Ethical Issues in Dealing with Corporate Employees (Current and Former) in Litigation. Nicole D. Bearce

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1 Ethical Issues in Dealing with Corporate Employees (Current and Former) in Litigation Nicole D. Bearce

2 Lawsuit Against a Corporation When a Company is sued, its present and former employees are often named co-defendants or key fact witnesses For a number of reasons, including to maintain control over the defense, the Company will oftentimes offer to have its counsel represent the current or former employee.

3 Ethical Issues 1. Conflict of Interest Analysis Must be analyzed before joint representation is undertaken and revisited throughout the course of the litigation. Must obtain informed consent from company and employee. 2. Indemnification and Advancement of Attorneys Fees When is it allowed? Relationship between separate counsel and corporation. 3. Compensation of Current or Former Employee as a Fact Witness Is it permitted at all? If so, how much?

4 Conflicts of Interest Can the same attorney represent the company and the employee?

5 Conflicts of Interest New Jersey RPC 1.7 prohibits joint representation if there is a concurrent conflict of interest, which exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client, or a third person or by a personal interest of the lawyer.

6 Conflicts of Interest However, the lawyer may represent a client if: (1) each affected client gives informed consent, confirmed in writing, after full disclosure and consultation, provided, however, that a public entity cannot consent to any such representation. When the lawyer represents multiple clients in a single matter, the consultation shall include an explanation of the common representation and the advantages and risks involved; (2) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (3) the representation is not prohibited by law; and (4) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal. The ABA Model Rules of Professional Conduct 1.7 and Rule 1.7 of the New York RPCs contain the same provisions in a different order.

7 Conflicts of Interest Normally, the interests of the company and employee are aligned because of the doctrine of respondeat superior. Conflicts can arise in a number of circumstances: Causes of action in which doctrine of respondeat superior does not apply. (In re Petition for Review of Opinion 552 of the Advisory Committee on Professional Ethics, 102 N.J. 194, 197 (1986) (potential conflict in representing municipality and employee in 1983 because respondeat superior is not recognized.) Claims alleging intentional misconduct of employee. (E.g., Averhart v. Cmm cns Workers of Am., No , 2013 WL , at *3-4 (D.N.J. Apr. 9, 2013) (except if patently frivolous, allegations of intentional misconduct require separate counsel for employee.) Criminal allegations against company or employee. Individual may face jail time and may cut a deal to testify against company.

8 Conflicts of Interest Informed Consent is agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct. N.J. RPC 1.0(e). Whether informed consent is achieved is fact specific. Generally the attorney will bear the burden of showing that informed consent has been met. Celgene Corp. v. KV Pharm. Co., No , 2008 WL (D.N.J. Feb. 21, 2013).

9 Conflicts of Interest Full disclosure of potential future conflict to both company and employee, including information on what will happen if conflict arises. Consider having employee consult with separate counsel. Disclaimer: At the present time, we do not see any conflict that would prevent the firm from representing both the Corporation and [Employee]. It is possible, however, that such a conflict may arise or become apparent in the future, in which case it is understood that [Employee] would retain separate counsel and that the firm would continue to represent the Corporation. In re Rite Aid Corp. Sec. Litig., 139 F. Supp. 2d 649, (E.D. Pa. 2001). Courts are split on enforceability of this type of provision: Rite Aid, supra (attorney could continue representing company); Host Marriot Corp. v. Fast Food Operators, Inc., 891 F. Supp (D.N.J. 1995) (same with respect to prior joint representation of tenant and subtenant). Attorney is expected to keep confidences from new corporate client. (Host Marriot Corp., supra) Touchcom, Inc. v. Bareskin & Parr, 299 F. App x 953 (Fed. Cir. 2008) (Virginia version of Rule 1.7; continued representation of company would be improper due to prior exposure to confidential information.)

