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A RUBIK’S CUBE OF ETHICAL DILEMMAS FACED BY GENERAL AND
CORPORATE COUNSELS
PAULINE E. HIGGINS, LL.M., J.D., CPA Pauline E. Higgins &
Associates, P.C.
12 Greenway Plaza, Suite 1100 Houston, Texas 77046
(713) 425-4924 [email protected]
http://www.paulinehigginsassociates.com/
State Bar of Texas 11th ANNUAL
ADVANCED IN-HOUSE COUNSEL COURSE August 2-3, 2012
Dallas
CHAPTER 20
mailto:[email protected]://www.paulinehigginsassociates.com/
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1
Pauline Edwards Higgins, LLM, JD, CPA
Attorney & Counselor at Law
Certified Public Accountant
Certified Birkman International Coach
[email protected]
12 Greenway Plaza, Suite 1100, Houston, Texas 77046
Phone: (713) 562-8100
Facsimile: (713) 521-9916
EXPERIENCES
Pauline E. Higgins & Associates, P. C.
Managing Partner & Chief Diversity Officer
2012 Preeminent AV Rated Attorney by Peers, Clients, and
Martindale Hubbell
2012 Top-Rated Attorneys in Texas (Wall Street Journal, Houston
Chronicle)
http://paulinehigginsassociates.com/
METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, HOUSTON,
TEXAS
August 2008 – February 2011
Senior Vice President, General Counsel & Corporate
Secretary
THOMPSON & KNIGHT LLP
Finance Partner & Chief Diversity Officer
An active corporate and finance senior partner, in leadership
roles as member of the
Houston Office’s Executive Committee, Firm’s first Chief
Diversity & Inclusion Officer,
and the Firm’s global Audit Letter Committee.
J. P. MORGAN CHASE & CO.
Vice President, Associate General Counsel, and Assistant
Corporate Secretary (Vice
President and Associate General Counsel for Texas Commerce Bank
N.A. and
Chase Bank of Texas N.A.)
EXXON COMPANY, U.S.A, HOUSTON, TEXAS
Transactional/Tax Litigation Attorney –
BRACEWELL AND PATTERSON, HOUSTON, TEXAS
1989-1990
Transactional/Tax (Associate) Attorney
http://paulinehigginsassociates.com/
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A Rubik’s Cube of Ethical Dilemmas Faced by General And
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TABLE OF CONTENTS
INTRODUCTION
..........................................................................................................................................................
2
I. A CONTEXTUAL CONSIDERATION OF ETHICAL ISSUES
..........................................................................
2 A. A "Hypothetical" for Context
..........................................................................................................................
2 B. Ethical Implications of Structural Characteristics of the
Corporate Counsel Relationship ............................. 3
II. FOUR DISTINCT BUT INTERRELATED ETHICAL ISSUES: PRACTICAL
SOLUTIONS TO DIFFICULT PROBLEMS
............................................................................................................................................................
4 A. Introduction
.....................................................................................................................................................
4 B. The Issues
........................................................................................................................................................
5
1. Identification of the Client
.......................................................................................................................
5 2. Too Many Hats
........................................................................................................................................
6 3. The Need for Independence
.....................................................................................................................
8 4. Divergence of the Interests of Corporate Counsel and Their
Employer-Clients ................................... 10
CONCLUSION
.............................................................................................................................................................
10 FOOTNOTES
...............................................................................................................................................................
13
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A RUBIK’S CUBE OF ETHICAL DILEMMAS FACED BY GENERAL AND
CORPORATE COUNSELS Ethics and the resolution of ethical dilemmas
have been, and continue to, an area of indelible and deep interest
to me. This focus of ethics and the related dilemmas has been with
me since I was a child, as a Certified Public Accountant, and in
all the roles in which I have been involved, personally and
professionally. As Vice President and Associate General Counsel at
JPMorgan, I was a member of the Global Conflict of Interest
Committee for JPMorgan and I was the Committee’s representative in
Texas. The first article that I penned for the Houston Bar
Association when I was featured as “Profile in Professionalism” was
centered on the subject matter of ethics and the ethical duties of
an attorney. Basically, thought the subject matter of the many
articles that I have written for the Texas Lawyer is not directly
on ethics, the theme within those articles on diversity and
inclusion is squarely about “doing the right and ethical thing.”
