Malpractice in the Line of Duty: Who Catches the Bullet?

A traditional requirement in many sophisticated equipment leasing and financing transactions is the closing opinion, in which an attorney or law firm is requested to opine on a variety of relevant topics, ranging from proper corporate or partnership approval of the transaction in question, to the legality, validity and enforceability of one or more material agreements. Oftentimes, there may be multiple closing opinions issued in respect of the closing, with certain opinions being rendered by internal counsel for one or more of the transaction participants, and another set rendered by external counsel.

Use and reliance on internal counsel opinions, in the place and stead of opinions rendered by external counsel, appears to be on the rise, attributable to two factors. First, equipment leasing and finance companies are increasingly adding highly skilled internal counsel to their corporate staff, as the leasing and finance business becomes increasingly subjected to various tax, accounting and securities laws. Second, the seemingly inexorable upward trend of external counsel fees has caused some companies to seek significant transactional cost savings by bringing “in house” as much legal work as possible in any given transaction ' including the delivery of closing legal opinions to third parties.

In such transactions, internal counsel for the lessee or lessor, or the borrower, is asked to render a legal opinion not to its corporate or partnership employer, but instead to the counterparty to the transaction at hand. Internal counsel, who may have considered the delivery of such opinions as merely ministerial or routine in the past (because of the relatively narrow scope of such internal opinions, when compared to the typically broader scope of accompanying external counsel opinions) are confronting the hard reality that as the scope of internal opinions they are requested to issue increases, so too does their personal exposure for malpractice if such opinions turn out to be incorrect.

This problem can be compounded if the internal counsel feels undue pressure from his or her employer (whether well founded or not) to issue “clean” opinions (that is, opinions with few, if any, assumptions, exceptions or qualifications) in order to get a deal closed quickly, or to satisfy “market syndication requirements.” In addition, while some companies invest the personnel and budget to create and maintain sophisticated law libraries of their own, oftentimes internal counsel may be hampered in their attempts to stay abreast of the most current developments in the law, constrained by a lack of time or at-hand resources to consult in order to learn of the most recent developments. Lastly, some internal counsel have labored under the misimpression that an opinion rendered in their capacity as internal counsel for a company subjects the company ' rather than the lawyer ' to claims of malpractice if the opinion turns out to be incorrect or misleading.

This article explores the liability standards applied to internal counsel in the delivery of legal opinions to third parties, as well as the ability of internal counsel to deflect personal liability for malpractice claims originating from opinions delivered by them in a company-sponsored transaction. The authors conclude that attempts by internal counsel to limit such malpractice exposure, or to shift exclusive liability for such malpractice claims to the internal counsel's company employer, will be largely ineffective, and so internal counsel should take other reasonable precautions to address this concern.

On the positive side, the authors were unable to locate reported case law in which an internal counsel was held liable to a third party on the basis of a malpractice claim stemming from the delivery of a closing legal opinion. In part, that may be because internal counsel are not perceived as viable economic targets for such claims, and/or because their company employers may be liable to the aggrieved party for any damages suffered through indemnities or default clauses. Nevertheless, prudent internal counsel may wish to take appropriate precautions in advance to share malpractice risk with their company employers, if they are unable to eliminate this risk by virtue of how internal counsel opinions are drafted in favor of third parties.

Opinion Standards for Internal Counsel: The Duty of Care

The Restatement of the Law Governing Lawyers describes the fundamental principle of a lawyer's “duty of care” as a duty to “exercise the competence and diligence normally exercised by lawyers in similar circumstances.” Traditionally, a lawyer owed a duty of care only to his client, and courts refused to expose lawyers to the risk of liability to third parties. Reflecting this approach, the Supreme Court, in Savings Bank v. Ward, 100 U.S. 195 (1879), ruled that in the absence of privity, no duty was owed by a lawyer to an injured non-client. The Court was persuaded that if privity were abandoned, the scope of liability would expand beyond measure.