10 Indemnification/Advancement Can you pay for the employee s legal expenses?

11 Indemnification/Advancement Indemnification allows a company to reimburse its employee for personal loses suffered as a result of the employee s proper exercise of official responsibility. All states have statutes authorizing indemnification under certain circumstances: Del. Code. Ann. tit. 8, 145 (model for many states), allows indemnification if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. Mandatory indemnification if an officer or director is successful in litigation on the merits, including a settlement for dismissal with prejudice without payment or assumption of liability. In re Mid-American Waste Sys., Inc., 228 B.R. 816, 823 (Bankr. D. Del. 1999)

12 Indemnification/Advancement N.J.S.A. 14A:3-5(2): (2) Any corporation organized for any purpose under any general or special law of this State shall have the power to indemnify a corporate agent [ any person who is or was a director, officer, employee or agent of the indemnifying corporation ] against his expenses and liabilities in connection with any proceeding involving the corporate agent by reason of his being or having been such a corporate agent, other than a proceeding by or in the right of the corporation, if (a) such corporate agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation; and (b) with respect to any criminal proceeding, such corporate agent had no reasonable cause to believe his conduct was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that such corporate agent did not meet the applicable standards of conduct set forth in paragraphs 14A:3-5(2)(a) and 14A:3-5(2)(b).

13 Indemnification/Advancement Advancement permits the company to pay for the employee s attorney as the expenses are incurred. Many state statutes require that the employee post an undertaking, which requires repayment if it is determined that the employee would not have been entitled to indemnification (e.g., he committed intentional wrongdoing). E.g., Del. Code. Ann. tit. 8, 145(e); N.J.S.A. 14A:3-5(2)(c)(6). Rights of indemnification/advancement can be changed in company s certificate of incorporation or by-laws, but state statutes preclude indemnification in certain areas: Delaware: Cannot be indemnified for violation of the duty to act in good faith. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, (Del. Sup. Ct. 2006). New Jersey: No indemnification for acts or omissions... in breach of [employee s] duty of loyalty to the corporation or its shareholders... [or] not in good faith or involved a knowing violation of law or... resulted in receipt by the corporate agent of an improper personal benefit. N.J.S.A. 14A:3-5(7).

14 Indemnification/Advancement Practically, many companies will appoint a friendly attorney/ firm to represent the employee. Raises potential problem under RPC 1.8(f), which prohibits attorney from accepting payment from third party other than client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer s independence of professional judgment or with the lawyerclient relationship; and (3) information relating to representation of a client is protected as required by RPC 1.6.

15 Indemnification/Advancement In re: State Grand Jury Investigation, 200 N.J. 481 (2009) New Jersey Supreme Court has held that [a] synthesis of RPCs 1.7(a)(2), 1.8(f) and 5.4(c) yields a salutary, yet practical principle: a lawyer may represent a client but accept payment, directly or indirectly, from a third party provided each of the six conditions is satisfied. The conditions are: 1. Informed consent of client 2. No interference with professional judgment 3. No current attorney-client relationship between the lawyer and the third party payer 4. No revealing confidential communications to payer 5. Payer to process and make payments promptly 6. Must seek court approval to withdraw

16 Indemnification/Advancement In re: State Grand Jury Investigation, 200 N.J. 481 (2009) Condition 3: No current attorney-client relationship between the lawyer and the third party payer. Would prohibit company from using one of its commonly used firms: Likely only applies if there is a conflict between the company and the employee. Consider using new firm/attorney not previously associated with company.

17 Compensation for Testimony Can you compensate the employee for his time as a fact witness?

18 Compensation for Testimony Particularly when it comes to former employees, oftentimes the employee will ask to be compensated for their time preparing and/or testifying at a deposition or at trial. As a general matter, however, when a party to litigation calls a witness because of that witness personal knowledge of the subject matter of a lawsuit: public policy dictates that such a witness may not be compensated for his services even if the witness has a close connection with the lawsuit. Goldstein v. Exxon Research & Eng g Co., No , 1997 WL , at *3 (D.N.J. Feb. 28, 1997).

