I. Unintentional Formation of an Attorney-Client Relationship

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1 In-house lawyers face a variety of issues that create exposure to ethical violations and claims of legal malpractice. These issues are often more subtle than those facing outside counsel, and pose a risk of civil liability for which the in-house lawyer may not be insured. The following areas are among those that warrant a high degree of attention. I. Unintentional Formation of an Attorney-Client Relationship In-house lawyers operate in an environment that lends itself to the inadvertent formation of attorney-client relationships. This possibility exists because an attorney-client relationship is deemed to have been created by reference to the client s reasonable expectations, not the attorney s intentions. Where the existence of an attorney-client relationship is in dispute, courts focus on the reasonable expectations of the client rather than the mutual assent of the parties to determine whether the relationship exists. See Bartholomew v. Bartholomew, 611 So. 2d 85, 86 (Fla. 2d DCA 1992). Absent an express agreement, it is the client s subjective belief that governs the formation, and the attorney s belief or understanding of the relationship is irrelevant. Id. An attorney-client relationship arises when a person manifests to a lawyer the person s intent that the lawyer provide legal services for the person and either the lawyer manifests to the person consent to do so or fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services. Restatement (Third) of the Law Governing Lawyers, Section 14. These standards leave open the possibility that, as a result of a misunderstanding, an attorney will find him or herself in the unenviable position of learning that he or she has been representing a client for some period of time without even knowing it. Understanding when an attorney-client relationship is formed has become increasingly important for in-house counsel. The Restatement cautions lawyers that represent organizations that a lawyer s failure to clarify whom the lawyer represents in circumstances calling for such a result might lead a lawyer to have entered into client-lawyer representations not intended by the lawyer. Id. at Comment F. The Restatement further warns: Hence, the lawyer must clarify whom the lawyer intends to represent when the lawyer knows or reasonably should know that, contrary to the lawyer s own intention, a person, individually, or agents of an entity, on behalf of the entity, reasonably rely on the lawyer to provide legal services to Page 1

2 that person or entity.... Such clarification may be required, for example, with respect to an officer of an entity client such as a corporation, with respect to one or more partners in a client partnership or in the case of affiliated organizations such as a parent, subsidiary, or similar organization related to a client person or client entity. Id. In-house counsel representing the company should expressly advise corporate employees of the attorney s role and the implications stemming from that role. Such advice is sometimes called giving corporate Miranda warnings. Nancy J. Moore, Conflicts of Interest For In-House Counsel: Issues Emerging From the Expanding Role of the Attorney-Employee, 39 S. Tex. L. Rev. 497, 503 (1998). There is not a clear consensus regarding how detailed such warnings must be in order to be effective. On the one hand, Rules 1.13(d) and 4.3 of the ABA Model Rules of Professional Conduct set what may be described as the minimum standard. Rule 1.13(d) provides: In dealing with an organization's directors, officers, employees, members, shareholders or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing. This rule requires a lawyer to merely explain that he represents the entity, not the individual, and only does so when the lawyer reasonably should know that the entity s interests are adverse to that of the individual. Rule 4.3 provides: In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. Although this rule is broader in that it is not limited to instances of adversity, it still requires that an attorney take only reasonable efforts to correct any misunderstanding, which under certain circumstances may Page 2

3 merely require a simple statement identifying the client as mandated in Rule 1.13(d). On the other hand, some have argued that a more detailed Miranda warning is required. Moore, 39 S. Tex. L. Rev. at 503. Such warnings would include advising corporate employees that: (a) [counsel s] role is to represent the organization, (b) an actual or potential conflict of interest may exist between the organization and the individual, (c) [counsel] cannot represent the individual, (d) their conversation may not be confidential and any information the individual provides may be used against [such individual], and (e) that he [or she] may wish to retain independent counsel. Id. Advocates of the more in-depth warning argue that such warnings are necessary to fully protect the entity from subsequent claims by the employee that the representation was joint. Id. The comment to Rule 1.13(d) actually advocates giving such a detailed warning as well, but does so in permissive, not mandatory, language. The comment also concludes that whether an in-house attorney should give a more in-depth warning to a corporate employee may turn on the facts of each case. Rule 1.13, Comment 8. In-house attorneys face the danger of inadvertent representation in a variety of situations. Corporate investigations are ripe for misunderstandings in which employees come to believe that the attorney interviewing them is doing so as their lawyer. It is also common for inhouse attorneys to provide legal services relating to quasibusiness/personal matters for corporate employees, including drafting employment agreements and compensations plans for corporate management, giving assistance regarding the exercise of stock options, and providing advice on the purchase or sale of securities and other filings. Moore, 39 S. Tex. L. Rev. at 505. Because these situations involve what appears to be a close relationship between the attorney and the individual, at least in the eyes of the individual, an attorney-client relationship may form under the reasonable expectations test. Id. In-house lawyers also face the danger of inadvertent representation of corporate employees when they manage litigation conducted by an outside law firm. Id. Engaging in activities such as drafting pleadings, attending depositions, and participating in interviews with employeedefendants can give the appearance that counsel is representing not only the company, but also the employees involved in the litigation. Page 3

