May 2000

Ethics and the Law
The Sad Story of an In-House Lawyer

by Barrie Althoff, WSBA Chief Disciplinary Counsel

This article looks at some employment law ethical issues facing an in-house counsel at a start-up company. It presents a hypothetical situation and examines some common ethical issues under Washington's Rules of Professional Conduct.

Last year Joan (all names are fictitious) graduated from law school, was admitted to the Eastcoast State Bar, and immediately started work at a handsome salary with stock options as sole in-house counsel and vice-president of personnel for SuperMegaRock.com, a small start-up corporation located in SillyCons Valley, Westcoast state. The company, formed one year earlier by its president, Bob Zooks, a flamboyant former rock musician, seeks to be the dominant rock music Internet site to attract advertisers wanting to reach a youthful audience.

Joan got the job on a tip from her long-time friend Sally, the company's vice-president and chief financial officer, whom Bob hired immediately after she got her M.B.A. After Joan began work at the company, Sally told her that when Bob hired her (Sally), he said he only hired young women for the company because it made him feel young, and besides she was really beautiful. Joan replied that she, too, really liked working with young people.

Joan liked her work and coworkers. She told Sally she felt flattered and trusted when Bob consulted her, often late at night, about complex confidential personal legal matters involving his ex-wife, even though, as Joan admitted, she did not always understand the legal issues. Bob told her several times he was glad she was representing him personally. She felt the same way when Sally asked her advice on personal legal problems. Sometimes, Joan asked Sally's advice on Bob's personal legal matters.

The day before the scheduled closing of the company's initial public securities offering, Sally and Joan had lunch together at a very popular and always crowded restaurant. Joan noticed that Sally looked troubled. Their conversation at the restaurant went like this:

"Joan, you've been my lawyer and my long-time friend, and I really need to talk to you about some things that have come up in my job and life."

"Sally, you know you can rely on me to keep a secret and help you. Why, we've been best friends for years and I owe my job to you!"

"Thanks Joan. I knew I could rely on you. I'm kind of mixed up on something. Tomorrow, when SuperMegaRock.com goes public, we'll both be gazillionaires with our stock options! Well, maybe not that rich, but at least millionaires! Can you believe it? Here we are, just barely out of school, and we can soon retire!"

"Yes! It's hard to believe, isn't it? And I owe it all to you, Sally! Thanks!"

"But, you know, Joan, while I want the company to succeed and want us to get rich, I'm scared. I don't want to get into trouble. When I first got here, Bob showed me how to keep the financial reports. We were losing lots of money at the time and he convinced me no one would be hurt if we jiggled the numbers just a little to make things look better. He said if we didn't, everyone would lose their jobs. I didn't like it, but I didn't think a little adjustment would hurt much, and, besides, I really wanted this job. When I signed off on the reports, Bob always took them from me saying he would personally walk them over to our outside auditors.

"Well, Bob knew how much I wanted the job. He kept telling me I needed to be a team player. I soon found out what he meant by that. He finally wore me down, so I've been sleeping with him for three months. I don't like it, but I want the job.

"But I don't want you to tell anyone about it. I'm so embarrassed, especially since Amanda, whom Bob fired last month from the shipping department, told me in confidence last night that Bob had also repeatedly demanded she become a team player. Amanda pretended she didn't know what Bob meant, but Bob kept sending her suggestive notes, and finally he told her explicitly what he wanted. Amanda refused and was fired on the spot. I told her I wouldn't tell anyone, so just pretend I didn't say anything about her. But it just makes me so mad!"

Joan, her hand trembling, reaches for her wine glass and takes a long drink as Sally goes on.

