The New Rules of Professional Conduct: Significant Changes for In-house Counsel - November 2007 - Professional Conduct and Legal Ethics
| Publication year | 2007 |
| Pages | 71 |
2007, November, Pg. 71. The New Rules of Professional Conduct: Significant Changes for In-House Counsel - November 2007 - Professional Conduct and Legal Ethics
November 2007
Vol. 36, No. 11 [Page 71]
Professional Conduct and Legal Ethics
The New Rules of Professional Conduct: Significant Changes for In-House Counsel
by Jack Tanner
Professional Conduct and Legal Ethics articles are sponsored by the CBA Ethics Committee. Articles published here do not necessarily reflect the legal interpretation of the Committee.
Article Editor:
Susan Bernhardt, Denver, of Netzorg, McKeever, Koclanes & Bernhardt LLP - (303) 864-1000, sbernhardt@ nmkb.com
Jack Tanner has been on the Colorado Bar Association Ethics Committee since 1997. He is a frequent lecturer and writer on legal ethics, particularly ethics for in-house counsel. He is a director with the law firm of Fairfield and Woods, P.C. - (303) 894-4495, jtanner@fwlaw.com. He gratefully acknowledges the assistance of Amanda E. Phillips, a third-year student at the University of Denver's Sturm College of Law, for her assistance with this article.
The impending changes to the Rules of Professional Conduct are significant for in-house counsel. In addition to the changes applicable to all lawyers, some Rules will now apply to in-house counsel that previously did not.
The Rules of Professional Responsibility (Rules) apply to in-house counsel, although how they apply is less obvious and less discussed than it is for outside counsel. Significant changes to the Rules (New Rules) become effective on January 1, 2008. An article by Marcy Glenn and Mike Berger that provides an overview of changes made to the existing Rules (Current Rules) by the New Rules on a rule-by-rule basis was published in the August 2007 issue of The Colorado Lawyer.(fn1)
In-house counsel have dual roles. First, they are lawyers working for their clients. Second, however, they function as gatekeepers for legal services and often are viewed as the client itself by outside counsel. Thus, in-house counsel must be familiar with the New Rules from both perspectives - as both a lawyer and a client.
Further, the stakes may be higher for in-house counsel than for outside counsel. Although outside counsel may have the fallback of ceasing representation of a particular client if things get too difficult, ethically, in-house counsel usually have no such luxury.
This article provides an overview of how the New Rules apply to in-house counsel. The discussion focuses on compensation issues and in-house practice, and is divided into three broad categories - getting hired as in-house counsel, practicing in-house, and handling things that go wrong.
Getting Hired (or Promoted) In-House
If an in-house counsel position includes compensation in the form of stock, stock options, or other nonmonetary consideration, being hired is itself a "business transaction with a client."(fn2) Under both Current and New Rule 1.8, a lawyer may not enter into a business transaction with a client unless the transaction complies with the requirements set forth in Rule 1.8. Colorado Bar Association (CBA) Ethics Committee Formal Opinion 109 provides an analysis of this Rule.(fn3)
Generally, the transaction must be fair and reasonable to an objective person, transmitted in writing, and understandable by a layperson. The client must be advised to obtain outside counsel to review the deal and be given time to do so before the deal is consummated. The client must give written, informed consent to the transaction.
When applied to a client offering an in-house position to an attorney, some of these conditions usually are met. For example, the offer presumably will be understandable by a layperson if a layperson is making it.
The offeree attorney still should make sure the transaction complies with Formal Opinion 109. Particularly, he or she should advise the offeror to have another attorney review the offer and give the offeror time to do so. The danger is not so much a grievance by the management hiring the lawyer, but rather a shareholder derivative suit in the future. If a disgruntled shareholder brings suit claiming management insiders (who may well include in-house counsel) looted the company, the shareholder may argue that the lawyer received the stock or stock options in an unethical fashion.(fn4)
If in-house counsel later is offered a promotion and nonmonetary compensation, the same procedure should be followed. If, as is often the case, the in-house attorney is offered the same compensation package that other employees are being offered, this would be strong evidence that the offer was objectively reasonable. Even so, the in-house attorney still should advise the client to have another lawyer review the transaction and give the client time to do so. This is especially important in a small company, where each employee's compensation may be unique.
Nonmonetary Compensation May Create an Unreasonable Fee
Current Rule 1.5 provides "a lawyer's fee shall be reasonable." It has long been the law that reasonableness is determined at the time the contract for the fee was executed,(fn5) unless the compensation rises so high that it is unconscionable.(fn6)
Thus, the contingency fee lawyer who only writes a letter may receive a disproportionate fee, because it was possible that he or she could have taken the case through trial without receiving any compensation. The same analysis currently would apply to stock and stock options - the stock or options may be worth little at the time they are awarded and thus the fee was "reasonable" at the time it was paid. The fact that the stock options may be quite valuable by the time they vest is not determinative.
New Rule 1.5, however, provides "lawyers shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses" (emphasis added). Comment [11] provides for an objective analysis of the reasonability of the fee.
If the New Rule is read literally, the analysis of whether the fee is reasonable should be made both at the time the agreement for the fee is entered into and at the time the fee actually is collected. Thus, stock options that may be worthless when issued but valuable by the time they vest may be subject to attack by the disgruntled stockholder. In this situation, however, the stockholder has an even better argument, because even if the transaction was reasonable when made, and even if the lawyer complied with the requirements of Rule 1.8 and CBA Opinion 109, the fee nevertheless may be excessive at the time it is collected.
New Rule 1.5 also prohibits the charging of "unreasonable expenses." "Unreasonable expenses" are not defined, but Comment [1] makes clear that making a profit on expenses is improper, just as prior ethical opinions have stated.(fn7)
Compensation and Conflicts of Interest
The in-house lawyer should always consider the limits on representation provided for in Rules 1.7 (Conflict of Interest) and 2.1 (Independent Judgment). For example, consider a situation where the in-house attorney has stock options in the employer/client, and those options have been earmarked for the attorney's retirement. The client is considering two possible courses of action, one that will result in an increase in the price of the stock in the short run but may be riskier in the long run. The other will provide greater certainty in value in the long run, but the stock's value will not spike in the short run.
If the attorney's advice would be different if he or she was five years from retirement than it would be if the attorney was twenty years from retirement, the attorney probably is not exercising independent judgment as required by the Rules. In this situation, the attorney must either divest the stock or not participate in the decision-making process itself.
Rule 1.5...
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