In-House Counsel, Whistleblowing, and Ethics, 0620 COBJ, Vol. 49, No. 6 Pg. 28

AuthorBY JACK TANNER
PositionVol. 49, 6 [Page 28]

49 Colo.Law. 28

In-House Counsel, Whistleblowing, and Ethics

Vol. 49, No. 6 [Page 28]

Colorado Lawyer

June, 2020

PROFESSIONAL CONDUCT AND LEGAL ETHICS

BY JACK TANNER

This article discusses ethical issues that in-house lawyers must consider before reporting a client's improper conduct. It also covers factors that must he considered in determining whether the lawyer can obtain relief based a client's subsequent retaliation.

Ethics rules have traditionally provided a client with complete and unfettered discretion to fire its lawyer for any reason whatsoever. Previously, ethics rules also did not allow a lawyer to disclose client information to third parties, absent a few exceptions. Thus, an in-house employee lawyer who was discharged for reporting client conduct to higher-ups in the organization, to regulators or to other authorities was unlikely to prevail on a claim for wrongful discharge

Recent changes in ethics rules and case law have modified these points. Lawyers now have more leeway to disclose client information, including by “whistleblowing,” which is notifying higher-ups in the client organization or authorities outside the organization of perceived improper conduct by the client Further, protections for whistleblowers have undercut the client’s authority to discharge a lawyer for any reason (including in retaliation for whistleblowing) without consequences

A lawyer who considers reporting a client constituent to a higher-up within an organizational client or reporting a client to an outside authority must analyze several ethical issues before doing so. If a lawyer reports a client and is discharged as a result, several factors can affect a claim for retaliatory (wrongful) discharge. These factors include whether the lawyer notified those inside or outside the client organization, whether protections offered are state or federal, and the relief sought. This article explores this relatively new and yet evolving area of the law.

Ethical Foundations

for Client Confidentiality

Under the former Colorado Code of Professional Responsibility (Code), a lawyer was required to maintain "confidences and secrets" of the client with few exceptions.[1]One exception was the "intention of [the] client to commit a crime and the information necessary to prevent the crime."2There was no exception that allowed disclosure of client confidences and secrets to prevent a wrong that was not a crime, or to mitigate or rectify damage done by a client. There were exceptions for fee disputes and for defending against malpractice claims, but not for other disputes with a client.3 Further, under the Code, there was no requirement to report ongoing unlawful conduct to higher-ups within an organizational client.

Under the Colorado Rules of Professional Conduct (Rules) adopted in 1997, the prohibition on disclosing "confidences and secrets" was expanded to prohibit a lawyer from revealing any "information relating to the representation of a client" to third parties, regardless of whether the information was confidential or secret, with only a few exceptions.4As originally adopted, these exceptions allowed disclosure to prevent a crime, but not to prevent noncriminal wrongs or to mitigate or rectify damage caused by a crime.5

The Rules also expanded a lawyer's ability to disclose client information in a dispute with a client. Under the Code, such disputes were limited to those regarding fees or malpractice claims, but the Rules allow disclosure "to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and client," among other things.[6]

The adoption of the Rules also created, for the first time, the obligation to report "up the ladder" within an organizational client under certain circumstances. When the client constituent was planning or engaging in unlawful conduct, or when the client constituent was violating his or her obligations to the organization, the lawyer was generally required to report this conduct to higher-ups within the organizational client.7 This process was to be repeated as necessary to change the client's conduct until the lawyer reported to the "highest authority in the organization," generally thought to be the board of directors.8 However, Rule 1.13 as originally adopted also included numerous factors the lawyer could consider in deciding whether to make a report; thus it essentially made this reporting permissive rather than mandatory.9

In the 1990s a series of corporate financial disasters rocked the United States, including those of Enron, Tyco International, Adelphia, and WorldCom. Lawyers for those companies, even when testifying before Congress, refused to disclose certain client information, including how much the executives in the companies knew about the fraudulent conduct and where missing funds might be located.10 These lawyers correctly relied on the then-applicable ethical rules in refusing to do so.11

