A RUBIK’S CUBE OF ETHICAL DILEMMAS FACED BY GENERAL AND CORPORATE COUNSELS

PAULINE E. HIGGINS, LL.M., J.D., CPA Pauline E. Higgins & Associates, P.C.

12 Greenway Plaza, Suite 1100 Houston, Texas 77046

(713) 425-4924 phiggins@paulinehigginsassociates.com

http://www.paulinehigginsassociates.com/

State Bar of Texas 11th ANNUAL

ADVANCED IN-HOUSE COUNSEL COURSE August 2-3, 2012

Dallas

CHAPTER 20

mailto:phiggins@paulinehigginsassociates.comhttp://www.paulinehigginsassociates.com/

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Pauline Edwards Higgins, LLM, JD, CPA

Attorney & Counselor at Law

Certified Public Accountant

Certified Birkman International Coach

phiggins@paulinehigginsassociates.com

12 Greenway Plaza, Suite 1100, Houston, Texas 77046

Phone: (713) 562-8100

Facsimile: (713) 521-9916

EXPERIENCES

Pauline E. Higgins & Associates, P. C.

Managing Partner & Chief Diversity Officer

2012 Preeminent AV Rated Attorney by Peers, Clients, and Martindale Hubbell

2012 Top-Rated Attorneys in Texas (Wall Street Journal, Houston Chronicle)

http://paulinehigginsassociates.com/

METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, HOUSTON,

TEXAS

August 2008 – February 2011

Senior Vice President, General Counsel & Corporate Secretary

THOMPSON & KNIGHT LLP

Finance Partner & Chief Diversity Officer

An active corporate and finance senior partner, in leadership roles as member of the

Houston Office’s Executive Committee, Firm’s first Chief Diversity & Inclusion Officer,

and the Firm’s global Audit Letter Committee.

J. P. MORGAN CHASE & CO.

Vice President, Associate General Counsel, and Assistant Corporate Secretary (Vice

President and Associate General Counsel for Texas Commerce Bank N.A. and

Chase Bank of Texas N.A.)

EXXON COMPANY, U.S.A, HOUSTON, TEXAS

Transactional/Tax Litigation Attorney –

BRACEWELL AND PATTERSON, HOUSTON, TEXAS

1989-1990

Transactional/Tax (Associate) Attorney

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TABLE OF CONTENTS

INTRODUCTION .......................................................................................................................................................... 2

I. A CONTEXTUAL CONSIDERATION OF ETHICAL ISSUES .......................................................................... 2 A. A "Hypothetical" for Context .......................................................................................................................... 2 B. Ethical Implications of Structural Characteristics of the Corporate Counsel Relationship ............................. 3

II. FOUR DISTINCT BUT INTERRELATED ETHICAL ISSUES: PRACTICAL SOLUTIONS TO DIFFICULT PROBLEMS ............................................................................................................................................................ 4 A. Introduction ..................................................................................................................................................... 4 B. The Issues ........................................................................................................................................................ 5

1. Identification of the Client ....................................................................................................................... 5 2. Too Many Hats ........................................................................................................................................ 6 3. The Need for Independence ..................................................................................................................... 8 4. Divergence of the Interests of Corporate Counsel and Their Employer-Clients ................................... 10

CONCLUSION ............................................................................................................................................................. 10 FOOTNOTES ............................................................................................................................................................... 13