4 II. Attorney-Client Privilege In-house attorneys face unique challenges in the creation and preservation of attorney-client privileged communications. Because inhouse attorneys often serve their employer in both a legal and business capacity, many of their communications have mixed subjects and purposes, and involve more than providing legal advice or counseling about issues related to legal representation. In-house counsel must be able to identify, craft, and preserve privileged communications. Adversaries seeking to discover communications involving in-house attorneys can get them in one of at least two ways. They can prove that the communications were not privileged in the first place, or that the privilege that attached to the communication has been waived. A. Identifying and Crafting Privileged Communications It isn t always easy to determine what communications are intended to be privileged, or which ones warrant protection of the attorney client privilege. As recently as 10 years ago, the Florida Supreme Court stated: The question of what constitutes a confidential communication in the corporate context, and under what circumstances such a communication should be protected, presents a quandary unresolved by this court or the United States Supreme Court. Southern Bell Tel & Tel. Co. v. Deason, 632 So. 2d 1377, 1382 (Fla. 1994). How can the in-house lawyer and client have any confidence that a given communication will be treated as privileged if the courts that will ultimately decide the issue are not sure themselves? As a starting point, the lawyer should ensure that the fundamentals of privileged communications are present with respect to each communication the client wishes to protect. First, the communication must meet the ordinary standards for the application of the attorney-client privilege. Allen D. Ullberg & George A. Kuhlman, Legal Ethics: Current Trends Concerning In-House Attorney- Client Privilege, SC40 ALI-ABA 379, 392 (March 1998). Under the typical standard, the privilege applies if: 1. The asserted holder of the privilege is or sought to become a client; 2. The person to whom the communication was made is (1) a lawyer or the lawyer s subordinate and (2) was acting as a lawyer in connection with the communication; Page 4

5 3. The communication relates to a fact of which the attorney was informed: a. by the client; b. without the presence of strangers; c. for the purpose of obtaining primarily an opinion i. on law; ii. legal services; or iii. assistance in some legal proceeding; and not d. for the purpose of committing a crime or tort; and 4. The privilege has been (1) claimed and (2) not waived by the client. United States v. United Shoe Mach., 89 F. Supp. 357, (D. Mass 1950) (rejected on other grounds). Second, in the corporate context, courts have created an additional set of considerations that account for the unique circumstances surrounding an in-house counsel s hybrid role. Ullberg & Kuhlman, SC40 ALI-ABA at 393. The most well-known is the Upjohn test, which stems from the United States Supreme Court case Upjohn v. United States, 449 U.S. 383 (1981). Under the Upjohn test, a court examines six factors to determine whether a corporate communication involving attorneys is privileged: 1. Whether the communications were made by corporate employees to corporate counsel upon order of superiors in order for the corporation to secure legal advice from counsel; 2. Whether the information needed by corporate counsel to formulate legal advice was not available to upper level management; 3. Whether the information communicated concerned matters within the scope of the employee s corporate duties; 4. Whether the employees were aware that the reason for communications with counsel so the corporation could obtain legal advice; Page 5

6 5. Whether the communications were ordered to be kept confidential and they remained confidential; 6. The identity and resources of the opposing party. Ullberg & Kuhlman, SC40 ALI-ABA at 393. Because the Court in Upjohn was construing Federal Rule of Evidence 501, the decision is not binding on the states. Id. In fact, a number of states have rejected the Upjohn test in favor of other approaches. Id. (noting that Alaska, Arkansas, Florida, Hawaii, Illinois, Georgia, Maine, North Dakota, Oklahoma, Oregon, South Dakota, and Texas have all adopted different tests either by statute or decisional law). For example, Florida has adopted a version of the subject matter test for determining whether a corporation s communications are privileged. Under Florida s test, a corporate communication is protected if: 1. The communication would not have been made but for the contemplation of legal services; 2. The employee making the communication did so at the direction of his or her corporate superior; 3. The superior made the request of the employee as part of the corporation's effort to secure legal advice or services; 4. The content of the communication relates to the legal services being rendered, and the subject matter of the communication is within the scope of the employee's duties; 5. The communication is not disseminated beyond those persons who, because of the corporate structure, need to know its contents. Southern Bell, 632 So. 2d at Other courts apply a control group test, where the determination of whether the attorney-client privilege applies focuses on which corporate employee is involved in the communication: [I]f the employee making the communication, of whatever rank he may be, is in a position to control or even to take a substantial part in a decision about any action which the corporation may take upon the advice of the attorney, or if he is an authorized member of a body or group which has that Page 6