"Yesterday afternoon I was doing a final numbers check for tomorrow's closing. The numbers were way off. They simply didn't make sense. This morning, when Bob was out, I found in his office copies of the financial reports he gave to the outside auditors. I compared them with my reports. Here they all are. I want you to keep them to protect me. I couldn't believe it! Bob changed all my reports to show that the company was making big money when in fact it was losing money. All those false reports have my name on them! And if that's not enough, as I walked into the restaurant today, I saw Bob's ex-wife. She had a silly smirk on her face. Without saying a word, she handed me this rumpled paper and walked off. It shows Bob was convicted and served time for embezzlement eight years ago! That sure isn't in the company's offering prospectus! Joan, I'm so very glad you're my lawyer and will look out for me!"

Joan, turning very pale, reaches again for her wine glass as she decides what to say and do.

What should Joan say and do? Does Joan have any ethical problems? What are they? Assume that Eastcoast state and Westcoast state have each adopted Rules of Professional Conduct identical to Washington's.

Joan should first finish her glass of wine, relish it, order another, and perhaps a third. She should then reach for her cellular phone and dial ETHICS-101 for immediate help as she peruses help-wanted advertisements. When she gets home that night, if she reaches for another glass of wine, she should instead call her bar association's Lawyers' Assistance Program. She should then get a good night's sleep in anticipation of her search for a new career. In the morning, she should think about some of the following ethical problems which she needs to resolve.

Joan, admitted to the Eastcoast State Bar, practices as in-house counsel in Westcoast state for SuperMegaRock.com. She is not licensed to practice in Westcoast state.

Whether an in-house counsel needs to be licensed to practice in each jurisdiction in which he or she gives legal advice varies from jurisdiction to jurisdiction. Jurisdictions usually require in-house counsel to be licensed in at least one jurisdiction. Thus, Joan could not have simply graduated from law school and become in-house counsel without having been licensed to practice in any jurisdiction. Some jurisdictions require licensing in their jurisdiction only if the in-house lawyer engages in litigation, while others require it whether the in-house lawyer advises the corporate client or represents it in litigation. Some jurisdictions, like Washington state, permit a lawyer already licensed in one jurisdiction to choose either a full license to practice by meeting the usual full admissions requirements, or a limited license to practice with reduced admission requirements. Washington APR 8(f). Limited licensing requires the in-house lawyer to limit his or her practice exclusively for the benefit of the corporation by which he or she is employed. Some states, such as Washington, also provide reciprocal admissions for lawyers licensed in other jurisdictions with corresponding reciprocal admissions provisions.

Jurisdictions permitting an in-house lawyer to practice law without being licensed in their specific jurisdiction, or permitting a limited license for an in-house lawyer, do so only for the lawyer's practice with the corporate entity. If the lawyer represents anyone other than the corporate entity, the in-house lawyer must be licensed to practice law in that jurisdiction.

Joan provided legal advice to the company, to Bob and to Sally, all of whom think of Joan as their lawyer. Even if Joan did not have to be licensed in Westcoast state to practice law exclusively for the company, by providing legal advice to Bob and Sally she lost any in-house lawyer exemption. She is thus likely violating West-coast state's criminal statute governing the unauthorized practice of law. Her unlicensed representation of Bob and Sally in Westcoast state also likely violates Eastcoast state's RPC 5.5(a), which prohibits a lawyer from practicing law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction. This violation likely subjects Joan to disciplinary action in Eastcoast state.

We do not know whether Joan's rendering of personal legal services to Bob and Sally was merely a personal decision by Joan, or whether it was a result of a formal or informal company plan or practice to make legal counsel available to employees as a fringe benefit of employment. If the company has such a plan or practice, it may itself be engaged in the unauthorized practice of law through its unlicensed agent, Joan. Thus, Joan may not only be engaged herself in the unauthorized practice of law, but may also be assisting another person (the company) in the unauthorized practice of law. RPC 5.5(b) prohibits a lawyer from assisting a person who is not a member of the bar in the performance of activity that constitutes the unauthorized practice of law. This violation may also subject Joan to disciplinary action in Eastcoast state.

Joan has ethics problems from her multiple client representations and her failure to clarify who, at any given moment, is her client and to whom she has duties of loyalty, independence and confidentiality. Her dual capacity as in-house lawyer and as vice-president of personnel magnify these problems.

