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December 11, 2013 Articles

Litigation Ethics: Representing Corporations and Other Organizational Clients, Part 1 of 3

Lawyers who represent corporations practice in an ethics minefield.

By Kenneth R. Berman – December 11, 2013

Representing corporations is not easy. A company’s legal problems can be complex. But solving them is often not the biggest challenge. Legal problems aside, lawyers who represent corporations practice in an ethics minefield. If you don’t watch out, you can easily step on an ethics issue buried just beneath the surface. Even if you’re very careful, these ethics landmines can still explode. The dilemmas may not be of your own making. Sometimes we inherit them. Sometimes our clients, our partners, our associates, or circumstances beyond our control impose them on us. Sometimes we simply fail to recognize them, either because we’re not fully aware or because they do not trigger a red flag. In this three-part series, several of these landmines will be examined.

The Corporate Quandary
Handling a corporation’s legal work is particularly risky. Because corporations are inanimate and can only act through agents, the lawyer may be unable to recognize which constituents embody the client. Is the corporate client the directors, the officers, the employees, or the shareholders? What if their interests are not aligned? Does the corporation itself have interests different from those expressed by the constituents from whom the lawyer takes direction? How does the lawyer recognize and deal with these potentially divergent interests? To whom does the lawyer owe the duty of loyalty or the duty of disclosure? Whose confidences must the lawyer protect? What should be done when the lawyer’s view of the corporation’s best interest conflicts with the views of the constituents who engaged the lawyer?

Corporations are often members of a corporate family. They have parent and grandparent companies, sister companies, and subsidiaries. Some corporate clients are from mixed families, not wholly belonging to a single parent. What does the lawyer do when a corporate client is adverse to a company related to another client? Does the nature of the relationship between the companies matter and, if so, how do we know when the relationship is so attenuated that the conflict issue disappears?

Corporations face legal and business issues that, by their nature, seem to entangle their lawyers in ethics issues. For example, to control expenses, a company asks its lawyer to provide an alternative fee agreement in which the lawyer gets a fixed fee, regardless of how much or how little work the lawyer performs. Do ethics issues lurk in this arrangement? Or say a corporate client puts pressure on its lawyer to resolve a pending dispute. The lawyer suggests that the client deal directly with the opposing party, but the client asks the lawyer to ghostwrite a letter with the client’s signature to kick off the negotiations and bypass the opposing party’s lawyer. What do the rules of professional responsibility say about that?

Model Rule 1.13
The Model Rules of Professional Conduct have a separate rule—1.13—devoted entirely to representing organizational clients. One chief purpose of the rule is to give guidance when, in the course of a representation, the lawyer learns that someone in the company is about to violate a legal obligation. This circumstance puts the lawyer in the crosshairs between the duty of loyalty, duty of care, and duty of confidentiality. The rule attempts to put these into balance by discussing when the lawyer is either required or permitted to disclose the information or take other action. In one section, for example, the rule states:

If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer the matter to 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.

Unfortunately, the rule exposes the lawyer to the risk of being second-guessed, with potential disciplinary consequences for making a move someone else, in hindsight, concludes was wrong. For example, the rule imposes a standard that depends on what the lawyer “knows” about the constituent’s actions or intended actions, when the line between what the lawyer “knows” and what the lawyer merely has “reason to believe” may not be so clear, and when the lawyer may be unaware of all the facts, including some that might put the conduct in a different light. And before the lawyer’s duty to act is triggered or before the lawyer’s response is shielded by the rule, the lawyer must know that the constituent’s conduct violates a legal obligation, even though the question of a violation is often subject to great debate and disagreement. Further, the lawyer must know that the conduct is “likely” to result in “substantial” injury to the organization, requiring the lawyer to separate the probable from the possible and to know when a quantum of likely injury qualifies as substantial.

Then, once the lawyer has concluded that these circumstances exist, the lawyer is required “to proceed as is reasonably necessary in the best interest of the organization.” The rule does not identify what those steps might be, leaving it to the lawyer’s judgment—measured against a vague standard of reasonable necessity—to decide what to do. If the lawyer were to report the conduct, say, to the FBI, the lawyer could potentially be disciplined if a bar overseer later concludes that such reporting was not reasonably necessary. The rule’s very next sentence requires the lawyer to take the specific step of reporting the conduct to a higher authority in the organization, a duty excused only if the lawyer reasonably believes—again the same vague standard—that such reporting is unnecessary.