7 authority, then, in effect he is (or personifies) the corporation when he makes his disclosure to the lawyer and the privilege would apply. City of Philadelphia v. Westinghouse Elec. Corp., 210 F. Supp. 483, 485 (E.D. Pa. 1962). These authorities highlight another trap for the unwary in-house attorney: whether your communication was privileged will turn on what state s laws, or federal rule, may govern the disposition of that question. Regardless of the test they apply, courts tend to focus on whether the advice given was legal advice or business advice when deciding whether the attorney-client communication was privileged in the corporate context. Ullberg & Kuhlman, SC40 ALI-ABA at 395. Given the unique role of in-house attorneys, the advice they give often contains both legal and business advice, and often it is intermingled. Id. While many courts hold that a communication is privileged only if it is predominantly legal in nature, see e.g., Rossi v. Blue Cross & Blue Shield, 542 N.Y.S.2d 508, 511 (N.Y. 1989), there is no bright line rule. Ullberg & Kuhlman, SC40 ALI-ABA at 395. Courts also consider a number of other factors when determining whether to extend a privilege to mixed communications, such as: Id. at For what purpose the attorney was contacted (i.e., business transaction, negotiation, imminent litigation, etc.); 2. When and where the communications took place; 3. Whether the attorney holds any other offices in the company; and 4. Whether the communication conveys any legal research. B. Maintaining the Privilege Successfully attaching the attorney-client privilege to a communication is not the end of the process in fact, it is only the beginning. After such a communication comes into existence, it must be guarded, maintained, and preserved. That job falls not just on the client, but on the lawyer as well. Attorneys owe their clients the ethical duty to preserve confidential communications and protect them from subsequent disclosure. Page 7

8 One way to prevent waiver is to make it clear on the face of the document that a given communication is privileged. If their communications are written, or if oral communications are memorialized in writing, clients and lawyers should ensure that the writing looks privileged. When a communication appears privileged on its face, the party seeking disclosure will often bear the burden of proving it is not. See e.g. Shell Oil Co. v. Par Four Partnership, 638 So. 2d 1050, (Fla. 5th DCA 1994). In-house counsel should make sure each document is labeled or titled to reflect its confidential status, and that the attorney participating in the communication did so in his or her capacity as attorney for the company client. Ullberg & Kuhlman, SC40 ALI-ABA at 402. Counsel should implement a policy for what the appropriate label should say (e.g., Privileged Attorney-Client Communication, Confidential, or Highly Confidential ) and under what circumstances it should be used. Id. Also, the company should designate legal titles for all legal personnel, and such personnel should use letterhead, stationary, note pads, and s that indicate their legal capacity. Id. Confidential documents should also be kept or stored in a fashion that indicates their privileged status. Legal files and documents should be kept separate and distinct from other business files. Id. Procedures should be enacted for retaining the confidentiality of legal communications, including segregation, cabinet locks, and computer passwords. Id. Access to these communications should be limited to legal personnel and only those others who play an integral role in the legal department. A necessary corollary to the make-it-look-privileged strategy for maintaining the attorney-client privilege is: and don t waive it. Disclosure to third parties will waive an otherwise confidential communication, and such waivers will sometimes result in ethical violations. Privileged communications should not be shared internally or externally with anyone that is not clearly a party to the privilege or the communication itself. Finally, in-house counsel should note that it is the entire board of directors that holds the privilege over confidential communications, and therefore an individual officer or director cannot waive the privilege contrary to the wishes of the company s board. Tail of the Pup, Inc. v. Webb, 528 So. 2d 506, 507 (Fla. 2d DCA 1988). Page 8

