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March 01, 2017

Scruples: Disclosing Misconduct of a Client’s Employee

Michael Downey

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Paradox blocked Ethox’s progress toward the exit. “I have a question for you.”

“What seems to be the issue?” Ethox responded.

“You may recall that I have been representing ACME Products in a lawsuit.” Ethox nodded. Paradox continued, “Nemesis’s client is claiming that ACME’s boomerangs do not actually return to the sender.”

“I have done some investigating,” Paradox said, “and I believe Nemesis is right—the boomerangs do not return. Moreover, I believe that the manager of ACME’s production of the boomerangs withheld this information from everyone—even ACME’s board. What should I do?”

“First, we have to figure out if you made any misstatements to the court in pleadings or the like,” Ethox advised. “If you did, ABA Model Rule of Professional Conduct 3.3(a) would likely require you to correct the misrepresentation, even if it requires disclosing client confidences protected under Rule 1.6.”

“I don’t think that is an issue,” Paradox assured Ethox. “We haven't filed any substantive pleadings yet.”

“Good. You will need to be careful going forward that you don’t make any misstatements,” Ethox counseled Paradox.

“That shouldn't be a problem,” Paradox promised.

“Next, could the client’s misconduct result in death or substantial bodily harm?” Ethox asked. “If there is such a concern, you would be permitted to disclose the information. This would not be a mandate for disclosure, like the one Rule 3.3 imposes to correct a material misstatement to a tribunal. Rule 1.6(b)(1) would permit, but not require, you to make the disclosure.”

“Again, I don’t think that would be an issue,” Paradox said. “Most people use the boomerangs for entertainment. Normally, people don’t stand in front of someone throwing a boomerang because—even if it is going to return to the thrower—no one really knows when it will turn around.”

“Well, then the boomerang fraud is probably something you cannot voluntarily disclose to Nemesis or the public under Rule 1.6(b),” Ethox concluded. “You may need to disclose it within ACME, but you probably cannot disclose it outside ACME unless ACME fails to make a reasonable response.”

“Wait a second,” Paradox interrupted. “I recall something about the adoption of a crime-fraud exception to the duty of confidentiality under Rule 1.6.”

“You have a good memory,” Ethox said admiringly, “but I think you are making a common mistake. The two provisions that relate to disclosure of a client’s crime or fraud adopted in response to the Enron fraud are Rule 1.6(b)(2) and (3). Each contains an exception to the duty of confidentiality that allows—again, allows and not requires—a lawyer to disclose certain information to prevent or remedy a client’s crime or fraud that may cause substantial injury to someone’s financial or property interests. But these exceptions apply only when the client has used or is using the lawyer’s services to further the crime or fraud.”

Ethox continued, “The idea, based on Enron, is that lawyers should be able to disclose a client’s crime or fraud when, for example, the lawyer has prepared securities filings that were based on false information. But I do not think the exceptions would apply here because we are only defending a lawsuit.”

“You are probably right,” Paradox conceded. “But can I—or must I—report this to ACME’s management, and even to ACME’s board? I would hate to get anyone fired.”

“Yes,” Ethox assured Paradox. “Telling management or the board what has happened is not disclosing confidences. ACME is our client, and you would only be sharing the information within ACME. And ACME’s management deserves to know what is going on so they can try to fix the problem.

“If they do not take adequate steps to fix the problem,” Ethox concluded, “we may be able to take action under Rule 1.13. But, hopefully, we can leave those issues for another day.”

“I certainly hope that is true,” Paradox agreed. “Let me talk to management and let you know if further action is necessary.”

Michael Downey

The author is a legal ethics lawyer at Downey Law Group LLC, St. Louis.