Several RPC provisions, principally RPC 1.7 and RPC 1.8, limit Joan's ability to represent multiple clients. RPC 1.7(a) prohibits her from representing a client if the representation will be directly adverse to another client, unless certain requirements are met. RPC 1.7(b) prohibits her from representing a client if the representation may be materially limited by her responsibilities to another client or to a third person, or by her own interests, unless certain requirements are met. RPC 1.8 lists various specific prohibited transactions. The American Bar Association's RPC 1.13, not adopted by Washington, clarifies that when she represents an organization, she represents the entity through its representatives (directors and officers) and does not personally represent the representatives.

Conflict of interest rules are routinely enforced more through civil litigation than through the disciplinary process. The immediate practical remedy for litigation conflicts is often disqualification from the conflicting representations and possible loss of legal fees related to the representations. In non-litigation contexts, the conflict is often less obvious and more likely to be discovered after significant investment of time or resources in the representation. In part, this is because lawyers tend to treat conflicts-checking as a one-time task rather than a constant surveillance of each representation as persons or entities fade in and out.

If Joan's representation of Bob and Sally is limited to their respective personal, non-company legal matters and does not relate to their positions as employees of the company, Joan could probably represent them (unless those personal representations conflict with one another, as discussed below) while also representing the company. In the course of the representations, however, what was initially not a conflict situation may become a conflict necessitating her withdrawal or disqualification from all representations, and possible discipline.

When Sally speaks to Joan at the restaurant, Joan's role is at first unclear. Sally's initial statement that Joan has been her lawyer and long-time friend, and that she needs to consult Joan about some things that have come up in her job and life, suggests she is seeking a mixture of legal and personal advice from her lawyer friend. Joan's role as vice-president of personnel further complicates the issue. Joan should have been very alert to the ambiguity of her roles and have immediately clarified what she could talk to Sally about. Further, while Sally does not seem to be addressing Joan as the company's lawyer (as opposed to being Sally's own lawyer), some of Sally's comments (for example, about there being no disclosure in the company's prospectus about Bob's prior embezzlement conviction) could be read as being directed to Joan as the company's in-house lawyer. Sally's comments about age and gender discrimination and sexual harassment are relevant to Joan as both in-house lawyer and as vice-president of personnel. Sally's comments to Joan at the end of their conversation indicate that, by then, Sally thinks of Joan as her lawyer who is going to look out for her. Joan's multiple representations have firmly ensnared her in an ethics net.

Joan also has other conflicts problems. Since the conversation quickly turns to accounting irregularities in which Sally and Bob are both deeply involved, Joan has a conflict, since the interests of Sally, Bob and the company are all directly involved and are likely each opposed to the other. Since Joan is in-house counsel for the company and her client is the company as an entity, she cannot represent Sally (or Bob) as to their falsification of accounting records. Because of her conflicts, however, Joan would likely also be disqualified from representing the company in any action against Sally or Bob.

Joan is also conflicted as to Sally's disclosure of an unwanted sexual relationship with Bob, and of Amanda's being fired by Bob for refusing such a relationship. Sally's telling Joan not to disclose this information does not help Joan. Sally and Amanda (and likely others) have possible sexual harassment and gender- and age-discrimination claims against Bob and the company. Joan should have informed Sally at the beginning of their conversation that she represents the company and not Sally, and thus that she could not keep anything secret from her client, the company. At the same time, as vice-president of personnel, Joan needs to know the information about the possible claims. Joan's multiple conflicting roles make it impossible for her to represent the company, Sally or Bob.

Joan's representation of Bob in personal legal matters regarding his ex-spouse would likely disqualify Joan from representing the company or Sally (or Amanda) in any claims against Bob. When Bob's ex-spouse delivers to Sally evidence of Bob's embezzlement conviction, and Sally shows it to Joan, Joan is once again in a quandary. As lawyer for the company, Joan has an interest in disclosing this information to the company's management (which may or may not include Bob), especially in view of the company's imminent public offering of its securities. But as counsel for Bob, neither Joan nor Bob would likely want the information further disclosed.

