Counseling the Counselors

In the wake of recent product liability firestorms, there has been a heightened emphasis on corporate accountability. The actions of officers, directors and even corporate professionals are being more closely scrutinized than ever before, and in this climate, the personal liability risk of in-house counsel has increased exponentially. Because in-house attorneys must necessarily hover between multiple roles on a daily basis, including attorney, businessperson, investigator, and compliance officer (to name a few), these individuals are especially susceptible to heightened liability exposure. A variety of potential liability theories ' such as professional malpractice and breach of fiduciary duty claims ' may be pursued against in-house counsel by the corporation, its shareholders, and members of the public, as well as by governmental authorities.

Further complicating matters is the Responsible Corporate Officer (RCO) doctrine, which has gained serious traction in recent years. This doctrine allows civil and criminal liability to be strictly imposed on corporate employees for violations of law that occurred during their tenure if they had the power, by virtue of their position, to prevent or correct violations of law but failed to do so ' regardless of whether such employees had individual intent, awareness of the wrongdoing, or direct involvement in the misconduct. Often described as “the crime of doing nothing,” the RCO doctrine raises the possibility that personal liability for a corporation's misdeeds may be imposed on an in-house attorney based on nothing more than the attorney's position at the corporation.

The government's increased efforts to hold corporate employees personally responsible for corporate misconduct is illuminated by the widely publicized six-count indictment brought against a former in-house counsel of a pharmaceutical company alleging that the attorney obstructed an official proceeding, falsified and concealed documents, and made false statements during a Food and Drug Administration (FDA) investigation into whether the company had improperly introduced a misbranded drug into interstate commerce. The charges subjected the attorney to a maximum of 60 years in federal prison. The indictment was dismissed due to erroneous and prejudicial advice given to the grand jury; yet one month later, the government re-indicted the attorney on the same charges. After the prosecution had presented its case-in-chief, the judge ' in an unusual move ' granted the attorney's motion for a judgment of acquittal before the defense had even presented its case and admonished the Department of Justice (DOJ), stating that the case should never have been prosecuted. Although an acquittal was ultimately obtained, the attorney was still forced to endure two indictments, a trial, and extensive press coverage ' a series of events that sent a collective chill down in-house attorneys' spines.

It is therefore crucial that in-house attorneys vigilantly protect themselves from the ever-expanding morass of personal liability risk. It is recommended that all in-house counsel: 1) confirm that they have appropriate and adequate insurance coverage; 2) never lose sight of the fact that the company is the client; 3) maintain an open dialogue with all corporate players; 4) object when appropriate; 5) retain and consult with outside counsel; and 6) document any advice given.

Insurance Is Important

In-house attorneys should confirm that they have insurance coverage for their professional activities from their client corporations and those corporations should, in turn, want to protect their legal team. An absence of insurance coverage may prevent a corporation from retaining the best talent; because of the ever-present risk of personal liability, successful, high-quality attorneys will likely balk at joining a company that does not extend protection to its lawyers.

Many Directors and Officers (D&O) Liability policies contain “professional services” exclusions which may exclude coverage for legal work performed by in-house counsel. One option for a corporation is to include its in-house counsel and other legal staff as “insured persons” under its current D&O policy. In-house counsel should ensure that such insurance is available for all of their activities, i.e., the provision of both legal advice and business-oriented advice to the company. It is vital that in-house counsel review and analyze the scope of coverage available to them under the company's existing D&O policy so that any gaps in coverage can be readily identified and addressed.

Another option is for a company to purchase Employed Lawyers Professional Liability (ELPL) Insurance. There are added benefits to ELPL Insurance because those policies are: 1) usually written with a broader definition of “insured persons,” which will allow a corporation to insure its entire in-house legal team more easily; 2) specifically tailored to cover lawyers, and can include coverage for ethics or licensure proceedings; 3) lacking co-defendant requirements (which can limit coverage under a D&O policy for in-house counsel only where he/she is named as a co-defendant with the company or a director/officer); and 4) include personal injury perils coverage (e.g., malicious prosecution/defamation) as well as defense cost coverage for claimsmade by the insured organization. ELPL coverage can be provided as a separate stand-alone insurance policy, or as an extension to a company's existing D&O policy.

Never Forget Your Client Is the Company

In-house attorneys eventually become closely entwined with the members of the company's management. Cultivating these relationships is important, and, in the end, may greatly benefit the company overall. Nonetheless, every in-house attorney must remember that management is not the client ' the company is. The primary concern of every member of an in-house legal team must be the best interests of the company. Obligations to the company must always come first, and close relationships with management ' no matter how beneficial ' can never get in the way of those obligations. Further, it is important to consider the interests of the company holistically. Even if proposed conduct is not technically illegal, in-house counsel need to look beyond the mere question of legality and consider what is ultimately best for the company.