Through the years, the Savings Bank doctrine has evolved and, although different jurisdictions have adopted different standards, the strict privity requirement has been carved up into exceptions that establish a lawyer's duty of care to a third party. In New York, for example, the court in Prudential Ins. Co. of America v. Dewey, Ballantine, 80 N.Y.2d 377, 384 (1992), held that a lawyer owed a duty of care to a third party when “three critical criteria” were evident: 1) an awareness by the maker of a statement given to a third party that it is to be used for a particular purpose; 2) reliance by a known party on the statement in furtherance of that purpose; and 3) some conduct by the maker of the statement linking it to the relying party and evidencing the maker's understanding of that reliance. Similarly, in New Jersey, the court in Petrillo v. Bachenberg, 139 N.J. 472 (1995), held that a lawyer may owe a duty of care to third parties where the lawyer knows, or should know, that third parties will rely on the lawyer's representations and where the third parties are not too remote from the lawyer to be entitled to protection. In contrast, California ignores the doctrine of privity altogether and focuses on the policy reasons for establishing such a duty to third parties. Courts often reason, as the court did in Biakanja v. Irving, 320 P.2d 16 (1958), that a lawyer should be liable to any person who was intended by the client to benefit from the lawyer's engagement and who suffers a loss of that benefit on account of the lawyer's conduct.

As one can quickly see, delivery of a closing opinion in favor of a third party, expressly intended to give the non-client recipient legal comfort on various matters associated with the transaction in question, will almost surely trigger a duty standard (thus raising the specter of malpractice risk) to that recipient. The Committee on Legal Opinions of the American Bar Association Section of Business Law begins its article, “Closing Opinions of Inside Counsel” (the “ABA Report”), with the general principle that all lawyers must meet the same standard of care, whether they are members of a law firm or employees in a company, an arm of government, or other organization [ABA Section of Business Law, Committee on Legal Opinions, Closing Opinions of Inside Counsel, 58 Bus. Law 1127 (2003)]. In other words, the lawyer's employment status does not affect the standard of care owed to the recipient of a closing opinion. According to the ABA Report, regardless of the employment environment in which a lawyer may practice, a lawyer who issues a closing opinion to a third party generally owes a duty of care to the recipient of that opinion and is subject to potential liability and malpractice in connection with it.

Who Owes the Duty of Care?

The ABA Report clearly states that internal counsel are liable for third-party closing opinions issued by them to the same extent as external counsel. However, unlike an external counsel's closing opinion that is signed in the law firm's name (thus intentionally subjecting all equity members of the firm to joint and several liability for the opinion), internal counsel closing opinions will be signed by an individual, in the individual's name. In some cases, the individual may be the primary internal lawyer acting on the deal. However, there may be circumstances where another member of the company's legal department may be asked to execute the opinion in question, perhaps because that person is licensed to practice law in the relevant jurisdiction, or because company policy requires all opinions to be signed by the company's general counsel, or because the company itself (in part for marketing reasons) seeks to highlight the importance of the transaction to its own customer by having a “senior attorney” of the company (perhaps the general counsel) execute and deliver the opinion. Although these may be valid company reasons for having a lawyer who is not intimately familiar with a transaction or transaction documents execute and deliver a closing opinion, one can quickly see that doing so poses special risks for the signing attorney. That is because the internal counsel who signs a closing opinion in his or her name has personal responsibility for satisfying the duty of care owed to the opinion recipient [ABA Section of Business Law, Committee on Legal Opinions, Closing Opinions of Inside Counsel, 58 Bus. Law 1128 (2003)]. Furthermore, unless the other members of a law department or team render a part of the closing opinion and expressly permit reliance on it, they will not be vicariously liable to the recipient of an internal counsel opinion for possible violations of the duty of care by the signer [ABA Section of Business Law, Committee on Legal Opinions, Closing Opinions of Inside Counsel, 58 Bus. Law 1128 (2003)]. Hence, an internal counsel who is asked to execute an opinion prepared by others in his or her department would be wise to carry out the same level of due diligence as to the relevant facts, documents, and law as any external counsel would do.

