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Areas of Interest
May 30th, 2014
In-House Counsel Ethics: Practicing Law as a Square Peg
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.  (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.  (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.
Even after the spin-off, the general counsel’s troubles may not be over. Now, the subsidiary is a former client under Rule 1.9. See ABA Formal Op. 99-415 (noting that, the conduct of in-house counsel “for purposes of former client conflicts of interest is governed, as is that of all other lawyers, by Model Rule 1.9”). If litigation were to arise between the parent and its former subsidiary, it may create another conflict of interest for the general counsel. If the subsidiary refuses to waive the conflict, this could preclude the general counsel from representing the company in connection with the litigation and – by imputation – anyone else in the legal department.1 If so, that leaves no one in the legal department to communicate with outside litigation counsel and direct the litigation strategy. Requiring a company to defend or prosecute a lawsuit without the assistance of its own legal department creates an unnecessary impediment to the attorney-client relationship. It is difficult to see how this outcome benefits clients, i.e., those whom the conflict rules are intended to protect.
The emphasis on law firm practice permeates other aspects of the Rules.2 For example, a former in-house lawyer who was starting up his own solo practice approached me with what should have been a straightforward question: is he ethically permitted to list his former corporate employer on his LinkedIn profile? The lawyer was befuddled by the text of a New York advertising rule, which stated, in relevant part, “an advertisement may include information as to . . . names of clients regularly represented, provided that the client has given prior written consent.” New York Rules of Prof’l Conduct (“New York Rule”) 7.1(b)(2). Although not expressly stated, this rule suggests that lawyers may not include in their advertisements names of clients who are either not regularly represented or do not give consent. The lawyer’s question highlights the dual nature of the relationship between a company and its in-house counsel: the company is both the lawyer’s full-time employer and the lawyer’s client – a nuance that is not always recognized in the ethics rules. It probably would not occur to most former in-house lawyers that listing their employment history on their LinkedIn profile, marketing materials, or resume might constitute a technical violation of their particular state’s advertising rules. As with the imputation rules, this advertising restriction reflects a view of the attorney-client relationship that is premised on the law firm model, rather than the in-house model.
On the bright side, there is at least one area where in-house lawyers have received some personalized attention: most states now permit out-of-state lawyers to serve their corporate employers as in-house counsel. This has not always been the case. Up until 2011, for example, it was unclear whether out-of-state lawyers working as in-house counsel in New York were violating criminal statutes that prohibited the unlicensed practice of law. Not only that, but any New York lawyer that assisted an unlicensed in-house lawyer could be aiding the unauthorized practice of law in violation of New York Rule 5.5(b). This problem was finally – some might say belatedly – resolved when New York adopted an in-house counsel registration rule that permitted out-of-state lawyers to serve as in-house counsel for companies in New York. Recently, New York further expanded opportunities for in-house lawyers by permitting registered in-house lawyers to provide pro bono services in New York state.
Like law firm practitioners, in-house lawyers will confront a wide range of ethical issues over the course of their careers. Unlike law firm practitioners, in-house lawyers have fewer clear guideposts to help them navigate the ethical landscape. Ethics committees can help by developing more creative solutions to the ethical challenges faced by in-house lawyers, such as representing corporate affiliates or navigating conflict of interest and imputation rules. Arguably, the people who are best situated to answer these questions are in-house lawyers. Yet, in my experience, ethics committees are disproportionately populated with law firm practitioners. In order to address these challenges, more in-house lawyers should consider joining ethics committees and other associations that develop policies, promulgate ethics rules, and issue ethics opinions. Getting involved is the best way to get your voice heard. The alternative is to spend your professional life as a square peg in a round hole.
Reprinted with permission from Business Law Today, a publication of the American Bar Association.
1 A New York Solution
Even after the spin-off, the general counsel’s troubles may not be over. Now, the subsidiary is a former client under Rule 1.9. If litigation were to arise between the parent and its former subsidiary, it may create another conflict of interest for the general counsel. If the subsidiary refuses to waive the conflict, this could preclude the general counsel from representing the company in connection with the litigation and – by imputation – anyone else in the legal department. This problem may be solved in New York state by reference to Allegaert v. Perot, 565 F.2d 246 (2d Cir. 1977) and its progeny. Under the reasoning of these cases, clients who were jointly represented by a lawyer have no expectation of confidentiality as between them. As a result, the lawyer may be free to take sides in a subsequent dispute between those clients, even where the current dispute is “substantially related” to the former representation. Although these authorities may provide some comfort to in-house lawyers who face disqualification claims by former corporate affiliates, many jurisdictions do not follow New York’s interpretation of the “substantially related” test.
2 Other Considerations
This article does not purport to be an exhaustive treatment of all aspects of the Rules, but merely provides several illustrative examples. The analysis can become even more complicated when the in-house lawyer wears multiple hats (as many do), serving as legal counselor, business advisor and – in some cases – even as a business partner. See NYCBA Ethics Op. 2007-1 (noting that “in-house counsel often play multiple roles in an organization, including purely business roles,” which may affect how the Rules apply to them). For example, ethical rules that prohibit lawyers from charging or collecting “excessive” legal fees, such as New York Rule 1.5(a), create unforeseen perils for in-house lawyers who are partially compensated with corporate stock options that could appreciate in value beyond the original expectations. A compensation agreement that was reasonable when it was made may become excessive over the course of years or decades. And establishing the right to cash in on those stock options may involve the difficult – if not impossible – task of determining what portion of the compensation was for legal services as compared with business-related services.
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