Personally and professionally, I have made tough decisions at
significant costs when I have been faced with ethical dilemmas in
order to remain compliant with the Model Rules of Professional
Conduct. Thus, it should come as no surprise to those who really
know me that when presented the opportunity to dialogue with you at
this conference, I wanted my presentation to be about ethical
dilemmas with which corporate and general counsels faced on a daily
basis. As lawyers, regardless of our roles and regardless of the
seat in which we sit, we must remain ethical, be governed by
ethical principles and behaviors, and be an ethical beacon for our
legal profession. Why should attorneys be the butt of all ethical
jokes? We are in an honorable profession and we should treat the
profession and behave honorably. In performing my research while
reflecting on my personal experiences in my roles in private
practice as an associate and a partner and my additional roles as
Associate General Counsel and General Counsel, in private and
public settings, it is without question that an unequivocal
thorough vetting of the person for whom, and organization with
whom, you will work is of paramount importance. A decision to be an
in-house counsel or the General Counsel of any organization should
not be taken, or made, lightly. Skipping a thorough vetting could
be, in the end, catastrophic for one’s career and reputation. Your
reputation is the most important asset of an attorney, in
general, not to mention that of a General Counsel in his or her
role. A full understanding of The ABA’s Model Rules of Professional
Conduct Model, especially Model Rule 1.13, dealing with the
organization as a client, cannot be over emphasized – who really is
your client? During this process of pondering, reflection, and
research, I encountered an excellent article and presentation by
Professor Geoffrey C. Hazard, Jr. that was published in Emory
University’s Law Journal and presented at The Randolph Thrower
Symposium. I could not have outlined or stated the issues that I
had already outlined, planned, and the topic that I had
independently chosen, any better and substantively than Professor
Hazard, Sally R. Weaver, and Timothy P. Terrell did in their
presentations and responses, respectively, to Professor Hazard’s
Keynote to The Randolph Thrower Symposium (See footnotes n1-n6). I
sought and was granted permission to present their substantive
points to you with the deep hope that you will read with interest
and will join the much-needed quest to keep our legal profession
deeply ethical, regardless of which corporate counsel role in which
we sit or the cost that might be paid to remain unwaveringly
ethical and committed to the Model Code that governs us, our work,
and our role. Clean and clear optics regarding ethics and conflict
of interest are important. There are significant and critical
issues that affect the role of the general counsel and the
corporate counsel. Critical differences are also present between
the role of the corporate counsel and that of the private or law
firm counsel. One of the most critical differences between
corporate counsel and the attorney in private practice is the
corporate counsel’s economic dependence on a single entity, client,
and boss. A corporate counsel can enhance his or her value to their
client and garner power within the organization when he or she is
perceived as being of value and/or is “adding value.” Another
critical matter is when an entity is faced with losing the
protection of the attorney-client privilege because the corporate
counsel is offering business, as well as legal, advice. I believe
that corporate counsel should adhere to the exact rules of
professional conduct that are applicable to their colleagues in
private practice – no deviation should be allowed. After all,
aren’t we all practicing attorneys? The fact that the corporate
counsel only has one client is irrelevant to the full and complete
adherence to the respective State and ABA’s code of professional
responsibility. It becomes complex, however, when corporate
counsels make non-legal decisions, which may ultimately undercut
the corporate counsel’s
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credibility with respect to the legal aspect of the issues on
which he or she has already given non-legal advice. Professor
Hazard aptly points out that “these corporate counsels are all too
aware that some of their colleagues in private practice will use
these business and non-legal decisions to undercut the credibility
of corporate counsel with senior management.” Further, Professor
Hazard correctly states that "the role of corporate counsel is
among the most complex and difficult of those functions performed
by lawyers." Unfortunately, the complexities of the role of
corporate counsels are also areas in which courts, commentators,
and the organized bars have afforded little attention or
substantive guidance. We must independently monitor ourselves, our
roles, and our behaviors. However, in order to be effective with
the self-monitoring process, we must possess the knowledge, and
stay current with our understanding, of the Model Code of
Professional Responsibility.
INTRODUCTION At the 1997 Thrower Symposium the focus of was on
the critical issues that impact, and are relevant to, the role of
modern corporate counsel. These ethical issues and quandaries
surrounding in-house counsels are relevant now as they were then in
1997. Invariably, some of us have dealt, and are still dealing,
regularly, with these important and pertinent matters and issues.