If malpractice has occurred in the delivery of an internal counsel opinion, the aggrieved opinion recipient typically has the option of seeking compensation directly from the internal counsel's company employer under the general principle of respondeat superior, or by bringing a malpractice action against the lawyer in question, or both. The next part of this article explores what steps the internal counsel can take to better protect himself or herself from the successful pursuit of a malpractice claim. It is important to note that even if the malpractice claim proves to be unfounded, the very bringing of the action could cause internal counsel to suffer very real damages in terms of costs to defend the claim and public reputation.

Is a Disclaimer of Personal Liability Enforceable?

Just as with external counsel, perhaps the surest and most economical way in which internal counsel can best protect themselves from a malpractice claim is to take all steps necessary and prudent to issue an opinion that is in conformity with the law and the relevant facts. Thus, it behooves internal counsel to make the same use as external counsel would of appropriate assumptions, exceptions and qualifications (as well as officer's certificates from other company officers to establish relevant facts) to prepare the closing opinion, no matter the optic effect of doing so in the opinion. Such limitations could make it clear who may rely on the opinion, state that internal counsel is relying on facts provided by others without independent investigation, or define the controlling law and other similar limitations. In all cases, the effectiveness of the limitation or disclaimer depends upon whether it was reasonable under the circumstances to conclude that those who receive the opinion also receive the limitation or disclaimer and understand its importance.

While intentional misrepresentations will always give rise to liability, appropriate qualifications and limitations will stand up to testing under fire. For example, in Washington Electric Cooperative, Inc. v. Massachusetts Municipal Wholesale Electric Co., 894 F. Supp. 777 (D. Vt 1995), a law firm issued an opinion to a third party stating that certain utilities had the authority to enter into power sales agreements containing “take or pay” terms. Subsequently, the state court determined, as a matter of first impression, that the utilities had acted beyond their authority in entering into these contracts. In examining whether the law firm could be liable for negligent misrepresentation, the court observed that the opinion letter attested to the status of the law at the time it was rendered and the law firm disclaimed liability for future changes in the law or uncertainty in interpretation of the law. [The opinion letter contained a qualification warning that "the obligations of the Participants under the power sales agreements and the enforceability thereof may be subject to judicial discretion."] The court found that the qualification was consistent with accepted legal principles and held that it was effective to bar the claim for negligent misrepresentation.

Internal counsel may be tempted to try and shift malpractice liability exclusively onto his or her company employer, reasoning that the company should bear this risk since the company ' and not the individual lawyer ' is usually enjoying the economic fruits of the deal at hand. Such attempts may take the form of drafting the legal opinion so that it appears the internal counsel is merely acting as an agent on behalf of his or her employer in delivering the opinion. Or, the closing opinion may state at the beginning that “X Corporation through its Legal Department” or “the Legal Department of X on behalf of Corporation X” gives the closing opinion and may be signed by “X Corporation, Legal Department.” To further distance themselves from responsibility, members of the legal department may try to sign the closing opinion indicating their corporate titles or the basis of their power to act for the corporate employer. Or, in perhaps the most direct fashion, the internal counsel may include a statement in the opinion indicating that the opinion recipient agrees not to hold the rendering lawyer responsible for malpractice claims stemming from the opinion's contents.

The authors do not believe that such attempts would be successful in shifting exclusive liability to the company for any malpractice claim resulting from a deficient legal opinion. For example, the ABA Report takes the position that neither the use of company letterhead nor the indication of the signer's position with a company is understood as a matter of customary practice to change the signer's personal responsibility for the closing opinion. This position is logical, given that neither the corporate employer nor the law department can act as a lawyer because each lacks the professional standing required to deliver a closing legal opinion.

Moreover, by analogy, many states have enacted laws or professional practice rules that actively prohibit a lawyer's attempt to limit personal liability to its own client. For example, according to the Restatement of the Law Governing Lawyers, an agreement prospectively limiting a lawyer's liability to a client is unenforceable and renders the lawyer subject to professional discipline [Restatement (Third) of the Law Governing Lawyers '54(2) (1998)]. Both New York and California have adopted rules of professional liability that prohibit a lawyer from seeking, by contract or other means, to limit prospectively the lawyer's individual liability to a client for malpractice.” [N.Y. Prof'l Resp. Code DR 6-101 (Simon 2004); Rules of Professional Conduct of the State Bar of California, Rule 3-400 (West)]. While these provisions may not literally cover disclaimers of personal liability in internal counsel opinions (which are delivered to third parties, and not the internal counsel's company employer), the internal counsel's duty of care to a third party attaches a type of liability inherently personal that cannot be disclaimed.