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A RUBIK’S CUBE OF ETHICAL DILEMMAS FACED BY GENERAL AND CORPORATE COUNSELS Ethics and the resolution of ethical dilemmas have been, and continue to, an area of indelible and deep interest to me. This focus of ethics and the related dilemmas has been with me since I was a child, as a Certified Public Accountant, and in all the roles in which I have been involved, personally and professionally. As Vice President and Associate General Counsel at JPMorgan, I was a member of the Global Conflict of Interest Committee for JPMorgan and I was the Committee’s representative in Texas. The first article that I penned for the Houston Bar Association when I was featured as “Profile in Professionalism” was centered on the subject matter of ethics and the ethical duties of an attorney. Basically, thought the subject matter of the many articles that I have written for the Texas Lawyer is not directly on ethics, the theme within those articles on diversity and inclusion is squarely about “doing the right and ethical thing.” Personally and professionally, I have made tough decisions at significant costs when I have been faced with ethical dilemmas in order to remain compliant with the Model Rules of Professional Conduct. Thus, it should come as no surprise to those who really know me that when presented the opportunity to dialogue with you at this conference, I wanted my presentation to be about ethical dilemmas with which corporate and general counsels faced on a daily basis. As lawyers, regardless of our roles and regardless of the seat in which we sit, we must remain ethical, be governed by ethical principles and behaviors, and be an ethical beacon for our legal profession. Why should attorneys be the butt of all ethical jokes? We are in an honorable profession and we should treat the profession and behave honorably. In performing my research while reflecting on my personal experiences in my roles in private practice as an associate and a partner and my additional roles as Associate General Counsel and General Counsel, in private and public settings, it is without question that an unequivocal thorough vetting of the person for whom, and organization with whom, you will work is of paramount importance. A decision to be an in-house counsel or the General Counsel of any organization should not be taken, or made, lightly. Skipping a thorough vetting could be, in the end, catastrophic for one’s career and reputation. Your reputation is the most important asset of an attorney, in

general, not to mention that of a General Counsel in his or her role. A full understanding of The ABA’s Model Rules of Professional Conduct Model, especially Model Rule 1.13, dealing with the organization as a client, cannot be over emphasized – who really is your client? During this process of pondering, reflection, and research, I encountered an excellent article and presentation by Professor Geoffrey C. Hazard, Jr. that was published in Emory University’s Law Journal and presented at The Randolph Thrower Symposium. I could not have outlined or stated the issues that I had already outlined, planned, and the topic that I had independently chosen, any better and substantively than Professor Hazard, Sally R. Weaver, and Timothy P. Terrell did in their presentations and responses, respectively, to Professor Hazard’s Keynote to The Randolph Thrower Symposium (See footnotes n1-n6). I sought and was granted permission to present their substantive points to you with the deep hope that you will read with interest and will join the much-needed quest to keep our legal profession deeply ethical, regardless of which corporate counsel role in which we sit or the cost that might be paid to remain unwaveringly ethical and committed to the Model Code that governs us, our work, and our role. Clean and clear optics regarding ethics and conflict of interest are important. There are significant and critical issues that affect the role of the general counsel and the corporate counsel. Critical differences are also present between the role of the corporate counsel and that of the private or law firm counsel. One of the most critical differences between corporate counsel and the attorney in private practice is the corporate counsel’s economic dependence on a single entity, client, and boss. A corporate counsel can enhance his or her value to their client and garner power within the organization when he or she is perceived as being of value and/or is “adding value.” Another critical matter is when an entity is faced with losing the protection of the attorney-client privilege because the corporate counsel is offering business, as well as legal, advice. I believe that corporate counsel should adhere to the exact rules of professional conduct that are applicable to their colleagues in private practice – no deviation should be allowed. After all, aren’t we all practicing attorneys? The fact that the corporate counsel only has one client is irrelevant to the full and complete adherence to the respective State and ABA’s code of professional responsibility. It becomes complex, however, when corporate counsels make non-legal decisions, which may ultimately undercut the corporate counsel’s

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credibility with respect to the legal aspect of the issues on which he or she has already given non-legal advice. Professor Hazard aptly points out that “these corporate counsels are all too aware that some of their colleagues in private practice will use these business and non-legal decisions to undercut the credibility of corporate counsel with senior management.” Further, Professor Hazard correctly states that "the role of corporate counsel is among the most complex and difficult of those functions performed by lawyers." Unfortunately, the complexities of the role of corporate counsels are also areas in which courts, commentators, and the organized bars have afforded little attention or substantive guidance. We must independently monitor ourselves, our roles, and our behaviors. However, in order to be effective with the self-monitoring process, we must possess the knowledge, and stay current with our understanding, of the Model Code of Professional Responsibility.

