© 2014 Fox Rothschild

CORPORATE COUNSEL:IDENTIFYING THE CLIENT

Patrick L. Abramowich, Esquire

Who Is Corporate Counsel’s Client?

• Pennsylvania Rule of Professional Conduct1.13(a): “A lawyer employed or retained by anorganization represents the organization actingthrough its duly authorized constituents.”

• Comment [1]: “An organizational client is a legalentity, but it cannot act except through its officers,directors, employees, shareholders and otherconstituents. Officers, directors, employees andshareholders are the constituents of the corporateorganizational client.”

Who is Corporate Counsel’s Client?

Bottom Line: The client is the corporation, not itsconstituents.

• Generally speaking, the in-house attorney does notowe fiduciary duties to officers, directors, employees,or shareholders.

• Generally speaking, the in-house attorney cannot besued for malpractice by constituents.

• Most courts hold that corporate constituents are notintended third-party beneficiaries of services providedby corporate counsel. E.g., Murray v. Metro. Life Ins.Co., 583 F.3d 173 (2d Cir. 2009)

Who Is Corporate Counsel’s Client?

• Who are an organization’s “duly authorizedconstituents”?

– Restatement (Third) of the Law Governing Lawyers § 96(1)(2000), cmt. (d): The determination depends on the lawgoverning the form of business organization and the internalstructure set out in governing documents.

– Shareholders elect the directors; the directors manage thecorporation; directors delegate fiduciary responsibilities to theofficers.

• 15 Pa.C.S.A. § 1712(a) and (c) sets forth directors’ and officers’standards of care, including a director’s right to rely in good faith on theadvice of counsel.

• 15 Pa.C.S.A. § 1715(d): Presumption that corporate director acts in thebest interests of the corporation absent a breach of fiduciary duty, lackof good faith, or self-dealing.

Special Challengesfor In-House Counsel

• Officers and directors control in-house counsel’semployment and compensation

• Develop close relationships, and oftenfriendships, with corporate officers andemployees

• Extensive access to confidential information

• Dual role as part of the management team

Intracorporate Disputes

In-house attorney’s obligations when disputes developbetween corporate management:

– Lawyers may not substitute their judgment for that of duly-authorized managers, since the lawyer takes directionfrom the client. Pa.R.P.C. 1.2(a).

• Rule 1.13, cmt. [3]: “When constituents of the organization makedecisions for it, the decisions ordinarily must be accepted by thelawyer even if their utility or prudence is doubtful. Decisionsconcerning policy and operations, including ones entailing seriousrisk, are not as such in the lawyer’s province.”

– Lawyers must remain neutral and refrain from taking sides.E.g., In re: Wise, 740 N.E.2d 946 (Mass. 2000)

Intracorporate Disputes

– Lawyers may not assist an officer or director inbreaching their fiduciary duties to the corporation(e.g., usurping business opportunities) or otherconstituents (e.g., minority shareholders)

– If governing laws, internal documents, andreasonable efforts cannot resolve the dispute, thelawyer’s only option may be to withdraw.

“Reporting Up”

• Pennsylvania Rule of Professional Conduct 1.13(b)requires the lawyer to “proceed as is reasonablynecessary in the best interest of the organization” whena constituent acts in a manner that violates a legalobligation to the corporation or is a violation of lawreasonably imputed to the corporation, and likely toresult in substantial injury to the organization.

– Steps may include: (i) asking for reconsideration; (ii) advisingthat a second opinion be obtained; or (iii) reporting the decisionup the organizational hierarchy.

The Unintended Client

• Under Pennsylvania law, an implied attorney-clientrelationship will be found if: (i) purported clientsought advice; (ii) advice was within attorney’sprofessional competence; (iii) attorney expressly orimpliedly agreed to render assistance; and (iv) it wasreasonable for putative client to believe that theattorney was representing him.

