You’re a bright, young—or younger—lawyer with an okay solo practice. You’ve got a terrific client you especially like: a small but growing corporation. You just got off the phone with its CEO, whom you admire and enjoy working with. He’s made—perhaps—the offer of a lifetime. He asked you to join the company as its new—first—general counsel, a position the board just created. Also, as a vice president.
Not only is the salary substantially better than what you made during last year’s pandemic, but you’ll also be eligible for stock options, participate in the executive bonus pool, and have access to a deferred compensation plan with the company matching your contributions. You’ll get regular executive perks: health insurance, car allowance, and so on. What’s not to like?
His words: “If you’re interested, draw up an agreement, and we can talk.” Interested? You didn’t wait! Told him yes on the spot.
“Great. Pull an agreement together and send it to me.” He even emailed you a form of executive employment agreement the company’s been using. It has provisions that mirror the compensation package he described.
You’re excited to get going. But slow down.
The company’s your client. You owe it the same fiduciary duties you owe every client. Let’s work through what that may mean as you prepare to go in-house.
You think: “I’ll be an employee. Officer as well. Not like the outside lawyers the company hires for specific engagements. Does that affect the agreement I create?”
Good question. A California appellate court has answered it. (I’ll use the example of a California lawyer in this article because that’s where I focus my practice as a professional responsibility lawyer. Fifty-four jurisdictions have adopted the ABA Model Rules of Professional Conduct in some form, including Rule 1.8: Current Clients: Specific Rules. In California’s Rules of Professional Conduct, these matters are covered in Rule 1.8.1. How courts and bar discipline authorities enforce these rules will differ.)
The California case in question is Missakian v. Amusement Industry, Inc., et al. (2021) 69 Cal.App.5th 630 (“there is no persuasive reason to separate the two roles” [of employee and lawyer]). Craig Missakian, a former general counsel, sued his former employer over an oral agreement that, in addition to salary, was supposed to pay him a monthly bonus and 10 percent of any recovery from a lawsuit in which the company was locked. Later, offered another job, he left. The lawsuit settled. The company received $26 million. Missakian, however, never got his monthly bonus or the litigation bonus.
The company’s defense? The oral agreement was void because Missakian had failed his ethical obligation to have a written agreement for his contingent fee, as a provision of California’s State Bar Act, Business and Professions Code section 6147, required.
The court rejected Missakian’s argument that the ethics requirement did not apply to him because he was an employee, client’s general counsel, not an “outside” lawyer. The court, unimpressed, held: “A company can occupy its status as an employer and a client simultaneously and we see no reason why its status as an employer should result in less protection for it as a client for purposes of” a provision of the Act. After all, the California Supreme Court has recognized that an in-house lawyer representing his company occupies a role equivalent to that of private counsel (PLCM Group, Inc. v. Drexler 22 Cal. 4th 1084, 1093 (2000)) and that in-house lawyers owe a former corporate employer ethical obligations (General Dynamics Corp. v. Superior Court 7 Cal. 4th 1164, 1189–92 (1994)).
You ask: “Does the fact that I’ll have different roles—lawyer, but also vice president—affect my duties once I join the company?” After all, as a vice president, you may have tasks that don’t require a lawyer.
Another good question. California’s State Bar Court has answered that one:
The law is clear that even if [you were] not practicing law, [you’re still] required to conform to the ethical standards required of attorneys. . . . “Attorneys must conform to professional standards in whatever capacity they are acting in a particular matter” [Crawford v. State Bar (1960) 54 Cal.2d 659, 668]. An attorney who breaches fiduciary duties that would justify discipline if there was an attorney-client relationship may be properly disciplined for the misconduct [In the Matter of McCarthy (Review Dept. 2002) 4 Cal. State Bar Ct. Rptr. 364, 373].
In re Matter of Schooler (Review Dept. 2017) 5 Cal. State Bar. Ct. Rptr. 494, 503 (the state bar court rejected the defense of Jane L. Schooler that she had acted as executor of her parents’ estate, not as a lawyer; instead, the court recommended disbarment, and the California Supreme Court subsequently disbarred her).