American Bar Association Model Rule 1.13(f) provides: “In dealing with an organization's directors, officers, employees, members, shareholders, or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.” This rule codifies the obligation of an in-house attorney to put the company first consistently, and to firmly remind those who question an attorney's loyalty who his or her client actually is. Reminding management that one's duty is to the company and not to them personally will not only help protect in-house counsel from liability later, but it may also inspire management to remember that ultimately their work is for the company.

Keep an Open Dialogue

In order to safeguard the company ' and themselves ' from liability in the event a potentially unlawful act occurs, in-house counsel should strive to preempt issues from escalating into full-blown crises. To achieve this, general counsel and other in-house counsel should promote a culture of accessibility and keep an open dialogue with company officers and directors about legal issues on an ongoing basis. Corporate counsel should emphasize that the time to seek their opinion is not when an issue has already escalated but, rather, whenever any legal question or issue arises in the first instance.

Object When Appropriate

One of the most important steps in-house counsel can take to protect themselves from liability in a product liability suit against the company is to object when necessary to actions being taken by the company or even its outside counsel. It is crucial that in-house attorneys never agree silently to company actions when they, in fact, disagree. Without speaking up and objecting, counsel could find themselves just as culpable if the issue escalates, and may even face malpractice claims for failing to advise the company properly. When objecting, in-house counsel are advised to: 1) articulate the problem clearly (in an effort to avoid more confusion or future mistakes); and 2) follow the objection with creative alternatives to the same issue.

When objecting to a course of action is not enough, in-house attorneys may find themselves forced to withhold their approval. Merely signing-off with a disclaimer stating that the attorney is uncomfortable with or opposes the action being taken may not protect in-house counsel from liability.

In-house attorneys are key gatekeepers, and with the imposition of the RCO doctrine, the duty to object and act takes on a heightened magnitude. In-house counsel have a responsibility to deter fraud and misconduct and, to meet this responsibility, in-house attorneys must keep an open dialogue with management and address issues up front in an effort to prevent claims. If the signs of potential future improper conduct start to appear, in-house attorneys are advised to speak up, object to the course of action, and work with management to eliminate the problem. If it becomes clear to in-house counsel that the corporation nonetheless intends to embark on a course of action that will be harmful to the corporation and is likely to result in the commission of a legal violation, the attorney should report the issue immediately to the upper echelons of management and document all such communications.

Seek Advice from Outside Counsel

A strong partnership between in-house and outside counsel is essential for any successful company. Seeking assistance or a second opinion from outside counsel will not only benefit the company but will also help shield the in-house counsel from liability in a product liability suit. Outside counsel provide an extra layer of protection, and turning to them for necessary reviews and advice demonstrates a culture of compliance and integrity within the company.

While it is important for corporate counsel to obtain a second opinion if they are unsure about a certain transaction or business decision, they should only engage in work that they are truly competent to handle. In-house attorneys have a responsibility to understand every transaction fully before they provide advice or consent regarding it. Outside counsel can help in-house attorneys better understand the situation, but it is ultimately the duty of the in-house attorney to have complete oversight of the subject matter. This responsibility cannot be avoided by relying solely on the advice of outside counsel. In the final analysis, it is the in-house counsel who must take ownership for their decisions.

Document Your Advice

Due to the nature of product liability cases, claims may not arise until several years after a key decision has been made or a course of business chosen. Accordingly, corporate counsel should carefully document their advice, and retain all such proof.

Documenting one's advice will help any in-house attorney mount a defense if a personal liability claim arises, and will also be key in countering any claims that fiduciary duties were breached. Ideally, any such documentation will demonstrate that the in-house counsel kept the interests of the company first and acted within the scope of his or her role, thus allowing him or her to maintain the coverage of any applicable insurance policies.

Conclusion

In sum, accepting an in-house attorney position means taking on great responsibility, and with this responsibility comes the risk of significant potential personal liability and exposure. While it is a challenge for in-house counsel to navigate the waters in a corporate culture, general counsel and their in-house legal staff will better serve the corporation and more effectively shield themselves from any such liability when difficult liability issues arise, if they have appropriate and adequate insurance coverage, do not lose sight of the fact that the company is the client, keep an open dialogue with all corporate players, speak up when necessary to oppose actions that a company is taking, retain and consult with outside counsel, and document any advice given.