9 III. Conflicts of Interest A. Intended Multiple Representations Rule 1.7(a) of the Model Rule of Professional Conduct sets out two kinds of impermissible conflicts of interest, both of which pose a potential problem for in-house attorneys. One of these conflicts occurs if the representation of a client 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. Rule 1.7(a)(2). When an in-house attorney represents both an entity and an individual employee, the attorney will almost always be materially limited by his or her responsibilities to the other. Moore, 39 S. Tex. L. Rev. at 515. In litigation situations, for example, a conflict will most certainly arise when both the entity and the employee are named defendants, or when the employee is the subject of an investigation in which the entity is a likely target. Id. at 516. In such circumstances, an attorney s representation becomes materially limited due to the likelihood of one or both of the clients eventually pointing the finger at the other. Id. (citing as an example where the employer/entity seeks to avoid liability by establishing that the employee was acting outside the scope of his or her employment). When the positions of the clients become adverse, this constitutes a direct conflict regardless of whether the attorney s representation will become materially limited. Rule 1.7(a)(1) (stating that a conflict exists if the representation of one client will be directly adverse to another client ). A problem also arises where a represented employee gives the in-house counsel information which, if disclosed to the entityemployer, would warrant the termination of the employee. Id. at 522. Another potential conflict arises where an in-house attorney negotiates a transaction between the entity and the employee, such as a compensation agreement. Id. at 515. In these situations, the attorney s duty of loyalty to each client necessarily limits her ability to zealously advocate the best possible terms for the other client. Id. Even when in-house counsel is solely representing the employee in particular litigation, the danger of a conflict of interest exists if the entity has agreed to pay for the representation. Rule 1.8(f) of the Model Rules of Professional Conduct states that [a] lawyer shall not accept compensation for representing a client from one other than the client unless, among other things, there is no interference with the lawyer s independence of professional judgment or with the client-lawyer relationship. Retaining his or her independence of professional judgment becomes difficult when the corporate client funds the representation and attempts to control or direct the representation as well. Page 9

10 Moore, 39 S. Tex. L. Rev. at 533. If the entity exerts control to the extent that the in-house attorney considers any interests other than the best interest of the employee-client, then an impermissible conflict has arisen. Id. at 534. Even where a conflict exists whether because the clients positions are directly adverse or the attorney s representation of one client will be materially limited Rule 1.7(b) provides that an attorney may continue to represent a client if certain requirements are met, one of which is to obtain informed written consent from all affected clients. There are some representations, however, that are non-consentable. For example, where it becomes apparent that it will be in the best interests of one of the clients to take an adverse position toward the other, the clients consent is likely invalid. Moore, 39 S. Tex. L. Rev. at 518; see also Rule 1.7(b)(3) (lawyer may continue despite a conflict only if the representation of the client does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation ). Also, where the relationship between the in-house counsel and the entity is particularly close (e.g., there is a long-standing relationship between the two), it is likely that the attorney will favor the interests of the company over the interests of the employee. Moore, 39 S. Tex. L. Rev. at 519. In such situations, the employee s consent may be ineffective as well. See Rule 1.7(b)(1) (lawyer may continue representation despite a conflict only if he or she reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client ). In-house counsel should be aware that even if the representation is a consentable one, the consent must be informed. This requires the attorney to adequately disclose the nature of the dual representation and the potential issues that may arise as a result. With respect to obtaining informed consent from the employee, some commentators suggest that [f]irst and foremost, the individual should understand that there can be no expectation of confidentiality; all information given to the attorney will be shared with the company and vice versa. Moore, 39 S. Tex. L. Rev. at 525. The attorney should also inform the employee of the various reasons why retaining independent counsel might be favorable, such as the strategic options that may be foreclosed by joint representation, the danger of the lawyer favoring the interests of the company (even if subconsciously), and the possibility that the interests of the company may become directly adverse to the employee s (which would require the employee to seek independent counsel anyway). Id. at With regard to obtaining informed consent from the company, counsel s disclosure should include the risk of subsequent disqualification from continuing to represent the entity, and any other factors that may indicate an inclination to favor the employee s interests (e.g., close relationship with senior management employee). Id. at Page 10

