Mcle Article: the Rules of Professional Conduct Do Apply to In-house Lawyers

• Publication year: 2015
• Author: Neil J Wertlieb and Adam S. Bloom

MCLE Article: The Rules of Professional Conduct DO Apply to In-House Lawyers

Neil J Wertlieb and Adam S. Bloom^*

Neil J Wertlieb is a corporate partner at Milbank, Tweed, Hadley & McCloy LLP in Los Angeles. He is a former Chair of the California State Bar's Committee on Professional Responsibility and Conduct, a former Chair of the Business Law Section of the California State Bar, and a former Co-Chair of the Corporations Committee of the Business Law Section. He is also the General Editor of Ballantine & Sterling: California Corporation Laws, an Adjunct Professor at UCLA Law School, and a frequent speaker and expert witness on corporate transactions, corporate governance, and attorney ethics.

Adam S. Bloom is a corporate associate at Wilson, Sonsini, Goodrich & Rosati, P.C. and a former colleague of Mr. Wertlieb's at Milbank.

(Check the end of this article for information on how to access 1.0 self-study credits.)

This article is part of a series by the authors that focuses on ethical issues of particular interest to transactional attorneys in California.

Since you took an in-house attorney position and no longer work for a law firm, you don't have to worry about the nuances and application of all of California's ethical rules, right? Ok, fine, there's still the general duty of loyalty to consider, and, of course, confidentiality,² but most of the other ethical rules—just like time sheets and billings—no longer apply, right?

Sorry, but that's just not the case. In fact, you might be surprised to learn which ethical rules apply to you in your new position, and how such rules apply.

The Broad Reach of California's Ethical Rules

California's Ethical Rules Apply to In-House Attorneys

The ethical rules that govern lawyers in the State of California are the California Rules of Professional Conduct ("CRPC").³ The CRPC are binding on all members of the California State Bar, whether in-house or at a law firm, whether active or inactive, and whether performing services in a legal or business capacity.⁴ The California State Bar has disciplinary authority over all California State Bar members, and yet in-house attorneys are often surprised at how many of the rules are applicable to their duties.

California's Ethical Rules Apply to Certain Attorneys Who Aren't Even Members of the California State Bar

Even in-house attorneys who are not members of the California State Bar but who practice in California may be subject to the CRPC. The California State Bar permits foreign lawyers to practice as in-house counsel in the state under certain circumstances. An attorney who resides in California and who is licensed to practice law in another U.S. jurisdiction may register to provide legal services as in-house counsel for a single "qualifying institution" in California without becoming a member of the California State Bar.⁵ To be eligible to do so, an in-house attorney who is not a member of the California State Bar must meet the eligibility requirements of California Rules of Court (or CRC) Rule 9.46,⁶ which includes the requirement to abide by all laws and rules governing California State Bar members—e.g., the CRPC. In-house attorneys residing in California, including those who are not admitted to practice in California, must therefore abide by the ethical rules applicable to all members of the California State Bar.

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California's Ethical Rules Apply to "Inactive" Attorneys and Those Who No Longer Practice Law

A member of the California State Bar in good standing (i.e., a member who does not have any disciplinary charges pending) may request voluntary inactive membership at any time or upon retirement. Voluntarily inactive members may return to active status by applying to the California State Bar and paying any required fees. However, changing a lawyer's status as a member of the California Bar from "active" to "inactive" doesn't alter the fact that the CRPC still apply to that lawyer. The CRPC govern "members," and do not distinguish their application between "active" and "inactive" members.

Further, the CRPC do not only apply to practicing California attorneys and in-house attorneys who have availed themselves of CRC Rule 9.46 (discussed above); they also likely apply to non-practicing lawyers as well. The American Bar Association ("ABA") takes the position that lawyers who no longer practice law because they have taken a business role may be subject to discipline for misconduct.⁷ Because of the CRPCs' expansive definition and use of the term "member," the California State Bar could possibly take a similar view, should it learn of a non-practicing lawyer's misconduct.