Ronald J. Levine ([email protected]), a member of this newsletter's Board of Editors, is the Co-Chair of the Litigation Department at Herrick, Feinstein LLP, with offices in New York and Newark, NJ, where he concentrates in class action litigation. Sharon A. O'Shaughnessy ([email protected]) is a litigation associate with the firm. Briana Rose Pigott of Georgetown University Law Center was a summer law clerk at the time this article was written.

In the wake of recent product liability firestorms, there has been a heightened emphasis on corporate accountability. The actions of officers, directors and even corporate professionals are being more closely scrutinized than ever before, and in this climate, the personal liability risk of in-house counsel has increased exponentially. Because in-house attorneys must necessarily hover between multiple roles on a daily basis, including attorney, businessperson, investigator, and compliance officer (to name a few), these individuals are especially susceptible to heightened liability exposure. A variety of potential liability theories ' such as professional malpractice and breach of fiduciary duty claims ' may be pursued against in-house counsel by the corporation, its shareholders, and members of the public, as well as by governmental authorities.

Further complicating matters is the Responsible Corporate Officer (RCO) doctrine, which has gained serious traction in recent years. This doctrine allows civil and criminal liability to be strictly imposed on corporate employees for violations of law that occurred during their tenure if they had the power, by virtue of their position, to prevent or correct violations of law but failed to do so ' regardless of whether such employees had individual intent, awareness of the wrongdoing, or direct involvement in the misconduct. Often described as “the crime of doing nothing,” the RCO doctrine raises the possibility that personal liability for a corporation's misdeeds may be imposed on an in-house attorney based on nothing more than the attorney's position at the corporation.

The government's increased efforts to hold corporate employees personally responsible for corporate misconduct is illuminated by the widely publicized six-count indictment brought against a former in-house counsel of a pharmaceutical company alleging that the attorney obstructed an official proceeding, falsified and concealed documents, and made false statements during a Food and Drug Administration (FDA) investigation into whether the company had improperly introduced a misbranded drug into interstate commerce. The charges subjected the attorney to a maximum of 60 years in federal prison. The indictment was dismissed due to erroneous and prejudicial advice given to the grand jury; yet one month later, the government re-indicted the attorney on the same charges. After the prosecution had presented its case-in-chief, the judge ' in an unusual move ' granted the attorney's motion for a judgment of acquittal before the defense had even presented its case and admonished the Department of Justice (DOJ), stating that the case should never have been prosecuted. Although an acquittal was ultimately obtained, the attorney was still forced to endure two indictments, a trial, and extensive press coverage ' a series of events that sent a collective chill down in-house attorneys' spines.

It is therefore crucial that in-house attorneys vigilantly protect themselves from the ever-expanding morass of personal liability risk. It is recommended that all in-house counsel: 1) confirm that they have appropriate and adequate insurance coverage; 2) never lose sight of the fact that the company is the client; 3) maintain an open dialogue with all corporate players; 4) object when appropriate; 5) retain and consult with outside counsel; and 6) document any advice given.

Insurance Is Important

In-house attorneys should confirm that they have insurance coverage for their professional activities from their client corporations and those corporations should, in turn, want to protect their legal team. An absence of insurance coverage may prevent a corporation from retaining the best talent; because of the ever-present risk of personal liability, successful, high-quality attorneys will likely balk at joining a company that does not extend protection to its lawyers.

Many Directors and Officers (D&O) Liability policies contain “professional services” exclusions which may exclude coverage for legal work performed by in-house counsel. One option for a corporation is to include its in-house counsel and other legal staff as “insured persons” under its current D&O policy. In-house counsel should ensure that such insurance is available for all of their activities, i.e., the provision of both legal advice and business-oriented advice to the company. It is vital that in-house counsel review and analyze the scope of coverage available to them under the company's existing D&O policy so that any gaps in coverage can be readily identified and addressed.

Another option is for a company to purchase Employed Lawyers Professional Liability (ELPL) Insurance. There are added benefits to ELPL Insurance because those policies are: 1) usually written with a broader definition of “insured persons,” which will allow a corporation to insure its entire in-house legal team more easily; 2) specifically tailored to cover lawyers, and can include coverage for ethics or licensure proceedings; 3) lacking co-defendant requirements (which can limit coverage under a D&O policy for in-house counsel only where he/she is named as a co-defendant with the company or a director/officer); and 4) include personal injury perils coverage (e.g., malicious prosecution/defamation) as well as defense cost coverage for claimsmade by the insured organization. ELPL coverage can be provided as a separate stand-alone insurance policy, or as an extension to a company's existing D&O policy.

