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FORMAL OPINION 2004-02
REPRESENTING CORPORATIONS AND THEIR CONSTITUENTS IN THE CONTEXT OF GOVERNMENTAL INVESTIGATIONS
Topic: Multiple Representations; Corporations and Corporate Constituents
The Standard Articulated in DR 5-105
The Disinterested Lawyer Test
Consent After Full Disclosure
Risks and Advantages from the Corporate Client’s Perspective
Risks and Advantages from the Employee’s Perspective
Structuring the Representation to Minimize Potential Adverse Consequences
Contractual Limits on Representation
Understandings with Respect to Privileged and Confidential Information
Co-Counsel or Shadow Counsel
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1. Although we have found one ethics opinion in New York relating to multiple representation in a corporate context, that opinion is limited to the relatively narrow issue of an attorney’s duties when perjury is committed by a corporate officer and the attorney represents both the officer and the corporation. NYSBA Comm. On Prof’l Ethics, Op. 674 (1995).
2. The issues that might arise at trial are distinct from those implicated at the investigative stage of a matter. In addition, whether counsel should be disqualified and whether counsel should have accepted or continued in multiple representation are separate questions. Thus, while decisions rendered in the context of litigated actions provide some assistance, they do not define the universe of issues relevant to deciding whether it is ethically permissible to undertake multiple representation of a corporate client and one or more employee clients in the context of a government investigation.
3. The guidelines established in this Opinion apply to situations where a lawyer represents or may represent an organization and also one of its constituents, regardless of whether the constituent is an officer, director, or employee, and we use those terms interchangeably throughout the Opinion. However, as with all circumstances in which disclosure and consent is or may be required, the degree of sophistication of the constituent will play a role in how detailed the discussions of those issues need to be.
4. In recent years, both the Department of Justice and the Securities and Exchange Commission, among other law enforcement agencies, have repeatedly cited the willingness of a corporation to cooperate with governmental investigations (which cooperation is sometimes requested to include waiver of the attorney-client privilege) as an important factor in determining whether to hold a corporation civilly or criminally liable for the actions of its officers or employees. See, e.g., United States Attorneys Manual, Criminal Resource Manual 161 (January 20, 2003 memorandum of Deputy Attorney General Larry D. Thompson announcing a revised set of principles governing federal prosecution of business organizations) (“The main focus of the revisions is increased emphasis on and scrutiny of the authenticity of a corporation’s cooperation.”); SEC Release No. 34-44969, 2001 WL 1301408 (October 23, 2001) (Report on the Relationship of Cooperation to Agency Enforcement Decisions) (describing the nature and extent of a company’s cooperation with the SEC as important factors to be taken into account in determining whether an enforcement action will be brought against the company).
5. See, e.g., Restatement (Third) of the Law Governing Lawyers § 14 & cmts. e-f (conditioning attorney-client relationship on client’s intent and lawyer’s failure to “manifest lack of consent,” and stating that failure of corporate counsel to clarify whom he represents “in circumstances calling for such a result might lead a lawyer to have enteredinto client-lawyer representations not intended by the lawyer”); 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, 506 (1998) (noting the inability of many corporate employees to understand the distinction between the lawyer’s role as corporate counsel and his role as counsel for the employee in his individual capacity); see also Rosman v. Shapiro, 653 F. Supp. 1441, 1445 (S.D.N.Y. 1987) (implying attorney-client relationship between corporate counsel and corporate officer where attorney represented close corporation and officer “reasonably believed that [attorney] was representing him”). But see Talvy v. Am. Red Cross, 205 A.D.2d 143, 149-50, 618 N.Y.S.2d 25, 29-30 (1st Dep’t 1994) (“Unless parties have expressly agreed otherwise in the circumstances of a particular matter, a lawyer for a corporation represents the corporation, not its employees.”), aff’d mem., 87 N.Y.2d 826, 661 N.E.2d 159 (1995).
6. DR 7-104(a)(2) states that “[d]uring the course of the representation of a client a lawyer shall not give advice to a party who is not represented by a lawyer, other than the advice to secure counsel, if the interests of such party are or have a reasonable possibility of being in conflict with the interests of the lawyer’s client.” However, since the employee will not typically be named in any related action actually being litigated before a tribunal while the governmental investigation is still pending, the employee, properly speaking, may not be a “party” within the meaning of this provision.
7. As noted above, DR 5-109(A) prescribes what corporate counsel must instruct a corporate constituent in cases where the interests of the corporation and the constituent “differ.” Where the interests of the entity and the interests of the constituent are actually adverse, however, the New York Code provides no additional guidance and requires nothing more. It nevertheless may be advisable to consider that in situations of actually adverse interests, the ABA Model Rules provide specific guidance not also provided by the New York Code. Comment 10 to ABA M.R. 1.13 states: “There are times when the organization’s interest may be or become adverse to those of [the constituent]. In such circumstances the lawyer should advise any constituent . . . that the lawyer cannot represent such constituent, and that such person may wish to obtain independent representation. Care must be taken to assure that the individual understands that, when there is such adversity of interest, the lawyer for the organization cannot provide legal representation for the constituent individual, and that discussion between the lawyer for the organization and the individual may not be privileged.” Of course, there are many situations in which the entity’s and the constituent’s interests will or might “differ” within the meaning of the New York Code yet such warnings and separate representation will not be necessary.
8. Less sophisticated corporate clients might also mistakenly believe that multiple representation carries the benefit of ensuring that their employees are represented by attorneys whose first loyalty is to the corporation. In such cases, it is incumbent upon corporate counsel to make clear to the corporation that he will owe a full and equal duty of loyalty to the employee clients, and that, if she is unable to discharge that duty, she will not be able to continue representing the employee clients.
