New Ethical Requirements: Attorney-Client Privilege and In-House Counsel

There are several standard topics that in-house counsel have always watched carefully, such as the subtlety of ethics questions, conflicts, who is considered a client and the standard privilege issues. But times have changed, and the most vigilant may still find themselves in untenable positions. The old mantra for in-house counsel ' watch your back ' has been replaced with the question: “Whose back are you watching?” As we forge ahead, as important as it is to discern who the clients are is telling them and reminding ourselves how we maintain the privilege that is so critical to in-house attorney-client communications.

The highly controversial section 307 of the U.S. Sarbanes-Oxley Act, introduced after the collapse of Enron to appease the public's baying for corporate blood, now has in-house counsel more concerned about their own derriere than that of their employers. Many feel that section has effectively “deputized” the in-house lawyers of publicly listed companies, forcing them to turn in their employer/client to the U.S. Securities and Exchange Commission (SEC).

Under the Act, an issuer's in-house counsel has a statutory obligation to report “up-the-ladder” any violations of securities laws or breaches of fiduciary duty. Ultimately, if nothing is done, the lawyer must go to the top ' the SEC. Before the Enron collapse, the primary concern of the in-house lawyer was an allegation of misconduct, where they faced being disbarred. Now they face 20 years in jail or a $10 million fine if they fail to observe the act.

In-house counsel have reason to feel under siege. Not only are their loyalties split and their roles undermined, but under the legislation, they could find themselves personally liable for advice they give on wayward transactions. In other words, they could be sued by their employer.

What They Don't Know …

A recent survey of selected corporations discovered that many corporate agents ' including officers and directors ' know too little about the attorney-client privilege and do not appreciate that they are not personally protected when they communicate with corporate counsel. This results from too little information being disseminated within corporations about both the nature and scope of the corporate attorney-client privilege and the company's policies relating to the creation, dissemination, and storage of confidential corporate communications (“Corporate Attorney-Client Privilege: Study Reveals Corporate Agents are Uninformed: What They Don't Know Can Destroy The Privilege,” Paul R. Rice, March, 2003, ACCA Virtual Library).

Most corporate officers and managers are sophisticated and are aware that only communications between an attorney and client that relate to legal advice are protected by the attorney-client privilege. But how many also know that the communication has to be confidential? Or that the confidentiality of communications subsequently has to be maintained by allowing distribution of them within the corporation only on a 'need to know' basis?

This lack of knowledge about the requirement of confidentiality could result in the confidentiality being destroyed, thereby losing the privilege protection. Even if confidentiality is preserved, without established circulation procedures that are known and followed by employees, the preservation of confidentiality would have to be proven for each communication through the costly and time-consuming procedure of filing affidavits from each recipient, attesting to the propriety of receipt and further distribution.

Of greatest concern to in-house counsel is the expectation that officers and directors are better informed about the privilege than other employees. However, this may not be the case. This is particularly troublesome because, unlike the average employee, officers and directors have far greater access to confidential communications. Most don't think it's necessary to segregate privileged documents or clearly label them as “attorney-client communications” so as to alert potential readers to their confidential nature. While neither is required, if both are absent, there is an increased risk that unauthorized people with access to unsegregated documents will have read them, and thus destroyed the privilege.

Further, many corporate executives erroneously believe that corporate counsel personally represent them when they speak with in-house counsel on matters relating to their corporate responsibilities, which could give rise to personal liability. While this is of little legal consequence to the corporation and to the viability of its attorney-client privilege protection, it would certainly be of consequence to the individual executive if the corporation waives its privilege protection to disclose evidence of the executive's culpability; he would have no standing to object on his own behalf. This erroneous belief is widely held by other employees too.

The Individual v. the Corporation

Consequently, corporate counsel may be confronted with an ethical dilemma when eliciting incriminating information from individuals. This dilemma is exacerbated by survey results indicating that most employees expressing a willingness to continue to be candid (even in the face of potential personal liability), do so under the belief that the corporation will use its privilege to protect them. This, of course, is only true as long as protecting the individual is in the corporation's best interests.

In the corporate setting, the client is the corporate entity, the legal fiction that can only speak and act through its agents. Regardless of whether a corporate agent (executive or otherwise) personifies, and therefore speaks for, the corporation in communications with corporate counsel, no employee has the right to use the corporate privilege on his or her own behalf. This, coupled with the fact that the corporation's fiduciary duty to its shareholders precludes it from using its privilege for the benefit of individual employees when that action would not be in the best interests of the corporation, can lead to employees being offered up in sacrifice to the greater corporate good. For example, internal corporate investigations of fraud (bribery of foreign government officials), which have contained many candid statements from corporate employees, have been disclosed to the SEC in exchange for an agreement to drop all investigations of the company and approve stock actions pending before the Commission. In each instance, of course, the losers were the employees who were exposed to civil and criminal liability through their own words

This places corporations in somewhat of a dilemma. While knowledge of the privilege's requirements is important to its preservation, if employees are accurately informed about the limits of its protection, they likely will be less inclined to communicate candidly with corporate counsel. Fear of personal repercussions, however, should not pose a significant problem for two reasons. First, officers and directors are often insured against such exposure. Second, most communications with corporate counsel do not involve transactions that could give rise to personal liability.

When personal liability is at stake, corporate officers and directors should speak with their own attorney first. Regardless of what corporate employees are told about the scope of the corporation's privilege protection, corporations must protect themselves and their attorney-client privilege by informing employees about the privilege's requirements and of the corporation's storage and dissemination policies regarding confidential communications. Thus, at a time when threats, investigations and litigation against companies are increasing, and with the tug-of-war among directors, officers and the company for representation, it is crucial to remember that the obligation of the in-house attorney is to the company, not the individuals.