The following hypothetical and ethical issues were highlighted:
I. A CONTEXTUAL CONSIDERATION OF
ETHICAL ISSUES A. A "Hypothetical" for Context To fully
appreciate the complexity of the ethical issues that confront
corporate counsel, it is helpful to consider these issues in
context rather than in the abstract. 6 Therefore, the following
"hypothetical" situation was offered. “A recent law school graduate
accepts a position as an associate in a large law firm in a
progressive and burgeoning Southern city. After six years of hard
work, the firm invites our hypothetical associate to become a
partner. Several years later, our hypothetical partner has the
opportunity to become general counsel of a rapidly growing,
aggressive company that has recently completed its initial public
offering and is experiencing significant financial success,
reflected of course in a rapid rise in its stock price. After
serious consideration and with some reservations, the partner
resigns her partnership, accepts the position as general counsel
and
relocates her family from the large, diverse, and progressive
city in which she has practiced law and reared her family to the
headquarters of her new employer and client. Three weeks after she
begins her new job, with boxes still unpacked and photographs still
unhung, our new general counsel welcomes into her office the
internal auditor of the company who announces with a grim
expression, "We have a problem." Despite the law professor's
penchant for the ubiquitous hypothetical fact situation, the
scenario that I describe is, in fact, no hypothetical. 7 I was the
lawyer who is the subject of this brief introduction. The problem
that the internal auditor disclosed to me that day involved certain
financial transactions between the company and its chief executive
officer (CEO). Despite the company's status as a publicly held
company, the chief executive officer still retained ownership or
control of approximately sixty-three percent of the issued and
outstanding stock of the company. The questionable transactions
fell into two categories. First, the company had recorded as cash
on its financial statements a $ 6.6 million check from the CEO to
the company. 8 The check, however, had neither been cashed nor
deposited by the company for an extended period of
time--approximately seventeen months in the aggregate--and remained
un-cashed at the time of the internal auditor's disclosure to me.
The second group of transactions involved the payment by the
company of certain personal expenses of the CEO. These transactions
occurred without the knowledge or approval of the Board of
Directors For the next few weeks, I participated with the Audit
Committee of the Board of Directors and the internal audit staff in
an internal investigation of these "accounting irregularities," as
they were characterized in the press release issued by the company
regarding these events. On the date that the company issued the
press release, the Chief Financial Officer (CFO) of the company
resigned, and the price of the company's stock dropped from $ 15 to
$ 11.75 before stabilizing at $ 13.25. Shortly thereafter, a
shareholder securities fraud class action was filed against the
Company, the CEO, the President, the former CFO, and a former
member of the Board of Directors. Not surprisingly, the Securities
and Exchange Commission (SEC) also began an investigation. The
company settled the shareholder class action for $ 3.2 million
approximately eighteen months after it was filed. The SEC’s
investigation culminated in the entry of a cease and desist order
against the company and the CEO and the exclusion of the former CFO
from the practice of
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accountancy before the Commission for a period of three years.”
B. Ethical Implications of Structural
Characteristics of the Corporate Counsel Relationship
This scenario implicates some of the most significant issues
that corporate counsel confronts today. Who is the client? What are
the responsibilities of corporate counsel in a dispute between the
company and its shareholders, directors, officers, employees, or
other agents? To what extent can or should corporate counsel
participate in internal investigations involving possible
wrongdoing by constituencies of the client? Does the involvement by
corporate counsel in internal investigations enhance, impair, or
negate the protection afforded to the client under the
attorney-client privilege? Will corporate counsel have, or be
perceived to have, the requisite independence to conduct or
participate effectively in such investigations? Is the role of
corporate counsel one of advocate, compliance officer, or both? Are
the roles of advocate and compliance officer incompatible? These
difficult issues may arise in the context of the representation of
the client by outside counsel; however, I believe that these
problems are exacerbated by certain characteristics that are unique
to the relationship between corporate counsel and employer-clients.
These characteristics make the conventional paradigms for
considering the relationship between attorney and client inapposite
to the complex and multifaceted relationship between corporate
counsel and employer-clients. The California Supreme Court noted
"the descriptive inadequacy of the nineteenth century model of the
lawyer's place and role in society--one based predominantly on the
small-to-middle-sized firm of like-minded attorneys whose economic
fortunes were not tethered to the goodwill of a single client." 9
The court contrasted the economic dependence of corporate counsel
on one client and the multifaceted role often played by corporate
counsel with the multi-client base and single transaction or case
relationship that typifies the outside law firm's relationship with
its clients. 10 The first, and perhaps most critical, difference
between corporate counsel and their colleagues in private practice
is the economic dependence of corporate counsel on a single client.
As the California Supreme Court stated in General Dynamics Corp. v.