As an officer and general counsel, you’ll owe your company fiduciary duties (Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d. 327, 345). So, no matter your role performing a specific task, you’ll still be bound by the same ethical principles in dealing with the company as if you’re acting as its lawyer.
Now we come to what kind of agreement you’re preparing—an engagement agreement or a business transaction with your client? Likely, the latter.
Your agreement, addressing not only salary but other elements of executive compensation, will go much further than a basic retainer agreement. For example, it will have a provision that awards bonuses and a deferred compensation provision. It may even include a severance package in the event the company decides you and it should part ways.
These are not the kind of provisions one finds in a typical retention agreement by which a client engages a lawyer to render legal services. Rather, this will be an agreement that, fairly considered, memorializes a business or financial transaction between you and the company. To underscore that any business or financial transaction between a lawyer and client is subject to strict scrutiny, a provision in an otherwise standard retention agreement that gave the lawyer authority to compromise the client’s medical bills was found to be a business transaction subject to the prohibitions of the predecessor to Rule 1.8.1, subjecting the lawyer to disbarment (In re Silverton (2005) 36 Cal.4th 81, 85). Rule 1.8.1 applies even to an initial fee agreement if the lawyer acquires an ownership, possessory, security, or other pecuniary interest adverse to the client in the agreement (Rule 1.8.1, Comment [5], emphasis added). For example, a “charging lien” to secure hourly legal fees is an adverse interest that requires compliance with Rule 1.8.1 (Fletcher v. Davis (2004) 33 Cal.4th 61, 64).
We have to accept the reality that, because of the fiduciary nature of our lawyer-client relationship, when a lawyer enters a business or financial transaction with a client, any agreement the lawyer drafts will be construed against the lawyer. In the words of Mayhew v. Benninghoff ((1997) 53 Cal.App.4th 1365, 1369), “Attorneys wear different hats when they perform legal services on behalf of their clients and when they conduct business with them. As to the latter, the law presumes the hat they wear is a black one.”
With that as background, what are the implications?
In California, a lawyer is prohibited from entering a business or financial transaction with a client unless the lawyer complies with every provision of Rule 1.8.1. “In entering into the various business transactions with his clients, [lawyer] was required to satisfy all three requirements of [predecessor to Rule 1.8.1]” (Fair v. Bakhtiari (2011) 195 Cal.App.4th 1135, 1155, quoting BGJ Associates, LLC v. Wilson (2003) 113 Cal.App.4th 1217, 1226). “Otherwise, the transaction is voidable at the client’s election. [Predecessor to Rule 1.8.1] and [Probate Code] section 16004 make the underlying agreements ‘voidable not void’ at the election of the client” (Fair, supra, at p. 1154, quoting BGJ Associates, supra, at p. 1229.)
For purposes of our discussion, there’s no material difference in courts’ application of the mandatory requirements of Rule 1.8.1 and its predecessor, former rule 3-300 (In re Matter of Foster (Review Dept. 2019) 2019 WL 4263070 fn. 4 (Case No. 17-J-03246; Sept. 5, 2019) (“Rule 3-300 provides essentially the same proscription as Rule 1.8.1(a)”); I mention this decision not as precedent, but to emphasize the court’s interpretation of the two rules’ requirements).
What Are Rule 1.8.1’s Requirements?
A lawyer’s money interest, adverse to a client, is ethically permissible only if the lawyer meets all the following requirements:
Let’s discuss these requirements.
Fair and reasonable. A basic requirement of any transaction between a lawyer and a client is that the client must be treated fairly. Because of the lawyer’s fiduciary obligation, all dealings between a lawyer and a client in which the lawyer benefits are closely scrutinized for unreasonableness and unfairness (Rodgers v. State Bar (1989) 48 Cal.3d 300, 314; Beery v. State Bar (1987) 43 Cal.3d 802, 812–813 (lawyer suspended for two years for persuading conservator to lend money to another of lawyer’s clients without disclosing lawyer’s relationship to that client, and other dishonest and deceptive acts)). The burden is on the lawyer to prove the reasonableness and fairness of the transaction (Ramirez v. Sturdevant (1994) 21 Cal.App.4th 904; see also In Re Silverton, supra, at pp. 85–86).