Mitigating Malpractice Exposure

If the ability of internal counsel to deflect personal malpractice liability in the heat of deal battle is so circumscribed, does that mean internal counsel have no foxholes left in which to take shelter? Fortunately, the answer is “no,” but the most readily available alternatives require the cooperation of the internal counsel's employer. For example, internal counsel would be wise to determine if their company employer has obtained a malpractice policy covering the lawyer's opinion practice, and if so, what are its requirements for assuring coverage. Such policies may require the lawyers to take regular professional legal education courses, or to use “two lawyer review” rules similar to those in place at most large law firms. Alternatively (or ideally in addition to such coverage), the internal counsel may request active indemnification by its company employer to cover all costs, expenses and damages incurred by the internal lawyer in rendering legal opinions on behalf of the company, in all cases without regard to whether or not malpractice is actually found (although some states may limit the effectiveness of such indemnities under other theories of applicable law). Lastly, internal counsel may request their company employer purchase, on behalf of the lawyer, individual malpractice coverage pursuant to a separate malpractice policy in the name of that lawyer, where available. Likewise, recipients of internal counsel opinions would be wise to consider if, in the circumstances of any given deal, reliance on such opinions is well placed, if sufficient economic protections are not available for malpractice claims arising from such opinions.

Trend lines indicate that internal counsel opinions in lieu of external counsel opinions are a growing phenomenon. Internal counsel may have little choice but to accept that issuing such opinions is becoming a standard part of the internal lawyer's job description. At the same time, to the extent the rendering of such opinions by internal counsel is perceived as a way to lower transaction costs, then responsible companies will accept the return obligation to share back with their internal counsel (by means of malpractice premiums or indemnities) the risks inherent in asking or requiring internal counsel to issue such opinions. It may not be possible to avoid the malpractice bullet completely, but it should be possible to greatly lessen its sting.

A traditional requirement in many sophisticated equipment leasing and financing transactions is the closing opinion, in which an attorney or law firm is requested to opine on a variety of relevant topics, ranging from proper corporate or partnership approval of the transaction in question, to the legality, validity and enforceability of one or more material agreements. Oftentimes, there may be multiple closing opinions issued in respect of the closing, with certain opinions being rendered by internal counsel for one or more of the transaction participants, and another set rendered by external counsel.

Use and reliance on internal counsel opinions, in the place and stead of opinions rendered by external counsel, appears to be on the rise, attributable to two factors. First, equipment leasing and finance companies are increasingly adding highly skilled internal counsel to their corporate staff, as the leasing and finance business becomes increasingly subjected to various tax, accounting and securities laws. Second, the seemingly inexorable upward trend of external counsel fees has caused some companies to seek significant transactional cost savings by bringing “in house” as much legal work as possible in any given transaction ' including the delivery of closing legal opinions to third parties.

In such transactions, internal counsel for the lessee or lessor, or the borrower, is asked to render a legal opinion not to its corporate or partnership employer, but instead to the counterparty to the transaction at hand. Internal counsel, who may have considered the delivery of such opinions as merely ministerial or routine in the past (because of the relatively narrow scope of such internal opinions, when compared to the typically broader scope of accompanying external counsel opinions) are confronting the hard reality that as the scope of internal opinions they are requested to issue increases, so too does their personal exposure for malpractice if such opinions turn out to be incorrect.

This problem can be compounded if the internal counsel feels undue pressure from his or her employer (whether well founded or not) to issue “clean” opinions (that is, opinions with few, if any, assumptions, exceptions or qualifications) in order to get a deal closed quickly, or to satisfy “market syndication requirements.” In addition, while some companies invest the personnel and budget to create and maintain sophisticated law libraries of their own, oftentimes internal counsel may be hampered in their attempts to stay abreast of the most current developments in the law, constrained by a lack of time or at-hand resources to consult in order to learn of the most recent developments. Lastly, some internal counsel have labored under the misimpression that an opinion rendered in their capacity as internal counsel for a company subjects the company ' rather than the lawyer ' to claims of malpractice if the opinion turns out to be incorrect or misleading.