The rule is a strange combination of commands to take action and safe harbors for either acting or not acting. To be sure, the rule’s adoption of reasonableness standards—e.g., reasonable necessity and reasonable belief—undoubtedly gives the lawyer some discretion in deciding what to do. But what might appear reasonable in foresight or from the lawyer’s perspective might be unreasonable from hindsight or the perspective of someone else. It is difficult to tell whether the rule was intended to protect the client or the well-meaning lawyer, although one could argue it was meant to do both. One thing is clear, however. The rule illustrates why representing corporations is hard. There are serious ethical obligations and equally serious risks, while the path to the correct outcome is often poorly lit.

Flavors and Stripes
What follow are illustrative ethical dilemmas a lawyer can easily confront when representing corporations and other organizational clients. These dilemmas show not only the many flavors and stripes in which ethical quandaries appear, but why resolving them is so difficult. There seldom is an easy answer. The problems are typically enshrouded in gray and bathed in nuance.

Each of these dilemmas tees up an ethics issue and presents an analysis, based on the assumption that the ABA Model Rules of Professional Conduct govern. The arguments on either side of the question are meant to identify issues and risks in an even-handed way, highlight some of the more obvious matters that need to be considered, and show the difficulty in determining the proper result. In some instances, there is a discussion of how a bar ethics opinion or court has addressed the issue. Until there is a consensus, however, the result in one jurisdiction may not foretell the result in another. Further, the governing rules may vary from state to state, as the ABA Model Rules have not been adopted verbatim in all states.

Dilemma: Communicating with a Represented Opponent
Frustrated by the pace of settlement negotiations, the client urges the lawyer to wrap things up by year’s end. The lawyer explains that opposing counsel is unreasonable and that the client would be better off negotiating directly with the opposing party because the clients on both sides have an incentive to settle not shared by opposing counsel. When the client expresses a lack of confidence in writing a letter directly to the opposing party to begin negotiations, the lawyer offers to ghostwrite the letter for the client to sign and send on company letterhead, noting that bypassing the opposing lawyer in this way may be just what is needed to get the deal done.

Many believe that a lawyer may not ghostwrite a letter for the client to send to a represented adversary. Model Rule 4.2 provides that a lawyer may not communicate with a represented party on the subject matter of the representation without the opposing attorney’s consent, and Rule 8.4 provides that lawyers may not attempt to violate the rules through the acts of another or engage in dishonest or fraudulent conduct. Those who hold this view believe that ghostwriting a letter to the party on the other side and having the client sign and send it is an attempt to violate Rule 4.2 through the client and is dishonest in violation of Rule 8.4.

On the other hand, a client has the right to write to an opposing party directly, even if the party is represented by counsel. Those who believe a lawyer may ghostwrite such a letter argue that counseling a client on whether to exercise this right and how to do so is what lawyers do and is part of the duty of diligent and competent representation. Further, if the client were to write to the opposing party without any help from the lawyer, the client might say the wrong thing, which would prejudice the client and be a disservice. Rule 4.2 is meant to prevent lawyers from taking unfair advantage of represented parties or from soliciting admissions from them. Those who find no ethical issue argue that these concerns are not presented by ghostwriting such a letter because the opposing party is simply receiving the letter and is free to discuss it with the opposing attorney.

In 2011, the ABA issued Formal Opinion 11-461, which holds that “[p]arties to a legal matter have the right to communicate directly with each other. A lawyer may advise a client of that right and may assist the client regarding the substance of any proposed communication. The lawyer’s assistance need not be prompted by a request from the client. Such assistance may not, however, result in overreaching by the lawyer.”

Dilemma: Disclosing Publicly Available Information
In the course of defending a high-profile client in a well-publicized securities-fraud suit, the client tells the lawyer that the client was sued 10 years earlier in a securities-fraud class action and paid $20 million in a court-approved settlement. Later, as a panelist on a CLE program discussing his experience in the just-concluded suit, the lawyer reveals that his work in that matter was complicated because of the earlier litigation that the client settled for $20 million. The lawyer adds that he is not telling tales out of school because the $20 million settlement is a matter of public record, as it was approved in open court 10 years ago after an evidentiary hearing that was open to the public, and that the terms of the settlement can be obtained in a Google or PACER search.

With certain inapplicable exceptions, Model Rule 1.6 provides: “A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent [or] the disclosure is impliedly authorized in order to carry out the representation.” Those who believe the lawyer committed no ethical violation would note that the purpose of the rule is to keep a client’s information confidential, and the rule itself is entitled “Confidentiality.” They would point out that the information is already in the public domain and easily obtainable through an Internet search. Because any other lawyer on the CLE panel could have gotten the same information and discussed it at that CLE program, it would be an anomaly if all the other lawyers were free to discuss this public information but not the one lawyer who represented the client. Interpreting the rule to bar the lawyer from discussing this information, so the argument goes, would be unreasonable, inconsistent with common sense, and excessively literal. The lawyer should not be penalized for discussing information that was freely available to the public, particularly when the purpose of the discussion was to improve the legal profession.