Superior Court, "the economic fate of in-house attorneys is tied
directly to a single employer, at whose sufferance they serve." 11
The court thus concluded that the economic
dependence of corporate counsel on their employers is as
significant as that of other corporate executives. 12 The second
defining characteristic of the corporate counsel role is the
tendency for the corporate counsel to assume responsibilities in
the organization that exceed, and differ from, those of the typical
attorney-client relationship. Corporate counsel may serve as
members of the board of directors, as officers of the corporation,
and as members of executive management committees; in addition,
they may have compliance responsibilities that are not strictly
legal in nature. The inclination of corporate counsel and their
employers to define the role of corporate counsel expansively is
not surprising. Corporate counsel can enhance their value to their
client and their power within the organization when they are
perceived as "adding value" beyond traditional legal advice. The
organization may similarly benefit from the perspective of
corporate counsel on matters that could appropriately be
characterized as raising issues that implicate both law and
business. Notwithstanding the perceived value of this expansive
role to both the corporate counsel and to the organization, the
role may impose an unacceptable risk of conflict of interest and
the perception (if not the reality) of interdependence between the
organization and the corporate counsel. This broader role also
increases the likelihood that the organization will lose the
benefit of the attorney-client privilege. 13 The third
characteristic that defines the relationship between corporate
counsel and their employer-clients is the access afforded corporate
counsel to informal sources of information because of their
physical proximity to their clients. Professor Hazard characterizes
the information that flows from these informal sources as
back-channel or "water cooler" information. 14 The access to this
information implicates the lawyer's obligation to "act with
reasonable diligence . . . in representing a client" 15 in ways
that may differ significantly from the situation experienced by
outside counsel. Senior management often asks outside counsel to
respond to a narrowly defined legal problem presented by management
in a particular context. Corporate counsel, on the other hand, may
find it necessary to identify independently a particular legal risk
for the organization and suggest appropriate action to eliminate or
minimize the risk. Management's perception of the second situation
may differ significantly from management's perception of the first.
The situation is, of course, exacerbated when the back-channel
information involves possible wrongdoing by a senior executive in
the company, potentially placing corporate counsel in an
adversarial posture vis-a-vis management.
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Fourth, the close working relationship between management and
corporate counsel may create confusion and uncertainty about the
role of corporate counsel in the representation of the
organization. My experience indicates that the executives of many
corporations do not understand that corporate counsel represents
the entity rather than its constituents, including the executives
of the organization. 16 Insofar as the executives draw this
distinction, they often fail to comprehend its ramifications. These
consequences include the potential for conflict between the
interest of the executive and the interest of the organization and
the possibility that the information that the executive discloses
to counsel may not be treated as confidential or privileged. Who is
your client? Finally, the position of corporate counsel as
employee, in addition to legal counsel, creates a myriad of
opportunities for employment-related disputes that generally do not
arise in the context of the relationship between outside counsel
and their clients. Courts generally have permitted corporate
counsel to sue their employer-clients for age discrimination 17 and
for race discrimination. 18 Courts have held that corporate
counsels are within the class of employees protected under a state
"whistle-blower" statute. 19 Courts also have permitted corporate
counsel to sue under a state labor relations statute 20 and to
assert claims for wrongful termination based on the implied
covenant of good faith and fair dealing. 21 The most controversial
and frequently litigated disputes between corporate counsel and
their employer-clients involved allegations of retaliatory
discharge by corporate counsel whose employment was terminated
because of actions taken by counsel in the course of rendering
legal advice to the organization. 22 Courts had uniformly denied
corporate counsel the right to state a claim for retaliatory
discharge. 23Some courts, however, have concluded that the
attorney's role as corporate counsel does not preclude a
retaliatory discharge claim. 24 These structural characteristics
can lead to ethical problems that differ significantly from the
ethical dilemmas those attorneys in private practice confront. Four
of these ethical issues are addressed below and are focused, when
appropriate, on the applicable rules of professional conduct 25 and
on cases in which courts have addressed the unique attributes of
the relationship between corporate counsel and their clients or in
which the courts' perspective has specific implications for
corporate counsel. In each situation outlined, suggestions
regarding specific action that corporate counsel may take to
minimize the negative implications of the situation, both for
counsel and for their clients.
II. FOUR DISTINCT BUT INTERRELATED ETHICAL ISSUES: PRACTICAL
SOLUTIONS TO DIFFICULT PROBLEMS
A. Introduction Corporate counsel frequently must consider
ethical issues that are closely interrelated although distinct.