Joan's stock options when the company is going public may give rise to a personal conflict of interest in her representing the company, Sally or Bob. If a financial interest may materially limit Joan's ability to represent the company, Sally or Bob, RPC 1.7(b) prohibits Joan from undertaking or continuing one or more of those representations. Mere ownership of a modest amount of company securities should not, of itself, be sufficient under RPC 1.7(b) to constitute a conflict between an in-house lawyer and the lawyer's representation of the company. Nor should the mere existence of the imminent public offering of itself be sufficient to limit Joan's ability to represent the company, subject to her specific responsibilities as to that offering. But even if her role as lawyer for the entity did not clearly preclude her from representing Bob or Sally as to their falsification of accounting records, her personal financial interest in seeing a successful public offering may limit her ability to do so.

Likewise, Joan's and Sally's long-time friendship may materially interfere with Joan's ability to represent the company, or for that matter, Bob, in connection with any of the accounting irregularities, possible sexual harassment, or age- or gender-discrimination claims.

Joan has effectively conflicted herself out of most of her work. She may not represent Sally (or Amanda) in any sexual harassment/discrimination claims they may have against the company or Bob, nor may she defend Sally against any claims the company or others might bring against her as to the accounting irregularities. Joan may not defend Bob against any sexual harassment, or age- or gender-discrimination claims that Sally, Amanda or other employees might have against Bob. Because of her conflicts, Joan may not represent the company in any claims it has against Bob or Sally as to accounting irregularities or their non-disclosure, or as to sexual harassment, or age- or gender-discrimination, nor could she defend the company in any claims others may have as to those issues.

Joan is obliged to respect the confidentiality of communications to her both under the RPCs and under the applicable attorney-client privilege statute.

ABA Model RPC 1.6 prohibits a lawyer from revealing "information relating to the representation of a client" unless the client consents after consultation, or the disclosure is impliedly authorized in order to carry out the representation, or in certain other cases. Washington's RPC 1.6 is similar, although instead of referring to "information relating to the representation of a client," it refers to the client's "confidences or secrets." The terminology section of Washington's RPCs states that "'confidence' refers to information protected by the attorney-client privilege under applicable law, and 'secret' refers to other information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client."

In addition to the ethical or professional obligation to maintain client confidences, all states have a separate evidentiary rule governing the attorney-client privilege assuring confidentiality as to certain attorney-client communications. The RPC provision is broader than the attorney-client privilege.

Joan's conduct suggests several RPC violations. Joan could ask Sally's advice on Bob's personal legal matters only if she needed information from Sally on Bob relevant to those matters, gave Sally only the least possible amount of information needed for her to respond, and advised her of the confidential nature of the inquiry. Otherwise, Joan will have breached RPC 1.6 since Sally is neither a lawyer being consulted nor on Joan's legal staff, nor would the "implied" authorization be applicable.

Joan also has confidentiality problems as to the restaurant meeting. Joan and Sally met at a very popular and always-crowded restaurant. This puts into doubt satisfaction of the requirement under the statutory attorney-client privilege that there be a reasonable expectation of confidentiality as to the communication. If the requirement is not met, then even assuming an attorney-client relationship existed between Joan and Sally as to their conversation, the conversation would be discoverable in litigation.

Joan's dual role as in-house lawyer and as vice-president of personnel also raises issues. Making a lawyer a vice-president of personnel does not insulate every communication to her as attorney-client privileged or as protected under RPC 1.6 if the lawyer was not in fact acting as a lawyer at the time. If Sally talked to Joan in her capacity as vice-president of personnel, there would be no attorney-client relationship and hence no attorney-client privilege, nor would the communications be protected by RPC 1.6. However, given the uncertainty of her roles and the fact that Sally thinks of Joan as her counsel, Joan could not disclose that information.

