Ethical Considerations In Corporate Representations

By:

Brian T. Sumner is an associate in the Enforcement & Investigations practice group at Fried, Frank, Harris, Shriver & Jacobson LLP in Washington, D.C. He can be contacted at brian.sumner@friedfrank.com.

When representing an entity in an adversarial setting—whether litigation, a government investigation, or an internal investigation of potential wrongdoing—there are various ethical issues surrounding the lawyer’s representation of the entity, on the one hand, and the interests of the entity’s officers, directors, shareholders, and employees, on the other.

Who Represents the Organization?

ABA Model Rule of Professional Conduct 1.13 is the starting point in the analysis of a lawyer’s obligations with respect to a client that is an organization. Model Rule 1.13(a) states: “A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.”

Model Rule 1.13(a) does not specify whether “duly authorized constituents” means officers, directors, shareholders, employees, or some combination of the foregoing, or whether the meaning might change depending on the circumstances (e.g., if a particular officer engaged in wrongdoing to the detriment of the organization). By reference to the entity’s “duly authorized constituents,” the precise scope of Model Rule 1.13(a) hinges on the substantive law governing the organization and other factors. Lawyers should be sensitive to the underlying substantive law, corporate charter and bylaws, and the (perhaps competing) interests of the various constituencies within the organization. In general, a lawyer should act in a manner that is reasonable with respect to the legitimate interests of the entity’s various constituencies.

Communications with Constituents of the Organization

            Disclosure of the Identity of the Lawyer’s Client

            The principle underlying Model Rule 1.13(a) informs how counsel should handle conversations with officers, directors, employees, and other constituents of the organization. Model Rule 1.13(f) speaks to this and states:

In dealing with an organization’s directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituents with whom the lawyer is dealing.

The standard for disclosure embodied in Model Rule 1.13(f) is not the most conservative approach to disclosure among the various jurisdictions having adopted the Model Rules or variations thereof.[1] Under the most prudential approach, the lawyer would always inform the constituent of the identity of the lawyer’s client. When litigation is a possibility and all of the facts are not yet known to the lawyer, prudence would counsel in favor of such an approach.[2]

Protections for Communications Between Constituents and the Entity’s Counsel

Model Rule 1.6 regarding confidential information protects communications between constituents of an organization and the entity’s lawyer.[3] Such communications are also shielded from disclosure by the attorney-client privilege.[4] In communications between an entity’s counsel and its constituents, the organization’s lawyer should identify himself or herself as the company’s counsel, explain how the purpose of the communications is to enable counsel to render advice to the organization, and ask the constituent to maintain the confidentiality of the communication with company counsel.

In situations where the organization may wish to disclose the contents of such communications to third parties—such as the government or an industry regulator in connection with an investigation, or to the company’s outside auditor—company counsel should also inform constituents with whom counsel is speaking of that possibility. In that regard, counsel should tell constituents that because counsel represents the organization and not the constituent, the attorney-client privilege protecting the conversation between counsel and the constituent belongs to the company and not to the constituent, and that, therefore, any decision regarding whether to waive the privilege and provide information to a third party rests solely with the company and not with the constituent.

These warnings are important in many representations, but particularly those where counsel has represented the organization for a long time, where counsel has previously also represented individual constituents of the organization in their individual capacities, or where the client is a closely held organization in which constituents think of company counsel as “their lawyer.” Failing to provide clear warnings runs the risk of unintentionally creating an attorney-client relationship with a constituent (or a mistaken impression on the part of the constituent that such a relationship exists).[5] In either case, there can be significant consequences.[6]

Representation of Constituents of the Organizational Client

Notwithstanding the foregoing, Model Rule 1.13(g) permits company counsel to represent both the organization and one or more of its constituents, subject to the provisions of Model Rule 1.7 governing conflicts of interest. There may be several reasons to engage in multiple representations (e.g., cost savings, signaling to third parties that the organization views its interests as aligned with its constituents). At the same time, the risk that the company’s and the constituent’s interests will diverge at a later point rarely disappears entirely. If company counsel undertakes to represent one or more of the organization’s constituents individually, counsel should ensure that appropriate disclosures are made, that informed consents are obtained, and that the engagement letters describe what would happen if a conflict later emerges.

A middle ground between joint and independent representations is for separate counsel to be retained, but for that counsel to remain in the background as “shadow counsel” unless and until the need arises for such lawyer to emerge publicly. Another alternative is to engage a single additional lawyer for similarly situated constituents (e.g., one lawyer for all of the independent directors). In many of the situations where separate counsel is retained for individual constituents, company counsel and the lawyers for the individuals may wish to enter into a joint-defense or common-interest agreement in order to facilitate the sharing of information and planning of litigation strategy. Whether such agreements and the attorney-client privilege they seek to extend among their parties will be pierced by opposing parties is largely a function of the identity of particular parties, the nature of their shared legal interests, and the terms of the agreement, although, in recent years, the trend in the case law has been to restrict such agreements.

[1]               For example, in the District of Columbia, a lawyer must explain the identity of the client “when it is apparent that the organization’s interests may be adverse to those of the constituents with whom the lawyer is dealing.” D.C. Rules of Prof’l Conduct R. 1.13(c) (2007). See D.C. Bar Legal Ethics Comm., Op. 269 (1997).

[2]               The comments to the Model Rules acknowledge that “[w]hether such a warning should be given by the lawyer for the organization to any constituent individual may turn on the facts of each case.” Model Rules of Prof’l Conduct R. 1.13 cmt. [11] (2009).

[3]               Model Rules of Prof’l Conduct R. 1.13 cmt. [2] (2009).

[4]               Upjohn Co. v. United States, 449 U.S. 383 (1981).

[5]               Separately, a lawyer is obligated under Model Rule 4.3 to make reasonable efforts to correct any misunderstanding on the part of the (unrepresented) constituent about the lawyer’s role in the matter.

[6]               See, e.g., In re Grand Jury Subpoena, 415 F.3d 333 (4th Cir. 2005).

 

Advertisement