9 . Although there is an exception to the obligations of DR 4-101 “where an attorney acts for two or more clients jointly,” the scope of this exception is not entirely clear. Some authorities suggest that it is limited “only to the evidentiary privilege and applies only in subsequent litigation between the clients.” NYSBA Comm. on Prof’l Ethics Op. 555 (1984). These sources stress that before confidences may be shared between jointly represented clients, “the circumstances must clearly demonstrate that it is fair to conclude that the clients have knowingly consented to the limited non-confidentiality.” Id. Courts, however, have appeared more willing to infer such consent from the nature of the relationships in a multiple representation. See Tekni-Plex, 89 N.Y.2d at 137, 674 N.E.2d at 670 (“Generally, where the same lawyer jointly represents two clients with respect to the same matter, the clients have no expectation that their confidences concerning the joint matter will remain secret from each other . . . .”); accord Talvy, 205 A.D.2d at 149-50, 618 N.Y.S.2d at 29-30. Given these differing approaches, the Committee believes that it will always be advisable, prior to sharing the confidences of one client with another, for the lawyer to obtain the client’s consent, after full disclosure. See DR 4-101(C)(1). This can be done in an engagement letter that sets out the understandings and agreements between the corporate client and the employee client with regard to the sharing and control of confidential information.
10. For an example of one such potential complication, see infra note 13.
11. Cost savings will not ordinarily be among the potential advantages to the employee client because the cost of separate counsel would in many, if not most, cases be borne by the corporation. Payment of such costs by the corporation is plainly allowed so long as there is full disclosure and the client consents. See DR 5-107.
12. To determine whether to withdraw from employment in the context of a multiple representation, a lawyer should refer to, inter alia, DR 2-110 and EC 5-15.
13. In seeking the prospective waivers and advance permission to reveal confidential information (see discussion infra at 13), counsel should also bear in mind any specific reporting requirements to which the corporate client may be subject. For example, certain corporations, such as banks and broker-dealer firms, are subject to federal laws that require them to report suspicious financial transactions by filing suspicious activity reports (“SARs”). See, e.g., 12 C.F.R. pt. 21. If counsel for such a corporation undertakes the simultaneous representation of a corporate employee, counsel may obtain, in the course of representing that employee, otherwise privileged information regarding suspicious transactions that, as an agent of the corporation, counsel may be obligated to disclose to the corporation and that the corporation, in turn, may be obligated to report to the government. As such, counsel for corporations with reporting requirements should consider seeking prospective waivers and advance permission to disclose information from any potential employee client that would permit the filings of such reports. While DR 4-101(C)(2) permits an attorney to reveal client “[c]onfidences or secrets when . . . required by law . . . ,” the precise scope of this provision is unclear. It is thus uncertain whether the attorney, absent consent from the employee client, could report to the government information acquired in the course of representing that employee. Moreover, given that some of the reporting laws prohibit the filer of a SAR from informing any party that is involved in the underlying transaction, see, e.g., 31 U.S.C. 5318(g)(2)(A)(i), a prospective waiver prior to undertaking the representation may be the only opportunity for counsel to obtain the employee client’s consent.
14. In evaluating the validity of prospective waivers, reviewing courts try to ascertain whether the client was reasonably informed about the future matter. See Restatement (Third) of the Law Governing Lawyers § 122 (2000) (defining “informed consent” to a prospective (as well as current) waiver as “requiring that the client or former client have reasonably adequate information about the material risks of such representation”). ABA Formal Op. 372 (“the particular future conflict of interest as to which the waiver is invoked [must have been] reasonably contemplated at the time the waiver was given”); NYCLA Ethics Op. 724 (an advance waiver is valid if “the subsequent conflicts should have been reasonably anticipated by the original client based on the disclosures made and the scope of the consent sought”). Where the attorney specifically identifies the party or parties with whom the client’s interests potentially could differ and explains how that divergence could occur, courts have tended to uphold prospective waivers. See Unified Sewerage Agency v. Jelco Inc., 646 F.2d 1339, 1345 (9th Cir. 1981) (quoting In re Boivin, 533 P.2d 171, 174 (Or. 1975); accord Fisons Corp. v. Atochem N.A., Inc., No. 90 Civ. 1080 (JMC), 1990 U.S. Dist. LEXIS 15284, at *15 (S.D.N.Y. Nov. 14, 1990); see also Interstate Props. v. Pyramid Co., 547 F. Supp. 178, 181-82 (S.D.N.Y. 1982). In the scenarios being considered in this opinion, the party with whom the client’s interests might differ normally will be reasonably clear. Cf. W.R. Grace & Co. v. Goodyear Tire & Rubber Co., No. 1:99-CV-305, 1999 U.S. Dist. LEXIS 22554, at *12-*16 (W.D. Mich. 1999) (upholding prospective waiver executed by members of defense group that prohibited members from objecting “to the continued representation by Common Counsel of all or any of the other members [of the group] in connection with any legal services arising out of” the subject of the agreement). Moreover, even in litigation, courts have upheld prospective waivers involving representation of a corporation and its constituents. See In re Rite Aid Corp. Sec. Litig., 139 F.Supp.2d 649 (E.D. Pa. 2001) (permitting a lawyer who represented the corporation and several of its executives to withdraw from representing one of the executives and continue to represent the corporation after a conflict developed, based upon a written engagement letter containing an advance waiver); see also Zador Corp. v. Kwan, 37 Cal. Rptr. 2d 754 (Cal. Ct. App. 6th Dist. 1995) (upholding an advance waiver permitting a lawyer who represented a corporation and an individual to continue representing the corporation after a conflict developed between the corporation and individual).
Issued: June, 2004