INTRODUCTION At the 1997 Thrower Symposium the focus of was on the critical issues that impact, and are relevant to, the role of modern corporate counsel. These ethical issues and quandaries surrounding in-house counsels are relevant now as they were then in 1997. Invariably, some of us have dealt, and are still dealing, regularly, with these important and pertinent matters and issues. The following hypothetical and ethical issues were highlighted:

I. A CONTEXTUAL CONSIDERATION OF

ETHICAL ISSUES A. A "Hypothetical" for Context To fully appreciate the complexity of the ethical issues that confront corporate counsel, it is helpful to consider these issues in context rather than in the abstract. 6 Therefore, the following "hypothetical" situation was offered. “A recent law school graduate accepts a position as an associate in a large law firm in a progressive and burgeoning Southern city. After six years of hard work, the firm invites our hypothetical associate to become a partner. Several years later, our hypothetical partner has the opportunity to become general counsel of a rapidly growing, aggressive company that has recently completed its initial public offering and is experiencing significant financial success, reflected of course in a rapid rise in its stock price. After serious consideration and with some reservations, the partner resigns her partnership, accepts the position as general counsel and

relocates her family from the large, diverse, and progressive city in which she has practiced law and reared her family to the headquarters of her new employer and client. Three weeks after she begins her new job, with boxes still unpacked and photographs still unhung, our new general counsel welcomes into her office the internal auditor of the company who announces with a grim expression, "We have a problem." Despite the law professor's penchant for the ubiquitous hypothetical fact situation, the scenario that I describe is, in fact, no hypothetical. 7 I was the lawyer who is the subject of this brief introduction. The problem that the internal auditor disclosed to me that day involved certain financial transactions between the company and its chief executive officer (CEO). Despite the company's status as a publicly held company, the chief executive officer still retained ownership or control of approximately sixty-three percent of the issued and outstanding stock of the company. The questionable transactions fell into two categories. First, the company had recorded as cash on its financial statements a $ 6.6 million check from the CEO to the company. 8 The check, however, had neither been cashed nor deposited by the company for an extended period of time--approximately seventeen months in the aggregate--and remained un-cashed at the time of the internal auditor's disclosure to me. The second group of transactions involved the payment by the company of certain personal expenses of the CEO. These transactions occurred without the knowledge or approval of the Board of Directors For the next few weeks, I participated with the Audit Committee of the Board of Directors and the internal audit staff in an internal investigation of these "accounting irregularities," as they were characterized in the press release issued by the company regarding these events. On the date that the company issued the press release, the Chief Financial Officer (CFO) of the company resigned, and the price of the company's stock dropped from $ 15 to $ 11.75 before stabilizing at $ 13.25. Shortly thereafter, a shareholder securities fraud class action was filed against the Company, the CEO, the President, the former CFO, and a former member of the Board of Directors. Not surprisingly, the Securities and Exchange Commission (SEC) also began an investigation. The company settled the shareholder class action for $ 3.2 million approximately eighteen months after it was filed. The SEC’s investigation culminated in the entry of a cease and desist order against the company and the CEO and the exclusion of the former CFO from the practice of

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accountancy before the Commission for a period of three years.” B. Ethical Implications of Structural

Characteristics of the Corporate Counsel Relationship

This scenario implicates some of the most significant issues that corporate counsel confronts today. Who is the client? What are the responsibilities of corporate counsel in a dispute between the company and its shareholders, directors, officers, employees, or other agents? To what extent can or should corporate counsel participate in internal investigations involving possible wrongdoing by constituencies of the client? Does the involvement by corporate counsel in internal investigations enhance, impair, or negate the protection afforded to the client under the attorney-client privilege? Will corporate counsel have, or be perceived to have, the requisite independence to conduct or participate effectively in such investigations? Is the role of corporate counsel one of advocate, compliance officer, or both? Are the roles of advocate and compliance officer incompatible? These difficult issues may arise in the context of the representation of the client by outside counsel; however, I believe that these problems are exacerbated by certain characteristics that are unique to the relationship between corporate counsel and employer-clients. These characteristics make the conventional paradigms for considering the relationship between attorney and client inapposite to the complex and multifaceted relationship between corporate counsel and employer-clients. The California Supreme Court noted "the descriptive inadequacy of the nineteenth century model of the lawyer's place and role in society--one based predominantly on the small-to-middle-sized firm of like-minded attorneys whose economic fortunes were not tethered to the goodwill of a single client." 9 The court contrasted the economic dependence of corporate counsel on one client and the multifaceted role often played by corporate counsel with the multi-client base and single transaction or case relationship that typifies the outside law firm's relationship with its clients. 10 The first, and perhaps most critical, difference between corporate counsel and their colleagues in private practice is the economic dependence of corporate counsel on a single client. As the California Supreme Court stated in General Dynamics Corp. v. Superior Court, "the economic fate of in-house attorneys is tied directly to a single employer, at whose sufferance they serve." 11 The court thus concluded that the economic