As a result, significant changes were made to the ABA Model Rules of Professional Conduct in the "Ethics 2000" rule changes (adopted by Colorado effective February 1, 2008). New exceptions to Rule 1.6 allowed a lawyer to reveal information to "prevent, mitigate, or rectify" even noncriminal financial injury under certain circumstances,[12]and "to comply with other law or a court order."13

Perhaps more fundamentally, the exceptions to Rule 1.13's requirement of up-the-ladder reporting were significantly reduced.14 Previously, there were numerous factors a lawyer could consider that effectively made the reporting permissive rather than mandatory, but with the rule changes, the only exception remaining is when the lawyer "reasonably believes that it is not necessary in the best interest of the organization to do so ... "15

Another 2008 change to Rule 1.13 requires that, if the lawyer reasonably believes he or she has been discharged for reporting up the ladder, the lawyer must report the termination in such a way that the highest authority within the organization becomes aware of the discharge.16

Finally, if reporting up the ladder fails to change the client's conduct, Rule 1.13(c) permits—but does not require—the lawyer to disclose client information outside the organization if (1) the conduct is clearly a violation of the law, and (2) the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization.[17] The disclosure is allowed, despite Rule 1.6, "only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization."[18] But unlike Rule 1.6(b)(4) concerning disclosure to rectify or mitigate damage, this rule only applies to ongoing or future conduct.19

Rules l.6and 1.13 differ in this regard: Where the client is an individual, under Rule 1.6 the lawyer may disclose client information to third parties only to prevent the client from committing a crime20 or fraud,21 when certain other circumstances are present. Under Rule 1.13, however, where the client is an organization, the permission to disclose client information is much broader and applies to prevent any "violation of law," when other circumstances are present.22

Meanwhile, the ethical stance that the client has unfettered discretion in terminating a lawyer has remained constant. The official comment that a "client has a right to discharge a lawyer at any time, with or without cause, subject to liability for payment for the lawyer's services" was adopted with the original Rules and has not been changed since.23 This attitude is echoed in various other places in the Rules. For example, it is an ethical violation for a lawyer to enter into a covenant not to compete24or other agreement that restricts the lawyer's right to practice,25 in part because such an agreement "limits the freedom of clients to choose a lawyer."26

The Growth of Whistleblower Protections

Colorado first enacted statutory whistieblower protections for government employees in 1979 with the adoption of the State Employee Protection Act.27This statute was expanded in 2016 and again in 2017.28 In general terms, this act prohibits "any disciplinary action" against a state employee "on account of the employee's disclosure of information."29 It thus applies to state-employed lawyers.

Colorado enacted statutory protections for private employees in 1988 in the Private Enterprise Employee Protection Act.30 This act only applies to employees of a private enterprise that has a contract with the State of Colorado.31 The state legislature expanded these protections in 2017.32 This act prohibits "any disciplinary action against any employee on account of the employee's disclosure of information concerning said private enterprise."33 By its own terms, however, this act do es not apply to an "employee who discloses information which is confidential under any other provision of law."34

Colorado also recognizes the common-law tort of wrongful discharge in violation of public policy.35 This case law creates a remedy in certain circumstances for whistleblowers outside the state government context.36

There are too many federal statutes that provide protection against retaliation for whistleblowers to list in an article of this length. The Sarbanes-Oxley Act of 200237and the Dodd- Frank Wall Street Reform and Consumer Protection Act of 201038 are currently the two most prominent. These acts prohibit the termination of an employee as retaliation for bringing the client’s improper conduct to light.

Internal Whistleblowing by In-House Counsel

Internal whistleblowing—that is, reporting perceived improper conduct within an organization—is not only allowed under the Rules but may be required. Rule 1.13(b) requires up...

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