The Application of Certain California Rules to the In-House Attorney

While it is clear that the overall CRPC apply to in-house attorneys, how those rules actually apply is far less clear. Attorneys are relatively familiar with the application of the ethical rules to their practices when they work for law firms or as sole practitioners.⁸ In fact, many of the rules contemplate the attorney as an outside legal advisor with multiple clients—not an employee (or part) of a single client. But by their own terms, and as explained above, the CRPC are meant to govern the professional conduct of California lawyers regardless of whether such lawyers work at law firms, work in-house, or don't even work as lawyers anymore. Not only do the CRPC have an expansive definition of "member," which would pick up in-house attorneys, the term "law firm" is broadly defined in the CRPC to include in-house legal departments.⁹ As a result, to the extent the CRPC reference law firms, such rules apply to your in-house legal department as well.

How well, then, do the CRPC apply to in-house attorneys? Some of the rules are obvious in their application to in-house attorney (such as the duty of confidentiality mentioned at the forepart of this article¹⁰). Some of the rules don't really apply to the in-house attorney as a practical matter (such as the obligation to maintain trust accounts¹¹). But the application of some of the rules may come as a surprise to many in-house attorneys. The remainder of this article focuses on six familiar topics of California legal ethics and how they apply to the in-house lawyer.

Conflicts of Interest:¹²

Avoiding the representation of adverse interests

Rule 3-310(E) of the CRPC requires, among other things, that attorneys not accept employment on a matter that is adverse to a client where, by reason of the representation of that client, the attorney has obtained confidential information material to such employment (at least not without the informed written consent of the affected client). The Rule also applies where the affected client is a former client of the attorney—the attorney is prohibited from taking on the new adverse matter absent informed written consent from the former client.¹³

Perhaps you were familiar with this Rule while at your prior job working at a law firm. Suppose while at your firm you frequently represented Client A in a variety of corporate transactions, including working to prepare disclosure schedules and other documentation for a major financing transaction where Client A was the borrower. To make sure no one in the firm took on a representation adverse to Client A, conflict checks were run every time a new matter came to your firm. If, for example, Client B sought to engage you or your law firm in a new matter adverse to Client A where certain confidential information pertaining to Client A (such as the information you gathered in preparing disclosure schedules) would be material to the new engagement, the informed written consent of Client A (and perhaps of Client B as well) would need to be obtained prior to taking on the engagement. Such consent would be required even if Client A were no longer a client of your law firm. This is (or should be) standard operating procedure for law firms in order to assure their adherence to the duty of loyalty and the ethical rules applicable to conflicts of interest.

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That was then; this is now. You now work in-house, for a large company. And wouldn't you know it, today you learn that your boss is negotiating a deal in which your employer would acquire substantially all of the assets of your former law firm client, Client A. Can you work on this transaction, or are you conflicted out? Do the ethical rules applicable to conflicts of interest even apply? Is this an area of concern for the in-house attorney? The answer may surprise both you and your boss: You may have a conflict of interest. The confidential information about Client A you learned from your work for Client A may be very material now that your current employer wants to be sure it understands, and properly prepares for the acquisition of, the assets of Client A. In fact, such information may even be material to your employer's determination of whether it will proceed with the transaction and/or the purchase price it is willing to pay to acquire the assets. Unless Client A provides its informed written consent, your conflict of interest may prevent you from working on this transaction.¹⁴

In addition, Rule 3-310(B) of the CRPC may require that you provide written disclosure to your employer of the fact that you had previously represented Client A, especially if your previous relationship with Client A would "substantially affect" the work you might be asked to do on behalf of your employer in connection with the transaction involving your former client.¹⁵ This Rule (unlike Rule 3-310(E)) applies even if you had not obtained confidential information pertaining to Client A while at your law firm. However, while you may have to provide written disclosure to your current employer, if the work you will be doing on behalf of your employer does not bear a "substantial relationship" to the prior work you did on behalf of Client A, and Client A has no reasonable expectation of confidentiality, you may proceed to do the work without the consent of Client...