dependence of corporate counsel on their employers is as significant as that of other corporate executives. 12 The second defining characteristic of the corporate counsel role is the tendency for the corporate counsel to assume responsibilities in the organization that exceed, and differ from, those of the typical attorney-client relationship. Corporate counsel may serve as members of the board of directors, as officers of the corporation, and as members of executive management committees; in addition, they may have compliance responsibilities that are not strictly legal in nature. The inclination of corporate counsel and their employers to define the role of corporate counsel expansively is not surprising. Corporate counsel can enhance their value to their client and their power within the organization when they are perceived as "adding value" beyond traditional legal advice. The organization may similarly benefit from the perspective of corporate counsel on matters that could appropriately be characterized as raising issues that implicate both law and business. Notwithstanding the perceived value of this expansive role to both the corporate counsel and to the organization, the role may impose an unacceptable risk of conflict of interest and the perception (if not the reality) of interdependence between the organization and the corporate counsel. This broader role also increases the likelihood that the organization will lose the benefit of the attorney-client privilege. 13 The third characteristic that defines the relationship between corporate counsel and their employer-clients is the access afforded corporate counsel to informal sources of information because of their physical proximity to their clients. Professor Hazard characterizes the information that flows from these informal sources as back-channel or "water cooler" information. 14 The access to this information implicates the lawyer's obligation to "act with reasonable diligence . . . in representing a client" 15 in ways that may differ significantly from the situation experienced by outside counsel. Senior management often asks outside counsel to respond to a narrowly defined legal problem presented by management in a particular context. Corporate counsel, on the other hand, may find it necessary to identify independently a particular legal risk for the organization and suggest appropriate action to eliminate or minimize the risk. Management's perception of the second situation may differ significantly from management's perception of the first. The situation is, of course, exacerbated when the back-channel information involves possible wrongdoing by a senior executive in the company, potentially placing corporate counsel in an adversarial posture vis-a-vis management.

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Fourth, the close working relationship between management and corporate counsel may create confusion and uncertainty about the role of corporate counsel in the representation of the organization. My experience indicates that the executives of many corporations do not understand that corporate counsel represents the entity rather than its constituents, including the executives of the organization. 16 Insofar as the executives draw this distinction, they often fail to comprehend its ramifications. These consequences include the potential for conflict between the interest of the executive and the interest of the organization and the possibility that the information that the executive discloses to counsel may not be treated as confidential or privileged. Who is your client? Finally, the position of corporate counsel as employee, in addition to legal counsel, creates a myriad of opportunities for employment-related disputes that generally do not arise in the context of the relationship between outside counsel and their clients. Courts generally have permitted corporate counsel to sue their employer-clients for age discrimination 17 and for race discrimination. 18 Courts have held that corporate counsels are within the class of employees protected under a state "whistle-blower" statute. 19 Courts also have permitted corporate counsel to sue under a state labor relations statute 20 and to assert claims for wrongful termination based on the implied covenant of good faith and fair dealing. 21 The most controversial and frequently litigated disputes between corporate counsel and their employer-clients involved allegations of retaliatory discharge by corporate counsel whose employment was terminated because of actions taken by counsel in the course of rendering legal advice to the organization. 22 Courts had uniformly denied corporate counsel the right to state a claim for retaliatory discharge. 23Some courts, however, have concluded that the attorney's role as corporate counsel does not preclude a retaliatory discharge claim. 24 These structural characteristics can lead to ethical problems that differ significantly from the ethical dilemmas those attorneys in private practice confront. Four of these ethical issues are addressed below and are focused, when appropriate, on the applicable rules of professional conduct 25 and on cases in which courts have addressed the unique attributes of the relationship between corporate counsel and their clients or in which the courts' perspective has specific implications for corporate counsel. In each situation outlined, suggestions regarding specific action that corporate counsel may take to minimize the negative implications of the situation, both for counsel and for their clients.