Thus, for example, the same situation may implicate ethical issues
involving the organization as the client, 26 the duty of loyalty
and conflicts of interest, 27 the obligation to maintain client
confidences 28 and the obligation to act with reasonable diligence
in the representation of the client. 29 Of course, the intertwined
nature of these ethical issues is not unique to the practice
environment of corporate counsel, but it is exacerbated by the very
complex relationship between corporate counsel and their
employer-clients. This complexity, if overlooked, can be
detrimental to corporate counsel and client alike. Corporate
counsels, however, are generally reluctant to acknowledge, at least
publicly, any distinction between themselves and lawyers in private
practice. Technically, there may not be any distinction, however,
operationally and structurally, there is a ton of difference
between the chair in which the corporate counsel is sitting and the
one in which the private practitioner is sitting. Corporate
counsels have recently realized a significant increase in number
and growth in prestige. 30 They clearly remember, however, a time
in the not-so-distant past when many of their colleagues in private
practice relegated them to the status of second-class citizens. 31
They also fear that the development of different ethical rules for,
or the different application of existing ethical rules to,
corporate counsel could relegate them again to that second-class
status. 32 Corporate counsels have joined in a public incantation
of sameness. Nonetheless, I am concerned that the old adage "saying
it is so doesn't make it so" applies. Corporate counsels actually
do practice law in an environment that differs dramatically from
that of their colleagues in private practice. That difference means
that the existing rules of professional conduct, at least as
historically interpreted, may provide inadequate guidance to
corporate counsel. Corporate counsel can anticipate and respond
thoughtfully to these problems. Courts and commentators have begun,
somewhat, to evaluate and offer guidance about this complex
relationship. The following discussion identifies and analyzes four
situations that implicate important ethical issues that corporate
counsel will confront frequently. Practical suggestions for
minimizing the possibility that these
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A Rubik’s Cube of Ethical Dilemmas Faced by General And
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issues will arise and for addressing them when they cannot be
avoided are outlined below. B. The Issues 1. Identification of the
Client Model Rule 1.13 sets forth the basic parameters of the
attorney-client relationship when an attorney represents an
organization. It states that the lawyer in this situation
"represents the organization acting through its duly authorized
constituents." 33 The Comments to Rule 1.13 state that "officers,
directors, employees and shareholders are the constituents" of a
corporation 34 and that the equivalent persons acting on behalf of
unincorporated associations are the constituents of those
organizations. 35 The Model Rules do not distinguish a relationship
involving a lawyer who represents an organization in the capacity
of outside counsel from the relationship between a lawyer and the
organization she represents as an employee of that organization. I
believe, however, that the environment in which corporate counsel
practice substantially increases the likelihood of confusion about
the identity of the client, and concomitantly, the potential
negative ramifications for the attorney should such confusion
occur. The inevitable divergence between the goals and objectives
of the individual constituents of the organization and the best
interests of the organization can, and do, create career
threatening situations for corporate counsel. 36 When similar
tensions arise in relationships between outside counsel and their
clients, outside counsel may lose a client if the situation cannot
be resolved; however, corporate counsel may lose their jobs. 37
Professor Hazard has characterized Model Rule 1.13 as a "process
oriented" rule that "contributes little in the way of specific
dictates." 38 Rather, the Rule provides a "method of analysis and a
method of communicating with an entity client." 39 This
characterization is clearly accurate, but it does not mean that the
process oriented approach of Rule 1.13 is free of serious
substantive implications for corporate counsel. Rule 1.13(b)
articulates a process that an attorney should follow when a
constituent of the organization acts in a manner "that is a
violation of a legal obligation to the organization, or is a
violation of law which reasonably might be imputed to the
organization, and is likely to result in substantial injury to the
organization." 40 Rule 1.13(b) admonishes the lawyer to "proceed as
is reasonably necessary in the best interest of the organization"
41 but to do so in a manner that "minimizes disruption of the
organization and the risk of revealing information relating to the
representation
to persons outside the organization." 42 In other words, please
note that Rule 1.13 does not provide a safe harbor for the attorney
who chooses to become a whistle-blower. Rather than prescribing
specific measures to be instituted by lawyers in these
circumstances, Rule 1.13 recites a nonexclusive list of options
that the attorney may consider. These measures include a request
for reconsideration by the constituent, a suggestion that a
separate legal opinion be sought on the issue, and a referral of
the matter to "higher authority in the organization including, if
warranted by the seriousness of the matter, referral to the highest
authority that can act in behalf of the organization as determined
by applicable law." 43What if you have corruption at executive and
board level, jointly? In a corporation, of course, this highest
authority will almost always be the board of directors. If the
lawyer is ultimately unsuccessful in resolving the issue within the
parameters established by Rule 1.13, the lawyer may then resign. It
is significant that each of the specific suggestions offered by
Rule 1.13 is merely permissive, thus leaving the lawyer with the
responsibility of determining the appropriate course of action.