11 B. Unintended Multiple Representations When the in-house attorney unintentionally represents both the company and the employee, conflicts of interest pose a dangerous problem. As discussed above, an in-house attorney is particularly susceptible to creating unintentional attorney-client relationships with employees by, for example, becoming involved in internal investigations and handling quasi-business/personal matters. When a dispute arises, a judge or disciplinary authority determines retroactively whether an attorney-client relationship was formed, and conflicts of interest may have arisen that the in-house counsel did not even realize he or she had. Such conflicts may result in disqualification. Even when the attorney realizes before a dispute arises that he or she has unintentionally created an attorney-client relationship with an employee, and withdraws from representing the employee, disqualification may still result. Model Rule of Professional Conduct 1.9(a) forbids a lawyer from representing a client in the same or a substantially related matter in which the lawyer represented a former client, and where the current client s interests are materially adverse to the former client s interests, unless the lawyer obtains the former client s informed consent in writing. Therefore, an attorney may not always be able to continue representing the company after he withdraws from an unintended representation of an employee. C. Potential Consequence of Conflict: Disqualification of Entire Legal Department Avoiding conflicts of interest is especially important for in-house counsel in light of the drastic consequences that result from counsel being disqualified from continued representation of the company. Model Rule of Professional Conduct 1.10(a) imputes conflicts of interest created by one attorney to the attorney s entire corporate legal department. Moore, 39 S. Tex. L. Rev. at 522. Therefore, if an in-house attorney is disqualified from representing the company, so is the entire company legal department. Imputation of a conflict presents a particularly serious problem for organizational clients. Disqualification of the entire legal department renders a branch of the company essentially worthless (at least with respect to the matter at hand). Additionally, the disqualification not only prohibits the in-house lawyers from handling the matter, but it suggests that [they] may be barred from even managing the representation, a role which has gained increased importance in recent years. Id. at Page 11

12 IV. Unauthorized Practice of Law Even where conflict rules allow an in-house attorney to represent a company employee, the attorney must not violate still other rules: those prohibiting the unauthorized practice of law. Just like an outside lawyer, an in-house attorney licensed to practice law in one state may not represent a client, including corporate employees in a matter in another state. Although many states have rules that allow in-house lawyers who are not licensed in that state to represent their corporate employers without engaging in the unauthorized practice of law, these rules do not extend that privilege to the representation of individual employees. These situations actually pose a threat of unauthorized practice of law for both the in-house attorney and the company client. Obviously, when the attorney represents a company employee in a state in which he or she is not admitted, the attorney is committing the unauthorized practice of law. But the corporation itself is also guilty of unauthorized practice vicariously, through the actions of the in-house attorney as its agent. Moore, 39 S. Tex. L. Rev. at 512. V. Following Rule 1.13 Model Rule of Professional Conduct 1.13 sets out a process that a lawyer must follow when a constituent of the entity the attorney represents (director, officer, employee, etc.) acts in a way that is a violation of law which reasonably might be imputed to the organization, and is likely to result in substantial injury to the organization. The rule requires a lawyer faced with such a situation to proceed as is reasonably necessary in the best interest of the organization, but at the same time minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization. Rule 1.13 does not provide a safe harbor for the attorney who chooses to become a whistle-blower. Sally R. Weaver, Ethical Dilemmas of Corporate Counsel: A Structural and Contextual Analysis, 46 Emory L.J. 1023, 1033 (1997). Given this lack of a safe harbor, the decision to whistle blow or take other similar action as required by the rule can result in serious consequences for an in-house lawyer. Id. at Circumstances to which this rule applies may place the in-house lawyer at risk to not only lose a client, but also to lose his or her job. Id. at In-house counsel can minimize their exposure to such risks by making sure the company management understands counsel s role as attorney for the organization and the responsibilities that accompany that role: Page 12

13 First, corporate counsel should define clearly their role as counsel for the organization rather than for any of the individual constituents of the entity. It is helpful to reinforce this distinction periodically.... 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 [as discussed above] to constituents of the organization.... [The rule] 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. 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 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. 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. Id. at VI. Serving as Both In-House Counsel and Director In-house attorneys who also serve as directors of the company client face several ethical concerns. Such concerns include whether the attorney-client privilege attaches to certain communications at board meetings, client confidentiality, and conflicts of interest, among other things. In-house attorney who act in this dual role should be very familiar with the ABA Standing Committee on Ethics and Professional Responsibility Opinion , which directly and comprehensively discusses these ethical concerns. VII. Legal Malpractice Like their outside counterparts, in-house lawyers must be evervigilant to avoid exposing themselves to claims of legal malpractice. Page 13

14 However, in-house attorneys face issues relating to potential legal malpractice situations that outside lawyers do not. Although many corporate attorneys purchase malpractice insurance, many others do not. Even for those that have insurance, such coverage frequently only extends to legal advice to and representation of the company and its employees. If the attorney helps someone outside the company, or unintentionally creates an attorney-client relationship with a non-employee, a legal malpractice claim arising out of this type of representation may well be self-insured. Also, in-house attorneys should be conscious of the effect that committing malpractice may have on their employment relationship with the company. When an in-house attorney commits malpractice, he or she exposes the employer to vicarious liability for the damages, which may or may not be insured. Page 14