II. FOUR DISTINCT BUT INTERRELATED ETHICAL ISSUES: PRACTICAL SOLUTIONS TO DIFFICULT PROBLEMS

A. Introduction Corporate counsel frequently must consider ethical issues that are closely interrelated although distinct. Thus, for example, the same situation may implicate ethical issues involving the organization as the client, 26 the duty of loyalty and conflicts of interest, 27 the obligation to maintain client confidences 28 and the obligation to act with reasonable diligence in the representation of the client. 29 Of course, the intertwined nature of these ethical issues is not unique to the practice environment of corporate counsel, but it is exacerbated by the very complex relationship between corporate counsel and their employer-clients. This complexity, if overlooked, can be detrimental to corporate counsel and client alike. Corporate counsels, however, are generally reluctant to acknowledge, at least publicly, any distinction between themselves and lawyers in private practice. Technically, there may not be any distinction, however, operationally and structurally, there is a ton of difference between the chair in which the corporate counsel is sitting and the one in which the private practitioner is sitting. Corporate counsels have recently realized a significant increase in number and growth in prestige. 30 They clearly remember, however, a time in the not-so-distant past when many of their colleagues in private practice relegated them to the status of second-class citizens. 31 They also fear that the development of different ethical rules for, or the different application of existing ethical rules to, corporate counsel could relegate them again to that second-class status. 32 Corporate counsels have joined in a public incantation of sameness. Nonetheless, I am concerned that the old adage "saying it is so doesn't make it so" applies. Corporate counsels actually do practice law in an environment that differs dramatically from that of their colleagues in private practice. That difference means that the existing rules of professional conduct, at least as historically interpreted, may provide inadequate guidance to corporate counsel. Corporate counsel can anticipate and respond thoughtfully to these problems. Courts and commentators have begun, somewhat, to evaluate and offer guidance about this complex relationship. The following discussion identifies and analyzes four situations that implicate important ethical issues that corporate counsel will confront frequently. Practical suggestions for minimizing the possibility that these

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issues will arise and for addressing them when they cannot be avoided are outlined below. B. The Issues 1. Identification of the Client Model Rule 1.13 sets forth the basic parameters of the attorney-client relationship when an attorney represents an organization. It states that the lawyer in this situation "represents the organization acting through its duly authorized constituents." 33 The Comments to Rule 1.13 state that "officers, directors, employees and shareholders are the constituents" of a corporation 34 and that the equivalent persons acting on behalf of unincorporated associations are the constituents of those organizations. 35 The Model Rules do not distinguish a relationship involving a lawyer who represents an organization in the capacity of outside counsel from the relationship between a lawyer and the organization she represents as an employee of that organization. I believe, however, that the environment in which corporate counsel practice substantially increases the likelihood of confusion about the identity of the client, and concomitantly, the potential negative ramifications for the attorney should such confusion occur. The inevitable divergence between the goals and objectives of the individual constituents of the organization and the best interests of the organization can, and do, create career threatening situations for corporate counsel. 36 When similar tensions arise in relationships between outside counsel and their clients, outside counsel may lose a client if the situation cannot be resolved; however, corporate counsel may lose their jobs. 37 Professor Hazard has characterized Model Rule 1.13 as a "process oriented" rule that "contributes little in the way of specific dictates." 38 Rather, the Rule provides a "method of analysis and a method of communicating with an entity client." 39 This characterization is clearly accurate, but it does not mean that the process oriented approach of Rule 1.13 is free of serious substantive implications for corporate counsel. Rule 1.13(b) articulates a process that an attorney should follow when a constituent of the organization acts in a manner "that is a violation of a legal obligation to the organization, or is a violation of law which reasonably might be imputed to the organization, and is likely to result in substantial injury to the organization." 40 Rule 1.13(b) admonishes the lawyer to "proceed as is reasonably necessary in the best interest of the organization" 41 but to do so in a manner that "minimizes disruption of the organization and the risk of revealing information relating to the representation