This article explores the liability standards applied to internal counsel in the delivery of legal opinions to third parties, as well as the ability of internal counsel to deflect personal liability for malpractice claims originating from opinions delivered by them in a company-sponsored transaction. The authors conclude that attempts by internal counsel to limit such malpractice exposure, or to shift exclusive liability for such malpractice claims to the internal counsel's company employer, will be largely ineffective, and so internal counsel should take other reasonable precautions to address this concern.

On the positive side, the authors were unable to locate reported case law in which an internal counsel was held liable to a third party on the basis of a malpractice claim stemming from the delivery of a closing legal opinion. In part, that may be because internal counsel are not perceived as viable economic targets for such claims, and/or because their company employers may be liable to the aggrieved party for any damages suffered through indemnities or default clauses. Nevertheless, prudent internal counsel may wish to take appropriate precautions in advance to share malpractice risk with their company employers, if they are unable to eliminate this risk by virtue of how internal counsel opinions are drafted in favor of third parties.

Opinion Standards for Internal Counsel: The Duty of Care

The Restatement of the Law Governing Lawyers describes the fundamental principle of a lawyer's “duty of care” as a duty to “exercise the competence and diligence normally exercised by lawyers in similar circumstances.” Traditionally, a lawyer owed a duty of care only to his client, and courts refused to expose lawyers to the risk of liability to third parties. Reflecting this approach, the Supreme Court, in Savings Bank v. Ward , 100 U.S. 195 (1879), ruled that in the absence of privity, no duty was owed by a lawyer to an injured non-client. The Court was persuaded that if privity were abandoned, the scope of liability would expand beyond measure.

Through the years, the Savings Bank doctrine has evolved and, although different jurisdictions have adopted different standards, the strict privity requirement has been carved up into exceptions that establish a lawyer's duty of care to a third party. In New York, for example, the court in Prudential Ins. Co. of America v. Dewey, Ballantine , 80 N.Y.2d 377, 384 (1992), held that a lawyer owed a duty of care to a third party when “three critical criteria” were evident: 1) an awareness by the maker of a statement given to a third party that it is to be used for a particular purpose; 2) reliance by a known party on the statement in furtherance of that purpose; and 3) some conduct by the maker of the statement linking it to the relying party and evidencing the maker's understanding of that reliance. Similarly, in New Jersey, the court in Petrillo v. Bachenberg , 139 N.J. 472 (1995), held that a lawyer may owe a duty of care to third parties where the lawyer knows, or should know, that third parties will rely on the lawyer's representations and where the third parties are not too remote from the lawyer to be entitled to protection. In contrast, California ignores the doctrine of privity altogether and focuses on the policy reasons for establishing such a duty to third parties. Courts often reason, as the court did in Biakanja v. Irving , 320 P.2d 16 (1958), that a lawyer should be liable to any person who was intended by the client to benefit from the lawyer's engagement and who suffers a loss of that benefit on account of the lawyer's conduct.

As one can quickly see, delivery of a closing opinion in favor of a third party, expressly intended to give the non-client recipient legal comfort on various matters associated with the transaction in question, will almost surely trigger a duty standard (thus raising the specter of malpractice risk) to that recipient. The Committee on Legal Opinions of the American Bar Association Section of Business Law begins its article, “Closing Opinions of Inside Counsel” (the “ABA Report”), with the general principle that all lawyers must meet the same standard of care, whether they are members of a law firm or employees in a company, an arm of government, or other organization [ABA Section of Business Law, Committee on Legal Opinions, Closing Opinions of Inside Counsel, 58 Bus. Law 1127 (2003)]. In other words, the lawyer's employment status does not affect the standard of care owed to the recipient of a closing opinion. According to the ABA Report, regardless of the employment environment in which a lawyer may practice, a lawyer who issues a closing opinion to a third party generally owes a duty of care to the recipient of that opinion and is subject to potential liability and malpractice in connection with it.

Who Owes the Duty of Care?

