CHAPTER 12 ETHICS FOR IN-HOUSE COUNSEL AND LANDMEN
| Jurisdiction | United States |
(Apr 2018)
ETHICS FOR IN-HOUSE COUNSEL AND LANDMEN
Director
Fairfield & Woods P.C.
Denver, CO
[Page 12 - 1]
JACK M. TANNER helps solve business disputes, employing traditional and atypical litigation tactics to obtain the best results for his clients. He has represented clients in all aspects of complex commercial litigation and arbitration, including oil and gas, contracts, business torts, receiverships, intellectual property, and construction matters. He clients have included Noble Energy, Kinder Morgan, Microsoft, and Time Warner Telecom. Mr. Tanner has served on the Colorado Bar Association Ethics Committee since 1996, and is a frequent lecturer on legal ethics, particularly ethics for in-house counsel. He has authored several articles on legal ethics, including; "Top 10 Things In-House Lawyers Ned to Know About Ethics," 45 Colo. Law. No. 7, p. 59 (July, 2016) and "The New Rules of Professional Conduct: Significant Changes for In-House Counsel," 36 Colo. Law. No. 11, p. 71 (November, 2007). He also regularly speaks and writes on ethical issues for landmen under the AAPL Code of Ethics, and the interaction between that and legal ethics. Mr. Tanner has practiced with the Denver, Colorado full-service business law firm of Fairfield and Woods since 1987. After graduating from Duke Law School (with honors) in 1986 and prior to joining Fairfield and Woods, he served as law clerk to Justice (later Chief Justice) Luis Rovira of the Colorado Supreme Court.
I. INTRODUCTION
The ABA Model Rules of Professional Conduct ("Model Rules") and the Texas Disciplinary Rules of Professional Conduct ("Texas Rules") ("Rules" when both are substantially the same) apply to in-house counsel, although how they apply is sometimes less obvious and is certainly less discussed than it is for outside counsel. Certain ethical issues for in-house counsel arise repeatedly, and some have come to the fore recently. The stakes are higher for in-house counsel than for outside counsel because, because while outside counsel may just fire a particular client if things get too ethically difficult, an in-house counsel usually has no such luxury.
The American Association of Professional Landmen ("AAPL") Standards of Practice ("Standards") and the Code of Ethics ("Code") for the generally give guidance to landmen for ethical issues.
Some professionals are both licensed attorneys and members of the AAPL. There are times when the ethical requirements of the two professions are not identical, and particular concern is warranted. The old adage of simply "taking the higher road" does not always work.
II. GETTING HIRED (OR PROMOTED) IN-HOUSE
A. Clearing Conflicts Before Starting
It is the best practice to clear conflicts before moving in-house. An opinion of the Professional Ethics Committee for the State Bar of Texas ("Opinion") indicates a lawyer can disclose to a prospective employer information needed to complete a conflicts check before actually changing employers. See Opinion No. 607 (July 2010).
An in-house legal department is considered a "firm" for purposes of the Rules, including conflicts. See Rules Terminology. Thus if one in-house counsel is conflicted, then that conflict may be imputed to the entire department. Such a department-wide disqualification may work an extreme hardship on the client.
Under Rule 1.10, when a lawyer is leaving government work to go in-house, a confidentiality wall may be set up in advance that avoids this problem. This solution may not work for a lawyer coming from a non-government job.
Note to Landmen: As an ethical matter, it is very difficult to go to work for a competitor of a former employer in the same geographic area. "A Land Professional shall not betray his partner's, employer's, or client's trust by directly turning confidential information to personal gain." Code §2. This is one of the two areas that has generated the most ethics complaints against landmen.
The general rule for landmen seems to be that one cannot go to work for a competitor in the same geographic area. This would be using confidential information to compete with a former employer and considered a "betrayal." The same analysis would apply if a landman went out on her own.
B. Compensation of In-House Counsel as a Business Transaction with a Client
If an in-house counsel position includes compensation in the form of stock, stock options, or other significant non-monetary consideration, being hired by a client is itself likely a "business transaction with a client." Under ABA Rule 1.8 (Texas 1.08), a lawyer may not enter into a business transaction with a client unless the transaction complies with the requirements set forth in the Rule. E.g. Kaye v. Rosefielde, 75 A.3d 1168 (N.J. Super. Ct. App. Div. 2013).
[Page 12 - 2]
Generally, the transaction must be fair and reasonable to the client, transmitted in writing, and understandable by the client. The client must be advised to obtain other counsel to review the deal and given time to do so before the deal is consummated. The client must give written consent to the transaction.
When applied to a client offering an in-house position to an attorney, some of these conditions are necessarily met: the offer presumably will be understandable by the client if the client is making it. The attorney still should make sure the transaction complies with the procedural requirements of Rule 1.8. Particularly, he or she should advise the client to have another attorney review the offer and give the client time to do so.
Texas provides a "safe harbor" not contained in the Model Rules: Texas Rule 1.08(j) provides, "As used in this Rule, 'business transactions' does not include standard commercial transactions between the lawyer and the client for products or services the client generally markets to others." There are no Official Comments regarding this Rule and no comparable rule in the ABA Model Rules of Professional Conduct, so there is not much context as to what it means regarding transactions with employee attorneys. When the stock or stock options being offered the in-house lawyer are the same as dozens of other middle-managers are getting, this Rule might be persuasive authority that the transactions are not "prohibited" under Rule 1.08. It is not clear, however, that stock options to managers are technically "services the client generally markets to others."
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 have an additional argument against the lawyer: that the lawyer received the stock or stock options in an unethical fashion. If in-house counsel later is offered a promotion that includes non-monetary compensation, the same procedure should be followed. Further, if management changes in the future, the future management may look for ways to "undo" the transactions of prior management.
Note to Landmen: There are no ethical limits on compensation, as long as the client willingly agrees to it. It is unethical, however, to accept compensation from two different companies for the same work without them both giving knowing consent.
C. Nonmonetary Compensation May Create an Unethical Fee
Model Rule 1.4 prohibits an unreasonable fee and Texas Rule 1.04 prohibits an unconscionable fee. Both Rules contains a list of non-exclusive factors to determine if the fee is excessive, many of which can only be determined after the engagement.
Stock options in a publicly-traded company may be worthless when awarded because the strike price is the same as then-contemporaneous trading price. If the trading price increases before the options vest, however, they may become extremely valuable. The argument can be made that the fee is too high (especially if the lawyer also received a salary). Again, the concern is not so much...
To continue reading
Request your trial