to persons outside the organization." 42 In other words, please note that Rule 1.13 does not provide a safe harbor for the attorney who chooses to become a whistle-blower. Rather than prescribing specific measures to be instituted by lawyers in these circumstances, Rule 1.13 recites a nonexclusive list of options that the attorney may consider. These measures include a request for reconsideration by the constituent, a suggestion that a separate legal opinion be sought on the issue, and a referral of the matter to "higher authority in the organization including, if warranted by the seriousness of the matter, referral to the highest authority that can act in behalf of the organization as determined by applicable law." 43What if you have corruption at executive and board level, jointly? In a corporation, of course, this highest authority will almost always be the board of directors. If the lawyer is ultimately unsuccessful in resolving the issue within the parameters established by Rule 1.13, the lawyer may then resign. It is significant that each of the specific suggestions offered by Rule 1.13 is merely permissive, thus leaving the lawyer with the responsibility of determining the appropriate course of action. Lawyers are, of course, professionals; and the decision to cede significant discretion to the lawyer who is faced with the type of dilemma that Rule 1.13 contemplates may be appropriate. Rule 1.13, however, provides no "safe harbor" for lawyers who make difficult decisions under these circumstances. The potential costs associated with these difficult decisions are particularly high for corporate counsel. Nonetheless, corporate counsel may minimize the personal risks which can arise from these situations by ensuring that management understands the role of corporate counsel as counsel to the entity and the responsibilities that attend this role. What if he or she, senior management, is of the belief that corporate counsel represents him or her and senior management considers himself or herself as the “entity”? Corporate counsel often acknowledge the increased effectiveness that they enjoy when senior management believes that they are "team players." 44 I do not dispute the accuracy of this perception; however, the close working relationship that often exists between corporate counsel and senior management offers many opportunities for confusion about the identity of the client that counsel represents. Corporate counsel can make attempts to minimize the confusion as to the “entity” that corporate counsel represents. First, corporate counsel should define clearly their role as counsel for the organization rather than for any of

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the individual constituents of the entity. It is helpful to reinforce this distinction periodically in discussions at meetings of the board of directors and with senior management. 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 to constituents of the organization "when it is apparent that the organization's interests are adverse to those of the constituents." 45 Counsel must clearly indicate to these constituents that the lawyer represents the interests of the organization rather than those of its constituents. 46 This admonition is necessary because the entity's employees and representatives frequently do not appreciate the significance that attaches to the lawyer's representation of the entity. This failure to understand the significance of the lawyer's representation of the entity may foster the mistaken belief that the entity's lawyer represents their interests and owes them the same loyalty and duties that the lawyer owes to the entity. Rule 1.13 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. I emphasize that the discussion regarding the affirmative discussions regarding the obligation of corporate counsel the full understanding of the duty of loyalty to the organization, and not the persons in senior management or the board, should take place upfront and at the time of employment, at staff meetings, at board meetings, and periodic updates and training for, and with the board of directors. The unequivocal duty of loyalty to the organization can be stressed enough. 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 47 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." 48 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. Rule 1.13's generalities undoubtedly will be construed against the lawyer who surprises or fails to garner the support of the organization's highest authorities in these circumstances. What about when you have a senior

management and board who could not careless about Rule 1.13 and the duty of loyalty that is incumbent upon the corporate counsel? 2. Too Many Hats Corporate counsel frequently becomes involved in the business as well as the legal aspects of their employer-client's business. In fact, corporate counsels often consider the opportunity to participate in business decisions to be one of the principal reasons that they prefer the in-house environment to private practice. Most corporate general counsels are officers of the corporation, and many have officer designations in addition to their roles as general counsel. The most common designation is probably that of corporate secretary. Some general counsels serve as members of the board of directors and on executive management committees. Other corporate counsel may have compliance roles in the organization, with non-lawyer personnel who have responsibility for compliance functions reporting to them. Finally, corporate counsels often have equity interests in the organizations that employ them, at least through participation in employee stock option plans. The Model Rules provide no specific guidance about the ethical issues implicated by the various roles that corporate counsel play in an organization. Model Rule 1.7 provides the general rules governing conflicts of interest. Rule 1.7 prohibits an attorney from representing a client with interests that are directly adverse to the interest of another client. 49 It restricts the attorney from representing a client if such representation "may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interest." 50 The Comments to Rule 1.7 specifically address only one of the many roles that corporate counsel often fulfill in the organizations which they represent. In considering whether it is appropriate for the lawyer of an organization to also serve as a member of the Board of Directors, the Comments suggest that the lawyer "should determine whether the responsibilities of the two roles may conflict." 51 The Comments further provide that, in assessing the risk of conflict, the lawyer should consider: 1) the possibility that, and frequency with which, the lawyer may be required to advise the organization on matters concerning the Board of Directors; 2) the potential intensity of any conflicts between the organization and the Board of Directors; 3) the effect of the lawyer's resignation from the Board of Directors; and 4) the possibility that the corporation can secure legal advice from another