When Sally told Joan she needed to talk to her about some things in her job and life, Joan told Sally that Sally could rely on her to keep a secret and help her. Since Sally told Joan that the conversation involved her job, Joan, as in-house lawyer, should immediately have cautioned Sally that she represents the company and could not assure her that the information she provides could be kept confidential. Joan, knowing about the accounting irregularities, possible sexual harassment, and age- and gender-discrimination claims, was obliged to her client, the company, to act on that information. At the same time, Joan told Sally she would keep information confidential. Joan's obligations as lawyer for the company and as lawyer for Sally directly conflict with one another. She will have to withdraw from representation of both — no easy task for an in-house counsel with stock options on the eve of an initial public offering!

If Joan engaged in the unauthorized practice of law as to either the company, Sally or Bob, arguably there is no attorney-client evidentiary privilege or duty under RPC 1.6 to maintain client information, confidences or secrets. Such a contention would likely fail, however, since the rule and privilege usually apply where the client reasonably believes an attorney-client relationship exists even if the "attorney" is not licensed to practice law, or is an imposter. Sally's and Bob's beliefs that Joan is their attorney are reasonable, and thus both may rightfully claim their communications with Joan are privileged under the statute and protected under RPC 1.6. Thus, even if Joan or the company were unlawfully engaged in the practice of law, since Joan is not licensed to practice law in Westcoast state, communications with her would still be protected by the attorney-client privilege and RPC 1.6.

RPC 1.1 requires a lawyer to provide competent representation to a client. This requires the lawyer to have the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

Joan is barely out of law school and has been thrust into complex legal situations. Her conduct raises numerous questions as to her competence. She provided legal assistance to Bob on his complex legal matters involving his ex-spouse even though she did not always understand the legal issues. She also felt the same way when Sally asked for her advice on personal legal problems. Competent legal representation requires that she understand her client's matters.

Competent representation also requires a lawyer to have sufficient knowledge to recognize legal problems. Sally told Joan of Bob's statement to her that he only hired young women because it helped him stay young — and that Sally was beautiful. The statements and underlying hiring practices may support age- and gender-discrimination claims against the company, and raise a red flag as to possible sexual harassment. Joan's reply to Sally that she also liked to work with young people suggests that she missed the legal significance of Sally's comments.

Competent representation requires a lawyer to have knowledge of applicable court rules, including those governing the lawyer's ethical and professional responsibilities, such as those set out in the RPCs. Joan's repeated and multiple violations of her obligations to avoid conflicts of interest and to maintain client confidences and secrets evidences incompetence.

Joan's situation is not all that uncommon. An inexperienced lawyer is often thrust into situations which call for greater knowledge and experience than the lawyer possesses. This is especially true where the lawyer is in sole practice or is the only in-house lawyer. Even an experienced lawyer providing services for a fast-growing company, such as a dot-com company, may be sorely tested when cutting-edge legal and business issues appear daily with little or no time for considered responses. In such start-up companies, it is not unusual for management either to ignore legal issues, or to assert a lack of time or resources to deal with any "collateral issues" while the very existence of the company is at stake. Failure to deal with such basics, however, undermines the company's and management's future, and clouds their ability to attract capital and survive as a public corporation.

A lawyer in such a situation can meet her ethical obligation of competence only by having considerable experience or by study and consultation with knowledgeable experienced counsel. The isolation of a lawyer in sole practice or as the only in-house lawyer makes such study and consultation crucial.

The most basic ethical question a lawyer must ask and answer is "Who is my client?" Until the lawyer correctly answers that question, the lawyer is in great peril of violating his or her ethical duties. Among the most difficult ethical rules for a lawyer to master are the conflict of interest rules — the very rules that help a lawyer determine whether in fact he or she may safely and ethically represent a potential client. Unless the lawyer lives these rules, however, the lawyer will repeatedly be placed in situations of owing impossibly conflicting obligations to multiple clients. The lawyer likely will satisfy none of the clients and will subject himself or herself to malpractice suits and disciplinary action.

Back to table of contents >>