Lawyers are, of course, professionals; and the decision to cede
significant discretion to the lawyer who is faced with the type of
dilemma that Rule 1.13 contemplates may be appropriate. Rule 1.13,
however, provides no "safe harbor" for lawyers who make difficult
decisions under these circumstances. The potential costs associated
with these difficult decisions are particularly high for corporate
counsel. Nonetheless, corporate counsel may minimize the personal
risks which can arise from these situations by ensuring that
management understands the role of corporate counsel as counsel to
the entity and the responsibilities that attend this role. What if
he or she, senior management, is of the belief that corporate
counsel represents him or her and senior management considers
himself or herself as the “entity”? Corporate counsel often
acknowledge the increased effectiveness that they enjoy when senior
management believes that they are "team players." 44 I do not
dispute the accuracy of this perception; however, the close working
relationship that often exists between corporate counsel and senior
management offers many opportunities for confusion about the
identity of the client that counsel represents. Corporate counsel
can make attempts to minimize the confusion as to the “entity” that
corporate counsel represents. First, corporate counsel should
define clearly their role as counsel for the organization rather
than for any of
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A Rubik’s Cube of Ethical Dilemmas Faced by General And
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the individual constituents of the entity. It is helpful to
reinforce this distinction periodically in discussions at meetings
of the board of directors and with senior management. Second,
corporate counsel must diligently identify specific circumstances
in which confusion about this issue can arise. Rule 1.13(d)
requires counsel who confront these situations to provide
Miranda-like warnings to constituents of the organization "when it
is apparent that the organization's interests are adverse to those
of the constituents." 45 Counsel must clearly indicate to these
constituents that the lawyer represents the interests of the
organization rather than those of its constituents. 46 This
admonition is necessary because the entity's employees and
representatives frequently do not appreciate the significance that
attaches to the lawyer's representation of the entity. This failure
to understand the significance of the lawyer's representation of
the entity may foster the mistaken belief that the entity's lawyer
represents their interests and owes them the same loyalty and
duties that the lawyer owes to the entity. Rule 1.13 only requires
this disclosure when the lawyer believes that the entity's
interests may be adverse to those of the constituents. Prudence
suggests, however, that the lawyer's ethical obligations in these
situations be included in a general discussion with the board of
directors and senior management about the lawyer's role as counsel
to the entity. I emphasize that the discussion regarding the
affirmative discussions regarding the obligation of corporate
counsel the full understanding of the duty of loyalty to the
organization, and not the persons in senior management or the
board, should take place upfront and at the time of employment, at
staff meetings, at board meetings, and periodic updates and
training for, and with the board of directors. The unequivocal duty
of loyalty to the organization can be stressed enough. Finally,
corporate counsel should ensure that their clients understand the
steps that Model Rule 1.13 requires if an agent or representative
of the client 47 persists in taking an action that is "a violation
of a legal obligation to the organization, or a violation of law
which reasonably might be imputed to the organization." 48
Corporate counsel should discuss the ethical obligations of lawyers
under Rule 1.13 with management before, rather than after, this
situation arises and establish written policies and procedures for
resolving internal conflicts. Rule 1.13's generalities undoubtedly
will be construed against the lawyer who surprises or fails to
garner the support of the organization's highest authorities in
these circumstances. What about when you have a senior
management and board who could not careless about Rule 1.13 and
the duty of loyalty that is incumbent upon the corporate counsel?
2. Too Many Hats Corporate counsel frequently becomes involved in
the business as well as the legal aspects of their
employer-client's business. In fact, corporate counsels often
consider the opportunity to participate in business decisions to be
one of the principal reasons that they prefer the in-house
environment to private practice. Most corporate general counsels
are officers of the corporation, and many have officer designations
in addition to their roles as general counsel. The most common
designation is probably that of corporate secretary. Some general
counsels serve as members of the board of directors and on
executive management committees. Other corporate counsel may have
compliance roles in the organization, with non-lawyer personnel who
have responsibility for compliance functions reporting to them.