The ABA Report clearly states that internal counsel are liable for third-party closing opinions issued by them to the same extent as external counsel. However, unlike an external counsel's closing opinion that is signed in the law firm's name (thus intentionally subjecting all equity members of the firm to joint and several liability for the opinion), internal counsel closing opinions will be signed by an individual, in the individual's name. In some cases, the individual may be the primary internal lawyer acting on the deal. However, there may be circumstances where another member of the company's legal department may be asked to execute the opinion in question, perhaps because that person is licensed to practice law in the relevant jurisdiction, or because company policy requires all opinions to be signed by the company's general counsel, or because the company itself (in part for marketing reasons) seeks to highlight the importance of the transaction to its own customer by having a “senior attorney” of the company (perhaps the general counsel) execute and deliver the opinion. Although these may be valid company reasons for having a lawyer who is not intimately familiar with a transaction or transaction documents execute and deliver a closing opinion, one can quickly see that doing so poses special risks for the signing attorney. That is because the internal counsel who signs a closing opinion in his or her name has personal responsibility for satisfying the duty of care owed to the opinion recipient [ABA Section of Business Law, Committee on Legal Opinions, Closing Opinions of Inside Counsel, 58 Bus. Law 1128 (2003)]. Furthermore, unless the other members of a law department or team render a part of the closing opinion and expressly permit reliance on it, they will not be vicariously liable to the recipient of an internal counsel opinion for possible violations of the duty of care by the signer [ABA Section of Business Law, Committee on Legal Opinions, Closing Opinions of Inside Counsel, 58 Bus. Law 1128 (2003)]. Hence, an internal counsel who is asked to execute an opinion prepared by others in his or her department would be wise to carry out the same level of due diligence as to the relevant facts, documents, and law as any external counsel would do.

If malpractice has occurred in the delivery of an internal counsel opinion, the aggrieved opinion recipient typically has the option of seeking compensation directly from the internal counsel's company employer under the general principle of respondeat superior, or by bringing a malpractice action against the lawyer in question, or both. The next part of this article explores what steps the internal counsel can take to better protect himself or herself from the successful pursuit of a malpractice claim. It is important to note that even if the malpractice claim proves to be unfounded, the very bringing of the action could cause internal counsel to suffer very real damages in terms of costs to defend the claim and public reputation.

Is a Disclaimer of Personal Liability Enforceable?

Just as with external counsel, perhaps the surest and most economical way in which internal counsel can best protect themselves from a malpractice claim is to take all steps necessary and prudent to issue an opinion that is in conformity with the law and the relevant facts. Thus, it behooves internal counsel to make the same use as external counsel would of appropriate assumptions, exceptions and qualifications (as well as officer's certificates from other company officers to establish relevant facts) to prepare the closing opinion, no matter the optic effect of doing so in the opinion. Such limitations could make it clear who may rely on the opinion, state that internal counsel is relying on facts provided by others without independent investigation, or define the controlling law and other similar limitations. In all cases, the effectiveness of the limitation or disclaimer depends upon whether it was reasonable under the circumstances to conclude that those who receive the opinion also receive the limitation or disclaimer and understand its importance.

While intentional misrepresentations will always give rise to liability, appropriate qualifications and limitations will stand up to testing under fire. For example, in Washington Electric Cooperative, Inc. v. Massachusetts Municipal Wholesale Electric Co., 894 F. Supp. 777 (D. Vt 1995), a law firm issued an opinion to a third party stating that certain utilities had the authority to enter into power sales agreements containing “take or pay” terms. Subsequently, the state court determined, as a matter of first impression, that the utilities had acted beyond their authority in entering into these contracts. In examining whether the law firm could be liable for negligent misrepresentation, the court observed that the opinion letter attested to the status of the law at the time it was rendered and the law firm disclaimed liability for future changes in the law or uncertainty in interpretation of the law. [The opinion letter contained a qualification warning that "the obligations of the Participants under the power sales agreements and the enforceability thereof may be subject to judicial discretion."] The court found that the qualification was consistent with accepted legal principles and held that it was effective to bar the claim for negligent misrepresentation.

