the entity and its constituents is not prohibited. Both Rule 3-600(E) of the California Rules of Professional Conduct and Rule 1.13(g) of the ABA Model Rules state that a member representing an organization may also represent any of its directors, officers, employees, members, shareholders, or other constituents, subject to the rules relating to concurrent conflicts of interest. If the entity’s consent is required under Rule 1.7 to waive a conflict, the consent shall be given by an appropriate constituent of the entity, other than the individual or constituent who is to be represented.
Simply put, though a lawyer is cautioned against confusing the interests of the entity client with those of the individuals with whom he or she interacts on behalf of the entity, dual representation of the entity and such individuals is allowed, so long as the lawyer reasonably believes that neither representation will be diminished and obtains informed consent in writing from each client when necessary. In fact, in dealing with a close corporation or small association, it is common for a lawyer to represent both the entity and its major constituents, as for instance in establishing employee benefit packages.
It should be noted, however, that such dual representation may lead to further complexities down the road. When a change in control of the entity occurs or is threatened, the lawyer is often faced with difficult decisions involving personal and institutional relationships and loyalties and frequently has difficulties in determining his or her correct duty.
Moreover, the decision to represent both the entity and one or more of its constituents may also invoke the joint-client exception to the attorney-client privilege. California Evidence Code Section 962 defines the joint-client exception as follows:
Where two or more clients have retained or consulted a lawyer upon a matter of common interest, none of them, nor the successor in interest of any of them, may claim a privilege under this article as to a communication made in the course of that relationship when such communication is offered in a civil proceeding between one of such clients (or his successor in interest) and another of such clients (or his successor in interest).
In addition to California, other states have also adopted the joint-client exception. Therefore, in representing the constituents of a client entity, the joint-client exception adds another layer of complexity to the analysis of the lawyer’s duty. It should be noted that the burden falls on the lawyer to shape the clients’ expectations and to advise them of the various implications of a dual representation.
Representing a Partnership
Not only can the joint-client exception be implicated when the lawyer decides to represent both the entity client and its constituents, as described above, the exception can also be automatically triggered when the lawyer represents a partnership. Courts have held that in the context of representing a partnership, the partnership’s lawyer represents all partners as to matters of partnership business. Further, partners owe to one another, and general partners owe to limited partners, obligations of good faith and fair dealing. All partners are entitled to full access of partnership information. Because of this conclusion, some courts have held that the joint-client exception applies, and there could be no privilege between partners because they are all "joint clients" of the lawyer for matters involving the partnership business.
Some jurisdictions that have considered the issue reached the same conclusion using a different rationale. Ohio, for example, has adhered to the principle that a partnership is an aggregate of individuals and does not constitute a separate legal entity. Therefore, the ethical rule relating to entity representation does not apply to partnership representation. However, Ohio courts have noted that a lawyer retained by a fiduciary owes a similar duty to those with whom the client has a fiduciary relationship. Accordingly, in a partnership, because the partners owe a fiduciary duty to each other, a lawyer-client relationship established by one partner extends to all partners regarding matters to which the fiduciary duty relates, namely partnership affairs.
These principles have been applied broadly, even to limited partnerships and closely held corporations. In the context of limited partnerships, the lawyer for either the limited partnership or the general partner of the limited partnership also has a duty that extends to all the limited partners. The court that had considered the issue reasoned that inasmuch as a limited partnership is indistinguishable from the partners who comprise it, the duty arising from the relationship between the lawyer and the partnership also extends to the limited partners. Where such duty arises from the relationship between the lawyer and the general partner, the fiduciary relationship between the general partner and the limited partners extends the duty owed by the lawyer to the general partner to the limited partners regarding partnership affairs.
One California court has even extended these principles and applied the joint-client exception to a closely held corporation. In Hecht v. Superior Court, 192 Cal. App. 3d 560 (1987), the lawyer represented the real parties in interest, who, based on the attorney-client privilege, refused to disclose information generated under the aegis of the entity’s attorneys (Hecht, 192 Cal. App. 3d at 561). The party seeking production of privileged materials alleged that she had been wrongfully denied profits in certain entities (Id. at 564). The trial court denied her request for the materials, relying on the attorney-client privilege. The appellate court reversed the trial court’s ruling and found that she had a right to materials related to the companies, even if possessed or generated by the company’s attorneys (Id).
It should be noted, however, that the application of these principles may not be as broad as the holding of Hecht may suggest. In looking at the court’s analysis, one deciding element is the fact that, although the entity in question is officially a corporation, the intent and conduct of the parties suggest that it was in effect a partnership (Id. at 565-66). The rationale and holding of Hecht emphasizes how important it is for the lawyer to be proactive in shaping the understanding and expectations of the clients.
Andrew B. Serwin is a partner in the San Diego, California, office Foley & Lardner LLP; he may be reached at firstname.lastname@example.org. Jesica N. Pandika is an associate with Seyfarth Shaw LLP in their commercial litigation and labor and employment departments. She may be reached at email@example.com.