19 Compensation for Testimony Compensation for testifying may not permitted even if the amount of time committed is extreme: Hamilton v. Gen. Motors Corp., 490 F.2d 223, 225 (7th Cir. 1973). Retired former employee met with counsel seven times, helped develop a memorandum detailing his knowledge, maintained constant correspondence for four years and essentially came out of his retirement and thereafter for approximately ten years regularly devoted substantially all of his time and effort to assisting counsel. Compensation found inappropriate because of the potential dangerous consequences of this type of payment, i.e., potential for the witness to perjure himself to give more favorable testimony.

20 Compensation for Testimony Federal Antigratuity Statute, 18 U.S.C. 1801(b)(3) creates criminal penalties for anyone who directly or indirectly, corruptly gives, offers, or promises anything of value to any person, or offers or promises such person to give anything of value to any other person or entity, with intent to influence the testimony under oath or affirmation of such first-mentioned person as a witness upon a trial, hearing, or other proceeding. But, the statute shall not be construed to prohibit the payment or receipt of witness fees provided by law, or the payment, by the party upon whose behalf a witness is called and receipt by a witness, of the reasonable cost of travel and subsistence incurred and the reasonable value of time lost in attendance at any such trial, hearing, or proceeding, or in the case of expert witnesses, a reasonable fee for time spent in the preparation of such opinion, and in appearing and testifying. 1801(d).

21 Compensation for Testimony Nonetheless, courts recognize the following exceptions to the no compensation rule. You may pay a witness for: (1) expenses reasonably incurred by a witness in attending or testifying; (2) reasonable compensation for loss of time attending or testifying; and (3) reasonable fee for the professional services of an expert witness (noncontingency). Authority is split on whether payment for time in preparation for testimony may also be reimbursed: Centennial Mgmt. Servs., Inc. v. AXA Re Vie, 193 F.R.D. 671, 681 (D. Kan. 2000) (payment of reasonable compensation to witness to reimburse for deposition preparation did not violate RPC 3.4 or 18 U.S.C. 1801(b)(3) because such reimbursement is not the same as payment for or because of testimony). In re Complaint of PMD Enterprises, Inc., 215 F. Supp. 2d 519, (D.N.J. 2002) (payment to witness for time preparing for testimony beyond time at a hearing was improper under NJ RPC 3.4) (citing Goldstein v. Exxon).

22 Compensation for Testimony The amount of such compensacon must be reasonable, so as to avoid affec1ng, even uninten1onally, the content of a witness tes1mony. What is a reasonable amount is relacvely easy to determine in situacons where the witness can demonstrate that he has sustained a direct loss of income because of his Cme away from work where the witness is recred or unemployed the lawyer must determine the reasonable value of the witness Cme based on all relevant circumstances. ABA Comm. on Ethics & Professional Responsibility, Formal Op (1996) (emphasis added) Centennial Management Services, 193 F.R.D. at Court approved consulcng agreement with former insurance adjuster, paying $125/hr. for review of documents, $150/hr. for preparacon for tescmony; and $200/hr. for tescmony. Found reasonable based on amount of hours required and complexity of the case.

23 Compensation for Testimony - Consulting/ General Retainer Agreements Must be limited to compensate only for former employee s time and expenses in assisting in the litigation Care must be taken in evaluating what are reasonable payments: Former employee s years of experience; Personal knowledge of the subject matter of the litigation; Nature of the litigation; Former employee s current employment status Be wary of any condition re: truthfulness, materiality, helpfulness. There can be no restrictions on areas of testimony or success on the merits. New York v. Solvent Chemical Corp., Inc., 166 F.R.D. 284, 289 (W.D.N.Y. 1996): Defendant ICC entered into consulting agreement with former employee of a subsidiary company. A t the same time ICC agreed to settle a separate litigation in which the employee was named as defendant and agreed not to sue the employee in the action. Court found the circumstances surrounding the agreement made it clear that the settlement was intended to make the employee sympathetic and testify in a favorable manner. Payments to him and the consulting agreement were absolutely indefensible.