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lawyer when such conflicts develop. The Comments indicate that the lawyer should not serve on the Board of Directors if consideration of these factors suggests a material risk that the "dual role will compromise the lawyer's independence or professional judgment." 52 In Simms v. Exeter Architectural Products, Inc., 53 the United States District Court for the Middle District of Pennsylvania considered whether an attorney's ownership of stock in a closely-held corporation created a conflict of interest that precluded the attorney from representing the corporation. 54 Mr. Simms, a founding shareholder and director, as well as the former president of Exeter, moved to disqualify Exeter's law firm on the basis that the firm advised him personally regarding the matters at issue in the litigation. Mr. Simms asserted that the law firm should be disqualified due to an attorney-client relationship between him and the law firm, which created a conflict of interest regarding the law firm's representation of Exeter. 55 The court, however, looked beyond the purported attorney-client relationship between Mr. Simms and the firm and specifically considered the equity position in Exeter held by several partners in the firm and their spouses. 56 The court found that when the attorney is both an advocate for and an owner of an entity "it appears to be extremely difficult if not impossible for the attorney to give advice as a non-interested party." 57 The court concluded that the ownership of stock by partners in the firm and their spouses, although de minimus, created an appearance of impropriety that required the firm's disqualification from representing Exeter in a dispute between certain of the founding shareholders. 58 The corporate counsel's dual role as both business and legal advisor can also detrimentally affect the organization in the area of the attorney-client privilege. In 1981, the United States Supreme Court clearly found the attorney-client privilege applicable to certain communications between employees of a corporation and the corporation's corporate counsel. 59 The Court in Upjohn Co. v. United States rejected the "control group test" that several of the appellate courts had enunciated 60 but declined to articulate an alternative test. 61 In determining that the attorney-client privilege should extend to certain communications between employees of Upjohn and the corporate counsel, 62 the Court stated that the communications were made by the employees to corporate counsel at the direction of Upjohn management and for the purpose of securing advice from corporate counsel. 63 The Court also observed that the "communications concerned matters within the scope of the employees' corporate duties and the employees themselves were . . . aware that they

were being questioned in order that the corporation could obtain legal advice." 64 Upjohn clearly established that the protection of the attorney-client privilege extends to corporations under appropriate circumstances. Perhaps more importantly, at least from the perspective of corporate counsel, the Court in Upjohn did not distinguish communications to corporate counsel from communications to outside counsel in analyzing the applicability of the attorney-client privilege. Courts in subsequent decisions, however, have raised issues about the attorney-client privilege that are important to corporate counsel. Of particular concern is the decision by the United States District Court for the Southern District of New York in Georgia-Pacific Corp. v. GAF Roofing Manufacturing Corp. 65 Michael D. Scott, the in-house attorney for GAF, refused to answer certain questions in a deposition, claiming that the attorney-client privilege protected the information that Georgia-Pacific sought. Georgia-Pacific moved to compel. 66 The information that was the subject of the motion to compel involved negotiations between Georgia-Pacific and GAF in which Mr. Scott participated on behalf of GAF. Georgia-Pacific specifically sought testimony from Mr. Scott about recommendations he made to the GAF negotiators regarding certain provisions in the asset purchase agreement that was the subject of the negotiations. The court held that when Mr. Scott participated in the negotiations he "was not 'exercising a lawyer's traditional function.'" 67 Since Mr. Scott was acting as a negotiator on behalf of management, "he was acting in a business capacity." 68 The court relied in particular on a decision in which the New York Court of Appeals had observed that in-house attorneys may also serve as officers of the corporation and may have both business and legal responsibilities. 69 The Court of Appeals further observed that the day-to-day involvement of corporate counsel in the business of the company "may blur the line between legal and non-legal communications." 70 Many courts have used the business-legal dichotomy to determine when the attorney-client privilege applies to communications between corporate counsel and the representatives of their clients; however, Professor Hazard has appropriately criticized the court in Georgia-Pacific for "not having been strict enough in policing the privilege." 71 As Professor Hazard concedes, conversations between management and corporate counsels do lose the protection of the attorney-client privilege when they cease to be about legal matters. 72 The question Professor Hazard appropriately poses in regard to Georgia-Pacific is