Disclosure must be in writing and understandable. In its requirement that the lawyer disclose the transaction and its terms in writing in a manner that the client can reasonably “understand,” Rule 1.8.1 requires the lawyer to make the written disclosure in straightforward terms for the client (Hawk v. State Bar (1988) 45 Cal.3d 589, 594–595 (terms not disclosed in language clients could understand); BGJ Assocs., LLC v. Wilson (2003) 113 Cal.App.4th 1217, 1226–1227 (an attorney is not relieved of his or her [predecessor rule] obligations, even if the client consults with independent counsel regarding the proposed transaction)).
Full written disclosure requires the lawyer to provide the client with advice against himself. This means the lawyer must provide the client the same advice regarding the transaction against himself as the lawyer would provide to his client in connection with a transaction with a third party. Thus, the lawyer must inform the client of all the terms and relevant facts of the transaction, including the nature and extent of the lawyer’s role and all resulting compensation (Beery v. State Bar (1987) 43 Cal.3d 802).
Independent lawyer’s advice. The lawyer must advise the client in writing that the client may seek the advice of an independent lawyer whom the client chooses. This is a key element of Rule 1.8.1 precisely because of the nature of the lawyer-client relationship.
Opportunity to obtain that advice. The client must have a “reasonable opportunity thereafter” to seek that independent advice about the adverse interest or business deal (Rule 1.8.1(b)). The language of Rule 1.8.1(c) itself (“thereafter”) mandates some time delay between the lawyer’s presentation of the written proposal and the client’s consent. Presenting the writing that includes the admonition that the client may seek independent advice and having the client sign the document at the same time violates the rule.
Consent in writing. The client’s written consent should make clear that the client has fully understood all the terms and conditions of the transaction and has had both the advice to consult independent counsel and the opportunity to do so.
Failure to comply with any element of Rule 1.8.1 renders the transaction voidable at the client’s option (See BGJ, supra, at 1226; Law Offices of Dixon R. Howell v. Valley (2005) 129 Cal.App.4th 1076, 1104). If the client suffers a loss on account of the lawyer’s adverse interest, the violation of Rule 1.8.1 may provide evidence of a lawyer’s breach of fiduciary duty to the client (Mirabito v. Liccardo (1992) 4 Cal.App.4th 41, 45-47 (attorney liable for client’s consequential losses on breach of fiduciary duty theory); see also David Welch Co. v. Erskine & Tulley (1988) 203 Cal.App.3d 884; Day v. Rosenthal (1985) 170 Cal.App.3d 1125). Violation can also result in state bar discipline (In re Silverton, supra at pp. 94-95 (disbarment for violation); In re Matter of Lingwood (Review Dept. 2019) 5 Cal. State Bar Ct. Rptr. 660, 670-671 (failure to provide written description of terms of the transaction and a written statement to seek advice of independent lawyer—even though the transaction was fair and reasonable—resulted in actual suspension).
The lawyer has the burden of proof to show compliance with all the provisions of the rule and to demonstrate the dealings with the client were fair and reasonable (BGJ, supra, at p. 1228; Ramirez, supra, at p. 917).
Rule 1.8.1 is applied most stringently against lawyers who fail to comply with each of its provisions (see, e.g., Fair, supra, at p. 1155; even though the transactions were financially rewarding for the client, the court voided them because of the lawyer’s failure to comply with each element of Rule 1.8.1).
Use the form agreement the CEO sent. The company is apparently comfortable with it. Draft as fair and reasonable an agreement as you can. Then, strongly recommend—perhaps insist—that the company engage a competent, independent lawyer whom it chooses to review your handiwork and negotiate with you.
Finally, thrive in your new position—especially knowing that you’ve fulfilled your ethical responsibilities to your client.