• Kirschner v. K&L Gates, LLP, 46 A.3d 737, 748-49(Pa. Super. Ct. 2012); Cost v. Cost, 677 A.2d 1250,1254 (Pa. Super. Ct. 1996).

When Does an Attorney-ClientRelationship Arise?

• First Republic Bank v. Brand, 51 Pa. D.&C.4th

167 (April 30, 2001): Whether a corporation’scounsel represented shareholders of corporatetarget depends on the facts and circumstances.1. Was the shareholder separately represented?

2. Did the shareholder seek advice on particular orindividual matters?

3. Did the attorney have access to shareholder’sconfidential information?

4. Did the attorney bill and receive payment from theshareholder?

When Does an Attorney-ClientRelationship Arise?

5. Was the corporation closely held?6. Could the shareholder reasonably believe that the

attorney was acting as his individual counsel?7. Did the attorney affirmatively assume a duty by express

agreement or implication?8. Were the matters within the attorney’s professional

competence?9. Did the attorney enter into a fee arrangement?10. Was there evidence of reliance by the shareholder?

-- Does not matter if the shareholder benefitted fromthe attorney’s work.

Kirschner

• Pennsylvania Superior Court held that animplied attorney-client relationship existedbetween K&L Gates and LeNature’s.

• Engagement letter limited engagement tospecial committee of the board of directors and“no other individual or entity, including theCompany or any affiliated entity, shareholder,director, officer or employee of the Company…”

Kirschner

• Special Committee was convened by the Board of Directors toinvestigate alleged financial improprieties on behalf of thecompany.

• Under Delaware law, the Committee owed fiduciary duties toLeNature’s and could not limit them.

• K&L Gates presented its report to the CEO involved in thealleged fraud, who was not a member of the Committee, andlater to the full Board of Directors.

• Case settled in January for $23.8 million.

Unintended Client #1

• The Constituent

– Pennsylvania Rule of Professional Conduct1.13(e): “A lawyer representing an organization mayalso represent any of its directors, officers,employees, members, shareholders or otherconstituents, subject to the provisons of Rule 1.7[Conflicts of Interest: Current Clients]”

Intentionally Representing aConstituent

• Typical scenario involves advising the constituent in situations where thecorporation and constituent may both be liable for the constituent’s act oromission.

• Best practices:

– Prepare a written engagement agreement that, as applicable: (i) limits the scope of theengagement (Rule 1.2(c)); (ii) discloses any potential conflict of interest; (iii) states thatthe attorney will terminate her representation of the constituent if any actual conflict ofinterest develops between the corporation and constituent; (iv) consents to theattorney’s continued representation of the corporation in the event that the attorneymust withdrawal from representing the constituent; (v) acknowledges that the attorneywill utilize any confidential information disclosed by the constituent on behalf of thecorporation, which will not be privileged; (vi) addresses how fees and costs will bepaid (Rule 1.5(b)); and (vii) advises the constituent of the availability of other counseland to have the agreement reviewed by independent counsel.

– Review your professional liability policy to determine if the representation will becovered.

Avoiding the UnintentionalConstituent Client

• Pennsylvania Rule of Professional Conduct 1.13(d): “In dealing with anorganization’s directors, officers, employees, members, shareholders orother constituents, a lawyer shall explain the identity of the client when thelawyer knows or reasonably should know that the organization’s interestsare adverse to those of the constituents with whom the lawyer is dealing.”

– Comment [7] - There are times when the organization’s interest may be or becomeadverse to those of one or more of its constituents. In such circumstances the lawyershould advise any constituent, whose interest the lawyer finds adverse to that of theorganization, of the conflict or potential conflict of interest, that the lawyer cannotrepresent such constituent, and that such person may wish to obtain independentrepresentation. Care must be taken to assure that the individual understands that,when there is such adversity of interest, the lawyer for the organization cannot providelegal representation for that constituent individual, and that discussions between thelawyer for the organization and the individual may not be privileged.

– Comment [8] - Whether such a warning should be given by the lawyer for theorganization to any constituent individual may turn on the facts of each case.

