Top 10 Things In-House Lawyers Need to Know about Ethics, 0716 COBJ, Vol. 45 No. 7 Pg. 59

AuthorJack Tanner, J.

45 Colo.Law. 59

Top 10 Things In-House Lawyers Need to Know about Ethics

Vol. 45, No. 7 [Page 59]

The Colorado Lawyer

July, 2016

Jack Tanner, J.

Professional Conduct and Legal Ethics

Coordinating Editor

Stephen G. Masciocchi, Denver, of Holland & Hart LLP— (303) 295-8000, smasciocchi@hollandhart.com

In-house lawyers are subject to the same ethics rules that govern all attorneys. But some attorneys become in-house counsel with the mistaken belief that the ethics rules will be less problematic for them1. This may be because they only represent one company and thus have few clients, or they act in a capacity other than lawyer, for example, as vice president of a company.

This article discusses 10 important facts about ethics rules that in-house counsel should be aware of. Adhering to the requirements of these rules is imperative to avoiding ethical violations and legal actions based on questionable conduct.

1. The Ethics Rules Apply to All Attorneys

Both the Colorado Rules of Professional Conduct (Colo. RPC or Rules) and most of the CBA Ethics Committee’s Formal Ethics Opinions focus primarily on attorneys in private practice. The Rules and ethics opinions give scant guidance to in-house practitioners, but that does not mean the Rules do not apply to them.

The Rules expressly refer to in-house counsel in only one instance,1 in the definition of “firm” or “law firm,” which includes “lawyers in the legal department of a corporation or other organization.” The few other references to in-house counsel are located within official comments.2 But this paucity of references does not mean that in-house counsel face no ethical dilemmas.

In recent years, an increasing number of cases have addressed ethics issues affecting in-house counsel. Kaye v. Rosefielde,3 a New Jersey case, blatantly demonstrates—contrary to the belief of some in-house counsel—that the ethical rules do apply to them.

Kaye involved an in-house lawyer who was also the lawyer for the owner of the business and for trusts benefiting the owner’s children. The lawyer set up new companies for his individual client’ s v entures, and in one instance, the lawyer gave himself an ownership interest in a newly formed company without following the steps required by the New Jersey version of Rule 1.8 (Conflict of Interest: Current Client: Special Rules).4 Among other things, the lawyer violated Rule 1.8 by failing to advise the owner in writing to have another lawyer review the business transaction and then failing to allow the owner time to do so.

Later, the owner sued the (by then former) in-house lawyer for malpractice, claiming the lawyer violated several of New Jersey’s ethical rules, including its version of Rule 1.8. One of the lawyer’s defenses was that the requirements of Rule 1.8 did not apply to him because he was in-house counsel. The court soundly rejected this contention:

Independent of the particular facts of this case, we also discern no rational basis to exempt attorneys who have been hired by corporate clients to serve as in-house counsel from the ethical requirements of RPC 1.8. . . . We find nothing in the plain language . . . to suggest or even imply that lawyers who are retained by corporate clients as in-house or general counsel are exempt from the proscriptions of RPC 1.8(a).5

2. In-House Counsel Can Easily Have Conflicts of Interest

In-house counsel may feel that ethics issues involving conflicts are not of particular concern. In fact, in-house practice can often present ethical issues related to conflicts.

“Directly Adverse” Conflicts Under Rule 1.7(a)(1)

When in-house counsel represents groups of related companies, or officers, directors, owners, or employees at a company, these multiple representations can develop into a “directly adverse” conflict under Rule 1.7(a)(1) (Conflict of Interest: Current Clients). Dealing with a third party or giving a subsidiary legal advice may constitute legal representation that can lead to a conflict when issues arise between the subsidiary and parent. In other cases, mere inadvertence might create an attorney–client relationship between the in-house lawyer and a person or entity other than the company that employs him. For example, when an in-house lawyer answers legal questions from officers, employees, or owners about their personal legal issues (as opposed to those of the company), this can create an attorney–client relationship and thus increase the possibility of a directly adverse relationship arising with the company.

In Yanez v. Plummer,6 Yanez, an employee of Union Pacific Railroad, witnessed an accident at work. During a company investigation of the accident, he gave statements to an investigator. In subsequent litigation, he was to be deposed as a bystander witness, and Union Pacific provided one of its in-house lawyers, Plummer, to represent Yanez. Immediately before the deposition, Yanez told Plummer that his deposition testimony was likely to be unfavorable to Union Pacific and that he feared for his job. He asked Plummer who would “protect” him at the deposition. Plummer told Yanez that he was his attorney for the deposition, and that if he told the truth his job would not be affected. Plummer did not discuss any conflict of interest.

Yanez’s deposition testimony differed from the statements he had given to the investigator. He was later fired by Union Pacific for dishonesty. He brought suit against Union Pacific for wrongful discharge and against Plummer for malpractice, breach of fiduciary duty, and fraud. Plummer won on summary judgment, but the ruling was reversed on appeal.

The California Court of Appeals noted that as soon as Yanez told Plummer that his deposition testimony was likely to be unfavorable and he feared for his job, Plummer had a conflict of interest and needed to obtain the informed written consent of each client to continue the representation. Because he did not, Yanez had a possible malpractice claim. The court thus reversed the summary judgment and reinstated Yanez’s malpractice claim against Plummer.7

In Dinger v. Allfirst Financial, Inc.,[8] the in-house lawyer gave bank officers what appeared to be legal advice about when to cash in their stock options. When this advice turned out to be flawed, the (by then former) officers sued the bank, alleging that the bank (through the in-house lawyer) breached its fiduciary duty and made negligent misrepresentations. The Third Circuit acknowledged the district court’s ruling that there was a “confidential relationship” between the lawyer and the officers that created a fiduciary duty, and agreeing with the district court that the bank had not breached this duty, it affirmed summary judgment for the bank.9

In neither Yanez nor Dinger was the lawyer formally engaged, let alone paid, by the employees. The lesson from these cases is that if in-house lawyers give advice to owners or employees on their personal issues, they may create attorney–client relationships and thereby find themselves with a directly adverse conflict.

“Material Limitation” Conflicts Under Rule 1.7(a)(2)

Conflicts under Rule 1.7(a)(2) may also arise for in-house counsel. These “material limitation” conflicts can result from the lawyer’s own interest in the company, from the involvement of others with whom the lawyer has a personal relationship, or for myriad other reasons. For example, a lawyer’s ownership of stock in the client’s company may materially affect the lawyer’s advice to the client. Simply owning stock in a company and therefore wanting the company to do well, without more, does not create this conflict. But if an in-house lawyer owns stock in a company and prioritizes her interests in the performance of the stock over the good of the company when giving advice to the company, the lawyer could have a “material limitation” conflict.

Resolving the Conflict Under Rule 1.7(b)

If conflicts under either Rule 1.7(a)(1) or (a)(2) exist, the in-house lawyer, like any other lawyer, must follow the steps in Rule 1.7(b) to resolve the conflict and obtain the necessary consent. Otherwise, the in-house lawyer has a disqualifying conflict of interest.

3. An Offer of Stock or Stock Options in a Client Is a “Business Transaction” under Rule 1.8

Rule 1.8(a) was specifically addressed in Kaye, where in-house counsel obtained an equity interest in the client...

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