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whether it is possible to separate legal from business matters when the discussions involved the negotiation of complex provisions about environmental matters in an asset purchase agreement. 73 Nevertheless, it remains clear that those corporate counsels who combine a business role with their legal role in the company increase the likelihood that several problems will arise, especially with respect to disclosures in depositions and the potential loss of attorney-client privilege. The more roles that corporate counsel play in the organization, the greater the possibility that conflicts of interest will arise. These conflicts of interest may require that outside counsel be retained in circumstances in which that would not ordinarily be necessary, perhaps depriving the company of the most effective and efficient legal advice through the office of its corporate counsel. It is also clear that the company risks losing the protection of the attorney-client privilege when corporate counsel offers business as well as legal advice. I suggest that corporate counsel take certain steps to minimize the possibility that these situations will arise. First, corporate counsel should limit their role in the organization to serving as legal advisor to the entity. I can envision no circumstances under which it would be advisable or prudent for corporate counsel to serve on the board of directors of the entities they represent. 74 Corporate counsel should similarly undertake non-legal functions for the entity only when counsel's ability to render legal advice to the entity will clearly not be impaired. At times these non-legal roles are thrust upon corporate counsel after he or she is hired and corporate counsel finds it difficult to refuse and is , therefore, placed in a quandary. It is said that discretion is the better part of valor and corporate counsel may need to seek legal advice when he or she finds it difficult, notwithstanding Miranda Warnings, to affirmatively refuse and escape the pressure on non-legal roles and advice. In one of my very difficult corporate counsel roles, now looking through the 20-20 lens, I wished that I had retained independent legal counsel earlier (even at my own expense) to advise me during my difficult refusals. Second, corporate counsel should consider carefully the extent to which they should conduct or participate in internal investigations involving highly sensitive matters. Significant benefits may inure to the organization from the participation by counsel in such investigations, but such participation does raise issues implicating conflicts of interest, the attorney-client privilege and attorney work-product immunity, particularly when corporate counsel act in the

capacities of both fact-finder, business advisor, and legal advisor. 75 Finally, corporate counsel should be sensitive to those situations in which the advice that they render could be characterized as business rather than legal advice. If the protection of the attorney-client privilege is important to the client, corporate counsel should ensure that another attorney participates in such discussions in the role of legal advisor, thus cloaking the discussions with the protection of the attorney-client privilege that might otherwise be lost. 3. The Need for Independence Corporate counsel, having realized in recent years a substantial increase in number and stature, are understandably loath to concede that they are less independent or less professional than their colleagues in private practice. 76 Many years ago, Brian Forrow, who was then General Counsel of Allied Chemical, framed the question as follows: Is the hallmark of a lawyer--independent judgment--blurred because the lawyer serves as inside counsel? Or is inside counsel better able to bring independent judgment to a corporation's problems, even perhaps to go beyond the law to activate the corporate conscience? 77 Stated another way, is corporate counsel or outside counsel more likely to have the independence to tell senior management or the board of directors what they may not want to hear? Many years after Mr. Forrow posed this question, the United States District Court for the Northern District of California answered it in the context of the settlement of a shareholder class and derivative action against Oracle Systems Corporation. 78 The court was asked to confirm a proposed settlement of consolidated class and derivative actions arising out of allegations of securities fraud. 79 The terms of the settlement proposal made the settlement of each action contingent on the settlement of the other action. 80 The court indicated that it was willing to approve the settlement of the class action, 81 but it raised serious concerns about the terms of the settlement of the derivative action. More significantly, however, the court considered the process by which the "disinterested" directors approved the settlement so flawed that the process failed to satisfy the requirement of independence and good faith under Delaware law. 82 In finding that disinterested directors do not necessarily

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act with independence, the court focused on the close relationship between members of the board of directors and the natural empathy of the disinterested directors for their colleagues named as defendants in the derivative suit. 83 The court concluded that the retention of independent counsel to advise the disinterested directors is "one of the few safeguards to ensure the legitimacy of their acts and to aid the court in assessing the reasonableness of a derivative settlement or termination." 84 The court then focused on the involvement of Raymond Ocampo, Oracle's in-house general counsel, in this process and characterized h