When it comes to ethical guidance, in-house lawyers get the short end of the stick. The Model Rules of Professional Conduct (the “Rules”), which most U.S. jurisdictions have adopted in some form, are more compatible with law firm practice than in-house work. Although a handful of Rules, such as Rules 1.11, 1.12, and 3.8, single out government lawyers for special attention, in-house lawyers are not so fortunate. Not only must they figure out how to adapt the Rules to a corporate environment for which many of those Rules were clearly not designed, but they must do so with little assistance from ethics opinions and CLE programs. (There are some notable exceptions, such as NYCBA Formal Op. 2008-2 (“Corporate Legal Departments and Conflicts of Interest Between Represented Corporate Affiliates”) and ABA Formal Op. 99-415 (“Representation Adverse to Organization by Former In-House Lawyer”). Yet, as noted below, even those opinions cannot address all of the unique complexities raised by in-house counsel conflicts of interest. Of the scores of ethics panels I have been invited to speak on over the years, only one was titled “Ethics for In-House Counsel.” In-house lawyers are like the proverbial “square pegs” trying to navigate the “round hole” of legal ethics.
The primacy of the traditional law firm model is reflected in the terminology used throughout the Rules. For example, the conflict of interest rules provide that an individual lawyer’s conflict is imputed to all other lawyers “associated in a firm.” Rule 1.10(a) (emphasis added). What constitutes a “firm”? In common parlance, a firm generally means a private entity comprised of attorneys who provide legal services to outside clients. Yet, Rule 1.0(c) defines a “firm” or “law firm” as “a lawyer or lawyers in a law partnership, professional corporation, sole proprietorship or other association authorized to practice law; or lawyers employed in a legal services organization or the legal department of a corporation or other organization.” (emphasis added). Thus, corporate legal departments (and by extension in-house lawyers) are simply appended to the definition of a law firm, despite the fundamental differences between those two practice models. This lack of delineation can raise bewildering questions for in-house lawyers who try to apply the Rules to their own conduct.
Again, the conflict of interest rules provide a ready example. As noted above, individual conflicts are imputed to all lawyers “associated in a firm.” In many cases, the clients can waive the imputed conflict, but some conflicts are unwaivable under Rule 1.7(b). In a law firm context, this does not usually present an insurmountable obstacle. A client with an unwaivable conflict can hire another law firm. But what does a corporation do when its general counsel or other in-house lawyer has an unwaivable conflict – short of firing them? One may argue that such a scenario is impossible, because only current client conflicts under Rule 1.7 are unwaivable. Because a corporate in-house lawyer represents only one client at a time – the corporation – he or she can never have a conflict under Rule 1.7, so the argument might go. This reasoning ignores the realities of the modern business world. As corporate family structures grow in complexity, in-house lawyers face an unprecedented array of potentially conflicting client interests. The same legal department may provide legal advice and services to the parent company, wholly-owned subsidiaries, indirect subsidiaries, and other corporate affiliates and constituents. Just figuring out who your client is at any particular time can be a daunting proposition for an in-house lawyer. See Rule 1.0(c), Cmt. [2] (noting that “[t]here can be uncertainty [for in-house lawyers] as to the identity of the client,” because, “it may not be clear whether the law department of a corporation represents a subsidiary or an affiliated corporation, as well as the corporation by which the members of the department are directly employed”).
To make things more complicated, the legal and business interests of corporate affiliates are not always aligned. See Rule 1.13, Cmt. [10] (noting that “[t]here are times when the organization's interest may be or become adverse to those of one or more of its constituents”). For example, if a multinational conglomerate decides to spin off a litigation burdened subsidiary, the legal interests can become extremely complex, particularly if the general counsel has been directing the litigation up to that point. Strategic decisions made by the subsidiary in the litigation may adversely affect the parent company’s restructuring plans. How much authority should the parent company have to control the general counsel’s litigation decisions about the subsidiary before the spin-off? Conversely, does the general counsel – who arguably has a duty of loyalty to both parent and subsidiary – have to consider how his or her decisions today might impact the future prospects of subsidiary after the spin-off? How do the parent and subsidiary negotiate issues that will continue to impact the litigation after the spin-off, such as indemnification obligations or ownership of the attorney-client privilege? While the parent company might wish to retain control of privileged communications that occurred between the subsidiary and in-house counsel before the spin-off, the subsidiary would want to take the privilege with it. The general counsel can wind up torn between two clients that were once in harmony. See, e.g., Simon M. Lorne, “Losing the Privilege When the Subsidiary is Sold,” Business Law Today (January 2014) (discussing some of the ethical implications of for in-house counsel when a corporation sells a subsidiary).
One way to address this dilemma is to retain independent outside counsel for the subsidiary to protect its interests in the spin-off. See NYCBA Formal Ethics Op. 2008-2 (noting that, in a spin-off transaction, “it is wise for the parent to secure for the subsidiary outside representation”). The problem is that the outside counsel has to report to someone in the company and, usually, that someone is the general counsel. Even if the subsidiary has its own in-house counsel, that person often reports up the corporate ladder to the general counsel for the parent company. Although a solution could be fashioned involving informed waivers, limited scope representations, screening mechanisms, and independent legal advice, see id., these scenarios raise thorny questions for in-house lawyers who (unlike law firm practitioners) are inextricably intertwined with their corporate clients.