Those who believe the lawyer was wrong to discuss the 10-year-old settlement would point out that the rule is not limited to information that the client communicates to the lawyer in confidence but covers any “information relating to the representation.” They would argue that this 10-year-old information is obviously related to the representation, and, although it might be publicly available to anyone who is of a mind to search for it, the client is entitled to have the lawyer not publicize the information and increase the level of public awareness. In this instance, the lawyer made a disclosure of the information for his own benefit and not for the benefit of his client, when the client was entitled to the lawyer’s silence.

In Attorney Disciplinary Board v. Marzen, No. 08-1546 (Iowa Mar. 19, 2010), the Iowa Supreme Court sided with the view that the disclosure of client information is not excused simply because the same information could be obtained from publicly available court records. In that case, a client accused her former lawyer of sexual misconduct, an accusation that received a great deal of public attention as the lawyer was running for a county office. To defend his reputation, the lawyer pointed out that his client had brought an earlier proceeding in which she accused her probation officer of sexual misconduct. The Iowa Supreme Court held that “the rule of confidentiality is breached when an attorney discloses information learned through the attorney-client relationship even if that information is otherwise publicly available.”

Some states take a more moderate approach. In Massachusetts, for example, an advisory comment to Rule 1.6 states that “widely available” or “generally known” information is not protected by the rule:

[N]ot every piece of information that a lawyer obtains relating to a representation is protected confidential information. While this understanding may be difficult to apply in some cases, some information is so widely available or generally known that it need not be treated as confidential. The lawyer's discovery that there was dense fog at the airport at a particular time does not fall within the rule. Such information is readily available. While a client's disclosure of the fact of infidelity to a spouse is protected information, it normally would not be after the client publicly discloses such information on television and in newspaper interviews. On the other hand, the mere fact that information disclosed by a client to a lawyer is a matter of public record does not mean that it may not fall within the protection of this rule. A client's disclosure of conviction of a crime in a different state a long time ago or disclosure of a secret marriage would be protected even if a matter of public record because such information was not generally known.

See also Restatement of the Law Governing Lawyers § 59 (2000) (information learned from a client is confidential unless it is “generally known in the relevant sector of the public”). Yet in an apparent departure from the Massachusetts rule, which recognizes an exception for generally known information but holds that information is not generally known simply because it is in the public record, the Restatement states that “[i]nformation contained in books or records in public libraries, public-record depositaries such as government offices, or in publicly accessible electronic-data storage is generally known if the information is obtainable through publicly available indexes and similar methods of access.” Id. § 59 cmt. d. The Model Rules appear to take the most conservative approach, as they make no mention of generally known or available information.

Dilemma: Technological Competence
A junior lawyer comes to her supervising senior partner and asks whether the client’s electronically stored information should be produced in native format or in single page TIFFs. The senior lawyer, who has difficulty with emails and does not use a computer except to send an occasional email, does not know the difference between a native production and a TIFF production and is not in a position to advise the associate. The senior lawyer does, however, remark that it is comforting to have the junior lawyer on the case and will defer to her on this issue because of her superior knowledge about computers.

Has the senior lawyer breached the duty to provide competent representation? Model Rule 1.1 says that “[a] lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” It says nothing about technological capabilities. The comment to the rule says that, in determining whether a lawyer is providing competent representation, factors to consider include “whether it is feasible to . . . associate or consult with a lawyer of established competence in the field in question.” Those who argue that the senior lawyer need not develop any technical proficiency would say that the lawyer has an associate who is abreast of the latest technological developments, and it is therefore not “reasonably necessary” for the senior lawyer to understand the nuances of electronic discovery.

The contrary argument recognizes that this is a changing world where skills that would suffice in an earlier day are no longer adequate. Given that, by some accounts, 95 percent of all information is stored electronically, that clients can lose cases if electronically stored evidence is mishandled, and that the cost to the client of waging litigation is a direct function of how electronically stored information is handled, one might argue that a working familiarity with how electronic evidence is stored and produced is an occupational necessity for trial lawyers. Those who hold this view would argue that the fact that the associate asked the senior lawyer to make a decision on this question arguably shows that, if the senior lawyer knows so little that he has to defer to the associate who sought the senior lawyer’s advice on this very question, the senior lawyer’s technological illiteracy violates the duty to provide competent representation “necessary for the representation.”

In August 2012, the ABA amended the official comments to Rule 1.1, to add the following italicized words: “To maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.”

Keywords: litigation, corporate counsel, Model Rules of Professional Conduct, Model Rule 1.13

Kenneth R. Berman is a partner with Nutter McClennen & Fish LLP in Boston, Massachusetts.