Finally, corporate counsels often have equity interests in the
organizations that employ them, at least through participation in
employee stock option plans. The Model Rules provide no specific
guidance about the ethical issues implicated by the various roles
that corporate counsel play in an organization. Model Rule 1.7
provides the general rules governing conflicts of interest. Rule
1.7 prohibits an attorney from representing a client with interests
that are directly adverse to the interest of another client. 49 It
restricts the attorney from representing a client if such
representation "may be materially limited by the lawyer's
responsibilities to another client or to a third person, or by the
lawyer's own interest." 50 The Comments to Rule 1.7 specifically
address only one of the many roles that corporate counsel often
fulfill in the organizations which they represent. In considering
whether it is appropriate for the lawyer of an organization to also
serve as a member of the Board of Directors, the Comments suggest
that the lawyer "should determine whether the responsibilities of
the two roles may conflict." 51 The Comments further provide that,
in assessing the risk of conflict, the lawyer should consider: 1)
the possibility that, and frequency with which, the lawyer may be
required to advise the organization on matters concerning the Board
of Directors; 2) the potential intensity of any conflicts between
the organization and the Board of Directors; 3) the effect of the
lawyer's resignation from the Board of Directors; and 4) the
possibility that the corporation can secure legal advice from
another
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A Rubik’s Cube of Ethical Dilemmas Faced by General And
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7
lawyer when such conflicts develop. The Comments indicate that
the lawyer should not serve on the Board of Directors if
consideration of these factors suggests a material risk that the
"dual role will compromise the lawyer's independence or
professional judgment." 52 In Simms v. Exeter Architectural
Products, Inc., 53 the United States District Court for the Middle
District of Pennsylvania considered whether an attorney's ownership
of stock in a closely-held corporation created a conflict of
interest that precluded the attorney from representing the
corporation. 54 Mr. Simms, a founding shareholder and director, as
well as the former president of Exeter, moved to disqualify
Exeter's law firm on the basis that the firm advised him personally
regarding the matters at issue in the litigation. Mr. Simms
asserted that the law firm should be disqualified due to an
attorney-client relationship between him and the law firm, which
created a conflict of interest regarding the law firm's
representation of Exeter. 55 The court, however, looked beyond the
purported attorney-client relationship between Mr. Simms and the
firm and specifically considered the equity position in Exeter held
by several partners in the firm and their spouses. 56 The court
found that when the attorney is both an advocate for and an owner
of an entity "it appears to be extremely difficult if not
impossible for the attorney to give advice as a non-interested
party." 57 The court concluded that the ownership of stock by
partners in the firm and their spouses, although de minimus,
created an appearance of impropriety that required the firm's
disqualification from representing Exeter in a dispute between
certain of the founding shareholders. 58 The corporate counsel's
dual role as both business and legal advisor can also detrimentally
affect the organization in the area of the attorney-client
privilege. In 1981, the United States Supreme Court clearly found
the attorney-client privilege applicable to certain communications
between employees of a corporation and the corporation's corporate
counsel. 59 The Court in Upjohn Co. v. United States rejected the
"control group test" that several of the appellate courts had
enunciated 60 but declined to articulate an alternative test. 61 In
determining that the attorney-client privilege should extend to
certain communications between employees of Upjohn and the
corporate counsel, 62 the Court stated that the communications were
made by the employees to corporate counsel at the direction of
Upjohn management and for the purpose of securing advice from
corporate counsel. 63 The Court also observed that the
"communications concerned matters within the scope of the
employees' corporate duties and the employees themselves were . . .
aware that they
were being questioned in order that the corporation could obtain
legal advice." 64 Upjohn clearly established that the protection of
the attorney-client privilege extends to corporations under
appropriate circumstances. Perhaps more importantly, at least from
the perspective of corporate counsel, the Court in Upjohn did not
distinguish communications to corporate counsel from communications
to outside counsel in analyzing the applicability of the
attorney-client privilege. Courts in subsequent decisions, however,
have raised issues about the attorney-client privilege that are
important to corporate counsel. Of particular concern is the
decision by the United States District Court for the Southern
District of New York in Georgia-Pacific Corp. v. GAF Roofing
Manufacturing Corp. 65 Michael D. Scott, the in-house attorney for
GAF, refused to answer certain questions in a deposition, claiming
that the attorney-client privilege protected the information that
Georgia-Pacific sought. Georgia-Pacific moved to compel. 66 The
information that was the subject of the motion to compel involved
negotiations between Georgia-Pacific and GAF in which Mr. Scott
participated on behalf of GAF. Georgia-Pacific specifically sought
testimony from Mr. Scott about recommendations he made to the GAF
negotiators regarding certain provisions in the asset purchase
agreement that was the subject of the negotiations. The court held
that when Mr. Scott participated in the negotiations he "was not
'exercising a lawyer's traditional function.'" 67 Since Mr. Scott
was acting as a negotiator on behalf of management, "he was acting
in a business capacity." 68 The court relied in particular on a
decision in which the New York Court of Appeals had observed that
in-house attorneys may also serve as officers of the corporation
and may have both business and legal responsibilities. 69 The Court
of Appeals further observed that the day-to-day involvement of
corporate counsel in the business of the company "may blur the line
between legal and non-legal communications." 70 Many courts have
used the business-legal dichotomy to determine when the
attorney-client privilege applies to communications between
corporate counsel and the representatives of their clients;
however, Professor Hazard has appropriately criticized the court in
Georgia-Pacific for "not having been strict enough in policing the
privilege." 71 As Professor Hazard concedes, conversations between
management and corporate counsels do lose the protection of the
attorney-client privilege when they cease to be about legal
matters. 72 The question Professor Hazard appropriately poses in
regard to Georgia-Pacific is
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A Rubik’s Cube of Ethical Dilemmas Faced by General And
Corporate Counsels Chapter 20
8
whether it is possible to separate legal from business matters
when the discussions involved the negotiation of complex provisions
about environmental matters in an asset purchase agreement. 73
Nevertheless, it remains clear that those corporate counsels who
combine a business role with their legal role in the company
increase the likelihood that several problems will arise,
especially with respect to disclosures in depositions and the
potential loss of attorney-client privilege. The more roles that
corporate counsel play in the organization, the greater the
possibility that conflicts of interest will arise. These conflicts
of interest may require that outside counsel be retained in
circumstances in which that would not ordinarily be necessary,
perhaps depriving the company of the most effective and efficient
legal advice through the office of its corporate counsel. It is
also clear that the company risks losing the protection of the
attorney-client privilege when corporate counsel offers business as
well as legal advice. I suggest that corporate counsel take certain
steps to minimize the possibility that these situations will arise.
