Up the Ladder or Out the Door, 0421 KSBJ, 90 J. Kan. Bar Assn 2, 40 (2021)

AuthorBy J. Nick Badgerow.
Position90 J. Kan. Bar Assn 2, 40 (2021)

Up the Ladder or Out the Door: Corporate Counsel’s Obligations with Respect to Corporate Misconduct

90 J. Kan. Bar Assn 2, 40 (2021)

Kansas Bar Journal

April, 2021

March, 2021.

ethics: corporate misconduct

By J. Nick Badgerow.

I. Introduction and Overview

Lawyers representing a corporation are uniquely situated to learn information from various constituents of the organization – information which may well impact the future of the company. And those constituents trust that their communication of this information to corporate counsel will be protected by client confidentiality.

Sometimes, this information implies a violation of a legal duty owed by the company and which could result in substantial harm to the organization.

In such a situation, corporate counsel has a number of important obligations, both ethical and corporate, including the obligation to report the information “up the ladder” within the organization. A lawyer finding no solution may in some situations and in some states – though not in Kansas – report the information to authorities outside the organization. Meanwhile, the lawyer must maintain, to the extent possible, the duty of confidentiality owed to the organization.

II. The Lawyer Represents the Organization

Rule 1.13(a), Kansas Rules of Professional Conduct,[1] provides as follows: (a) A lawyer employed or retained by an organization represents the organization acting through its duly authorized constituents.

Even though an organization “cannot act except through its officers, directors, employees, shareholders and other constituents,”2 and though the lawyer receives his or her instructions from one or more constituents within the organization, it is to the organization – and not those individual constituents – to whom the lawyer owes his other loyalty.3

This is called the “entity theory” of organizational representation.4

III. Duty To Report “Up”

A. The Rule.

Rule 1.13(b), KRPC provides as follows: ( (b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and is likely to result in substantial injury to the organization, the lawyer shall proceed as is reasonably necessary in the best interest of the organization. In determining how to proceed, the lawyer shall give due consideration to the seriousness of the violation and its consequences, the scope and nature of the lawyers representation, the responsibility in the organization and the apparent motivation of the person involved, the policies of the organization concerning such matters and any other relevant considerations. Any measures taken shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization. . . .

Under this Rule, [u]nless the lawyer reasonably believes the organizations best interests do not so require, the lawyer must report misconduct “up the ladder” to the highest authorities in the organization, including, if necessary, “the highest authority that can act on behalf of the organization [under] applicable law. Rule 1.13(b). In a private organization, the highest authority will ordinarily be the corporations board of directors or similar governing body. Cmt. [5]. . .5

Another authority notes: [Rule] 1.13(b) governs a lawyers obligations to report to a higher authority within the organization -that is, to “report up” the organizational chain. Rule 1.13(b) governs when a lawyer is obligated -shall -report within the organization. . . . The standards requiring a lawyer to report up the chain of command, however, are high. A reporting obligation exists only where a lawyer “knows” that specified conditions exist. . . . Reporting to a higher authority may also include the “highest authority,” depending on the circumstances. The “highest authority” may be the board of directors or even the independent directors under certain circumstances. Comment [5].


B. Application of the Rule

So, what are the circumstances which lead to this duty to report to the board of directors?: 1. The lawyer must “know” that a person within the corporation

2. “has engaged in action, intends to act or refuses to act in a matter related to the representation,”

3. “that is a violation of a legal obligation to the organization, or a violation of law that reasonably might be imputed to the organization, and”

4. “that is likely to result in substantial injury to the organization.”

Even then, the lawyer is only required to act “[U]nless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so.” Moreover, the Comments to Rule 1.13 state that “[c]lear justification should exist for seeking review over the head of the constituent normally responsible for it,” and that referring the matter to higher authority is to be done only “[i]n an extreme case.”


The term “knows” is defined as “actual knowledge of the fact in question. A persons knowledge may be inferred from circumstances.”


C. Enforcement of the Rule

Lawyers who violate this rule by failing to seek review by higher authority in the organization have been disciplined

[10] and subjected to malpractice claims.


The new Model Rules make it clear that if a lawyer knows an officer or employee for the corporation has undertaken a wrongful act, or intends to act in a way that violates a legal obligation to the corporation or of law that could be imputed to the organization and is likely to result in substantial injury, the lawyer is required to act in the best interest of the corporation, including referral of the matter, if necessary, to the board of directors. Michigan Rule 1.13(b).


A Kansas case, In re Harding, illustrates this point. The respondent, a city attorney, instead of seeking a review by his organizational client, the city council, wrote a letter to the press and others outside the city, complaining of city actions and disclosing client-confidential information.

The Respondent failed to take measures which would minimize disruption of the City and reduce the risk of revealing confidential information when he disclosed confidential information to Mr. Drees, to Mr. Corn, and to the newspaper in his letter to the editor. The Respondents conduct resulted in substantial injury to the City. The Respondent failed to proceed in a manner that was in the best interest of the City. Accordingly, the Hearing Panel concludes that the Respondent violated KRPC 1.13(b). Further, the Respondent violated KRPC 1.13(b)(3) when he failed to try to rectify the misconduct within the City by referring the matter to the highest authority in the City. Finally, the Respondent violated KRPC 1.13(d) when he failed to advise Ms. Neish, the Mayor, and the Chief of Police that his representation of the City might be adverse to them. Accordingly, the Hearing Panel concludes that the Respondent repeatedly violated KRPC 1.13.


In another Kansas case, In re Bergman, a corporations general counsel failed to address or report to the board of directors her knowledge of the diversion and appropriation by two corporate officers of an asset purchase which had been negotiated for the corporation, the attempt to lease the asset to the corporation, and the appropriation of corporate assets for the renovation and improvement of the asset owned by t the two officers. “Under subsection (d), the respondent failed to explain to the board of directors that KCT’s interests were adverse to its constituents, Mr. Somervell and Mr. Mader. As such, the hearing panel concludes that the respondent violated KRPC 1.13(b) and KRPC 1.13(d).”


And in a third Kansas case, In re Diaz, a government lawyer publicly and surreptitiously released concerns about client conduct, including confidential (and classified) information, rather than reporting it up the chain of command. The lawyer was disbarred.

When asked why he did not share with his superior officers his concerns about the Navy’s then-refusal to release the information to Ms. Olshansky, Diaz replied, “I was worried about the effect it would have on me. . . . I wasn’t really to put—willing to put my neck on the line and jeopardize my career at the time. . . . [So], I did it anonymously.” On this latter point, the hearing panel held that “[I]f the Respondent disagreed with the actions taken by his client, the Navy, then the Respondent was duty bound to so inform those with decision making power within the Navy.”


Thus, under Rule 1.13(b), when a corporate lawyer learns that a constituent is violating a legal obligation to the organization or violating a law reasonably imputable to the organization and likely to result in substantial injury to the organization, the lawyer has an obligation to report up the organization’s chain of command, even if the constituent is the lawyer’s direct supervisor. This...

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