Internal counsel may be tempted to try and shift malpractice liability exclusively onto his or her company employer, reasoning that the company should bear this risk since the company ' and not the individual lawyer ' is usually enjoying the economic fruits of the deal at hand. Such attempts may take the form of drafting the legal opinion so that it appears the internal counsel is merely acting as an agent on behalf of his or her employer in delivering the opinion. Or, the closing opinion may state at the beginning that “X Corporation through its Legal Department” or “the Legal Department of X on behalf of Corporation X” gives the closing opinion and may be signed by “X Corporation, Legal Department.” To further distance themselves from responsibility, members of the legal department may try to sign the closing opinion indicating their corporate titles or the basis of their power to act for the corporate employer. Or, in perhaps the most direct fashion, the internal counsel may include a statement in the opinion indicating that the opinion recipient agrees not to hold the rendering lawyer responsible for malpractice claims stemming from the opinion's contents.

The authors do not believe that such attempts would be successful in shifting exclusive liability to the company for any malpractice claim resulting from a deficient legal opinion. For example, the ABA Report takes the position that neither the use of company letterhead nor the indication of the signer's position with a company is understood as a matter of customary practice to change the signer's personal responsibility for the closing opinion. This position is logical, given that neither the corporate employer nor the law department can act as a lawyer because each lacks the professional standing required to deliver a closing legal opinion.

Moreover, by analogy, many states have enacted laws or professional practice rules that actively prohibit a lawyer's attempt to limit personal liability to its own client. For example, according to the Restatement of the Law Governing Lawyers, an agreement prospectively limiting a lawyer's liability to a client is unenforceable and renders the lawyer subject to professional discipline [Restatement (Third) of the Law Governing Lawyers '54(2) (1998)]. Both New York and California have adopted rules of professional liability that prohibit a lawyer from seeking, by contract or other means, to limit prospectively the lawyer's individual liability to a client for malpractice.” [N.Y. Prof'l Resp. Code DR 6-101 (Simon 2004); Rules of Professional Conduct of the State Bar of California, Rule 3-400 (West)]. While these provisions may not literally cover disclaimers of personal liability in internal counsel opinions (which are delivered to third parties, and not the internal counsel's company employer), the internal counsel's duty of care to a third party attaches a type of liability inherently personal that cannot be disclaimed.

Mitigating Malpractice Exposure

If the ability of internal counsel to deflect personal malpractice liability in the heat of deal battle is so circumscribed, does that mean internal counsel have no foxholes left in which to take shelter? Fortunately, the answer is “no,” but the most readily available alternatives require the cooperation of the internal counsel's employer. For example, internal counsel would be wise to determine if their company employer has obtained a malpractice policy covering the lawyer's opinion practice, and if so, what are its requirements for assuring coverage. Such policies may require the lawyers to take regular professional legal education courses, or to use “two lawyer review” rules similar to those in place at most large law firms. Alternatively (or ideally in addition to such coverage), the internal counsel may request active indemnification by its company employer to cover all costs, expenses and damages incurred by the internal lawyer in rendering legal opinions on behalf of the company, in all cases without regard to whether or not malpractice is actually found (although some states may limit the effectiveness of such indemnities under other theories of applicable law). Lastly, internal counsel may request their company employer purchase, on behalf of the lawyer, individual malpractice coverage pursuant to a separate malpractice policy in the name of that lawyer, where available. Likewise, recipients of internal counsel opinions would be wise to consider if, in the circumstances of any given deal, reliance on such opinions is well placed, if sufficient economic protections are not available for malpractice claims arising from such opinions.

Trend lines indicate that internal counsel opinions in lieu of external counsel opinions are a growing phenomenon. Internal counsel may have little choice but to accept that issuing such opinions is becoming a standard part of the internal lawyer's job description. At the same time, to the extent the rendering of such opinions by internal counsel is perceived as a way to lower transaction costs, then responsible companies will accept the return obligation to share back with their internal counsel (by means of malpractice premiums or indemnities) the risks inherent in asking or requiring internal counsel to issue such opinions. It may not be possible to avoid the malpractice bullet completely, but it should be possible to greatly lessen its sting.