There are several standard topics that in-house counsel have always watched carefully, such as the subtlety of ethics questions, conflicts, who is considered a client and the standard privilege issues. But times have changed, and the most vigilant may still find themselves in untenable positions. The old mantra for in-house counsel ' watch your back ' has been replaced with the question: “Whose back are you watching?” As we forge ahead, as important as it is to discern who the clients are is telling them and reminding ourselves how we maintain the privilege that is so critical to in-house attorney-client communications.

The highly controversial section 307 of the U.S. Sarbanes-Oxley Act, introduced after the collapse of Enron to appease the public's baying for corporate blood, now has in-house counsel more concerned about their own derriere than that of their employers. Many feel that section has effectively “deputized” the in-house lawyers of publicly listed companies, forcing them to turn in their employer/client to the U.S. Securities and Exchange Commission (SEC).

Under the Act, an issuer's in-house counsel has a statutory obligation to report “up-the-ladder” any violations of securities laws or breaches of fiduciary duty. Ultimately, if nothing is done, the lawyer must go to the top ' the SEC. Before the Enron collapse, the primary concern of the in-house lawyer was an allegation of misconduct, where they faced being disbarred. Now they face 20 years in jail or a $10 million fine if they fail to observe the act.

In-house counsel have reason to feel under siege. Not only are their loyalties split and their roles undermined, but under the legislation, they could find themselves personally liable for advice they give on wayward transactions. In other words, they could be sued by their employer.

What They Don't Know …

A recent survey of selected corporations discovered that many corporate agents ' including officers and directors ' know too little about the attorney-client privilege and do not appreciate that they are not personally protected when they communicate with corporate counsel. This results from too little information being disseminated within corporations about both the nature and scope of the corporate attorney-client privilege and the company's policies relating to the creation, dissemination, and storage of confidential corporate communications (“Corporate Attorney-Client Privilege: Study Reveals Corporate Agents are Uninformed: What They Don't Know Can Destroy The Privilege,” Paul R. Rice, March, 2003, ACCA Virtual Library).

Most corporate officers and managers are sophisticated and are aware that only communications between an attorney and client that relate to legal advice are protected by the attorney-client privilege. But how many also know that the communication has to be confidential? Or that the confidentiality of communications subsequently has to be maintained by allowing distribution of them within the corporation only on a 'need to know' basis?

This lack of knowledge about the requirement of confidentiality could result in the confidentiality being destroyed, thereby losing the privilege protection. Even if confidentiality is preserved, without established circulation procedures that are known and followed by employees, the preservation of confidentiality would have to be proven for each communication through the costly and time-consuming procedure of filing affidavits from each recipient, attesting to the propriety of receipt and further distribution.

Of greatest concern to in-house counsel is the expectation that officers and directors are better informed about the privilege than other employees. However, this may not be the case. This is particularly troublesome because, unlike the average employee, officers and directors have far greater access to confidential communications. Most don't think it's necessary to segregate privileged documents or clearly label them as “attorney-client communications” so as to alert potential readers to their confidential nature. While neither is required, if both are absent, there is an increased risk that unauthorized people with access to unsegregated documents will have read them, and thus destroyed the privilege.

Further, many corporate executives erroneously believe that corporate counsel personally represent them when they speak with in-house counsel on matters relating to their corporate responsibilities, which could give rise to personal liability. While this is of little legal consequence to the corporation and to the viability of its attorney-client privilege protection, it would certainly be of consequence to the individual executive if the corporation waives its privilege protection to disclose evidence of the executive's culpability; he would have no standing to object on his own behalf. This erroneous belief is widely held by other employees too.

The Individual v. the Corporation

Consequently, corporate counsel may be confronted with an ethical dilemma when eliciting incriminating information from individuals. This dilemma is exacerbated by survey results indicating that most employees expressing a willingness to continue to be candid (even in the face of potential personal liability), do so under the belief that the corporation will use its privilege to protect them. This, of course, is only true as long as protecting the individual is in the corporation's best interests.

In the corporate setting, the client is the corporate entity, the legal fiction that can only speak and act through its agents. Regardless of whether a corporate agent (executive or otherwise) personifies, and therefore speaks for, the corporation in communications with corporate counsel, no employee has the right to use the corporate privilege on his or her own behalf. This, coupled with the fact that the corporation's fiduciary duty to its shareholders precludes it from using its privilege for the benefit of individual employees when that action would not be in the best interests of the corporation, can lead to employees being offered up in sacrifice to the greater corporate good. For example, internal corporate investigations of fraud (bribery of foreign government officials), which have contained many candid statements from corporate employees, have been disclosed to the SEC in exchange for an agreement to drop all investigations of the company and approve stock actions pending before the Commission. In each instance, of course, the losers were the employees who were exposed to civil and criminal liability through their own words

This places corporations in somewhat of a dilemma. While knowledge of the privilege's requirements is important to its preservation, if employees are accurately informed about the limits of its protection, they likely will be less inclined to communicate candidly with corporate counsel. Fear of personal repercussions, however, should not pose a significant problem for two reasons. First, officers and directors are often insured against such exposure. Second, most communications with corporate counsel do not involve transactions that could give rise to personal liability.

When personal liability is at stake, corporate officers and directors should speak with their own attorney first. Regardless of what corporate employees are told about the scope of the corporation's privilege protection, corporations must protect themselves and their attorney-client privilege by informing employees about the privilege's requirements and of the corporation's storage and dissemination policies regarding confidential communications. Thus, at a time when threats, investigations and litigation against companies are increasing, and with the tug-of-war among directors, officers and the company for representation, it is crucial to remember that the obligation of the in-house attorney is to the company, not the individuals.