First, corporate counsel should limit their role in the
organization to serving as legal advisor to the entity. I can
envision no circumstances under which it would be advisable or
prudent for corporate counsel to serve on the board of directors of
the entities they represent. 74 Corporate counsel should similarly
undertake non-legal functions for the entity only when counsel's
ability to render legal advice to the entity will clearly not be
impaired. At times these non-legal roles are thrust upon corporate
counsel after he or she is hired and corporate counsel finds it
difficult to refuse and is , therefore, placed in a quandary. It is
said that discretion is the better part of valor and corporate
counsel may need to seek legal advice when he or she finds it
difficult, notwithstanding Miranda Warnings, to affirmatively
refuse and escape the pressure on non-legal roles and advice. In
one of my very difficult corporate counsel roles, now looking
through the 20-20 lens, I wished that I had retained independent
legal counsel earlier (even at my own expense) to advise me during
my difficult refusals. Second, corporate counsel should consider
carefully the extent to which they should conduct or participate in
internal investigations involving highly sensitive matters.
Significant benefits may inure to the organization from the
participation by counsel in such investigations, but such
participation does raise issues implicating conflicts of interest,
the attorney-client privilege and attorney work-product immunity,
particularly when corporate counsel act in the
capacities of both fact-finder, business advisor, and legal
advisor. 75 Finally, corporate counsel should be sensitive to those
situations in which the advice that they render could be
characterized as business rather than legal advice. If the
protection of the attorney-client privilege is important to the
client, corporate counsel should ensure that another attorney
participates in such discussions in the role of legal advisor, thus
cloaking the discussions with the protection of the attorney-client
privilege that might otherwise be lost. 3. The Need for
Independence Corporate counsel, having realized in recent years a
substantial increase in number and stature, are understandably
loath to concede that they are less independent or less
professional than their colleagues in private practice. 76 Many
years ago, Brian Forrow, who was then General Counsel of Allied
Chemical, framed the question as follows: Is the hallmark of a
lawyer--independent judgment--blurred because the lawyer serves as
inside counsel? Or is inside counsel better able to bring
independent judgment to a corporation's problems, even perhaps to
go beyond the law to activate the corporate conscience? 77 Stated
another way, is corporate counsel or outside counsel more likely to
have the independence to tell senior management or the board of
directors what they may not want to hear? Many years after Mr.
Forrow posed this question, the United States District Court for
the Northern District of California answered it in the context of
the settlement of a shareholder class and derivative action against
Oracle Systems Corporation. 78 The court was asked to confirm a
proposed settlement of consolidated class and derivative actions
arising out of allegations of securities fraud. 79 The terms of the
settlement proposal made the settlement of each action contingent
on the settlement of the other action. 80 The court indicated that
it was willing to approve the settlement of the class action, 81
but it raised serious concerns about the terms of the settlement of
the derivative action. More significantly, however, the court
considered the process by which the "disinterested" directors
approved the settlement so flawed that the process failed to
satisfy the requirement of independence and good faith under
Delaware law. 82 In finding that disinterested directors do not
necessarily
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A Rubik’s Cube of Ethical Dilemmas Faced by General And
Corporate Counsels Chapter 20
9
act with independence, the court focused on the close
relationship between members of the board of directors and the
natural empathy of the disinterested directors for their colleagues
named as defendants in the derivative suit. 83 The court concluded
that the retention of independent counsel to advise the
disinterested directors is "one of the few safeguards to ensure the
legitimacy of their acts and to aid the court in assessing the
reasonableness of a derivative settlement or termination." 84 The
court then focused on the involvement of Raymond Ocampo, Oracle's
in-house general counsel, in this process and characterized h