Avoiding the UnintentionalConstituent Client

• Pennsylvania Rule of Professional Conduct 4.3 – Dealing withUnrepresented Persons

• (a) In dealing on behalf of a client with a person who is not represented bycounsel, a lawyer shall not state or imply that the lawyer is disinterested.

• (b) During the course of a lawyer's representation of a client, a lawyer shallnot give advice to a person who is not represented by a lawyer, other thanthe advice to secure counsel, if the lawyer knows or reasonably shouldknow the interests of such person are or have a reasonable possibility ofbeing in conflict with the interests of the lawyer's client.

• (c) When the lawyer knows or reasonably should know that theunrepresented person misunderstands the lawyer's role in the matter, thelawyer should make reasonable efforts to correct the misunderstanding.

Avoiding the UnintentionalConstituent Client

• Upjohn or “Corporate Miranda” Warnings

– Upjohn Co. v. United States, 449 U.S. 383 (1981) – SupremeCourt extended corporate privilege beyond the “control group” tonon-management employees.

– To ensure that the corporation, and not the employee, controlsthe privilege applicable to investigatory interviews, corporatecounsel must state that she represents the corporation and notthe individual employee, that the privilege belongs to thecorporation, and that the corporation may waive the privilege anddisclose the substance of the interview to third parties.

– Upjohn warnings should be signed by the employee orcontemporaneously documented.

Unintended Client #2

• The Corporate Subsidiary or Affiliate

– ABA Formal Ethics Opinion 95-390, Conflicts of Interest in theCorporate Family Context (1995): “[W]hether a lawyerrepresents a corporate affiliate of his client, for purposes of Rule1.7, depends not upon any clearcut per se rule but rather uponthe particular circumstances.” Applies a reasonable beliefstandard.

– Rule 1.7, Comment [34]: “A lawyer who represents a corporationor other organization does not, by virtue of that representation,necessarily represent any constituent or affiliated organization,such as parent or subsidiary.”

Facts Affecting Representation of aSubsidiary or Affiliate

• Typical scenario: Integrated legal department ofparent provides in-house legal services to parentand subsidiaries

• Factors supporting the existence of a lawyer-client relationship are shared directors, sharedofficers and management, shared office space,access to confidential information, observance ofcorporate formalities, shared corporate services,and integrated infrastructure

The Problem -- Teleglobe

• Teleglobe USA, Inc., et al. v. BCE, Inc., 493 F.3d 345 (3d Cir.2007)

• Bell Canada Enterprises, Inc. (“BCE”) acquired Teleglobe andsubsidiaries and caused them to make massive investmentsin fiber optic cable networks.

• When the market failed to support the investments, BCE’s in-house counsel advised both BCE and Teleglobe and itssubsidiaries about “Project X,” a “reassessment” ofTeleglobe’s investment strategy.

• BCE pulled support for the investments, leading shortlythereafter to Teleglobe’s bankruptcy.

Teleglobe

• The Third Circuit held that “for purposes of the attorneyclient privilege, the subsidiary and the parent are jointclients, each of whom has an interest in the privilegedcommunications.” 493 F.3d at 370.

• While neither BCE nor Teleglobe could waive the jointprivilege as to third parties, the privilege could not beasserted in litigation against each other.

• Lesson – beware the situation where a subsidiary oraffiliate later becomes adverse, e.g. through a sale orspin-off.

Avoiding the UnintendedSubsidiary or Affiliate Client

• Avoid undertaking joint representations exceptwhen strictly necessary

• Limit the scope of any representation of asubsidiary or affiliate

• Terminate a joint representation as soon as anyreasonable prospect of adversity develops andensure that the subsidiary or affiliate obtainsindependent counsel

Conclusion

• In sum…

– Clarify your role as counsel

– Document

– The facts and circumstances matter

Patrick L. Abramowich, Esquire

pabramowich@foxrothschild.com