Never Forget Your Client Is the Company

In-house attorneys eventually become closely entwined with the members of the company's management. Cultivating these relationships is important, and, in the end, may greatly benefit the company overall. Nonetheless, every in-house attorney must remember that management is not the client ' the company is. The primary concern of every member of an in-house legal team must be the best interests of the company. Obligations to the company must always come first, and close relationships with management ' no matter how beneficial ' can never get in the way of those obligations. Further, it is important to consider the interests of the company holistically. Even if proposed conduct is not technically illegal, in-house counsel need to look beyond the mere question of legality and consider what is ultimately best for the company.

American Bar Association Model Rule 1.13(f) provides: “In dealing with an organization's directors, officers, employees, members, shareholders, or other constituents, a lawyer shall explain the identity of the client when the lawyer knows or reasonably should know that the organization's interests are adverse to those of the constituents with whom the lawyer is dealing.” This rule codifies the obligation of an in-house attorney to put the company first consistently, and to firmly remind those who question an attorney's loyalty who his or her client actually is. Reminding management that one's duty is to the company and not to them personally will not only help protect in-house counsel from liability later, but it may also inspire management to remember that ultimately their work is for the company.

Keep an Open Dialogue

In order to safeguard the company ' and themselves ' from liability in the event a potentially unlawful act occurs, in-house counsel should strive to preempt issues from escalating into full-blown crises. To achieve this, general counsel and other in-house counsel should promote a culture of accessibility and keep an open dialogue with company officers and directors about legal issues on an ongoing basis. Corporate counsel should emphasize that the time to seek their opinion is not when an issue has already escalated but, rather, whenever any legal question or issue arises in the first instance.

Object When Appropriate

One of the most important steps in-house counsel can take to protect themselves from liability in a product liability suit against the company is to object when necessary to actions being taken by the company or even its outside counsel. It is crucial that in-house attorneys never agree silently to company actions when they, in fact, disagree. Without speaking up and objecting, counsel could find themselves just as culpable if the issue escalates, and may even face malpractice claims for failing to advise the company properly. When objecting, in-house counsel are advised to: 1) articulate the problem clearly (in an effort to avoid more confusion or future mistakes); and 2) follow the objection with creative alternatives to the same issue.

When objecting to a course of action is not enough, in-house attorneys may find themselves forced to withhold their approval. Merely signing-off with a disclaimer stating that the attorney is uncomfortable with or opposes the action being taken may not protect in-house counsel from liability.

In-house attorneys are key gatekeepers, and with the imposition of the RCO doctrine, the duty to object and act takes on a heightened magnitude. In-house counsel have a responsibility to deter fraud and misconduct and, to meet this responsibility, in-house attorneys must keep an open dialogue with management and address issues up front in an effort to prevent claims. If the signs of potential future improper conduct start to appear, in-house attorneys are advised to speak up, object to the course of action, and work with management to eliminate the problem. If it becomes clear to in-house counsel that the corporation nonetheless intends to embark on a course of action that will be harmful to the corporation and is likely to result in the commission of a legal violation, the attorney should report the issue immediately to the upper echelons of management and document all such communications.

Seek Advice from Outside Counsel

A strong partnership between in-house and outside counsel is essential for any successful company. Seeking assistance or a second opinion from outside counsel will not only benefit the company but will also help shield the in-house counsel from liability in a product liability suit. Outside counsel provide an extra layer of protection, and turning to them for necessary reviews and advice demonstrates a culture of compliance and integrity within the company.

While it is important for corporate counsel to obtain a second opinion if they are unsure about a certain transaction or business decision, they should only engage in work that they are truly competent to handle. In-house attorneys have a responsibility to understand every transaction fully before they provide advice or consent regarding it. Outside counsel can help in-house attorneys better understand the situation, but it is ultimately the duty of the in-house attorney to have complete oversight of the subject matter. This responsibility cannot be avoided by relying solely on the advice of outside counsel. In the final analysis, it is the in-house counsel who must take ownership for their decisions.

Document Your Advice

Due to the nature of product liability cases, claims may not arise until several years after a key decision has been made or a course of business chosen. Accordingly, corporate counsel should carefully document their advice, and retain all such proof.

Documenting one's advice will help any in-house attorney mount a defense if a personal liability claim arises, and will also be key in countering any claims that fiduciary duties were breached. Ideally, any such documentation will demonstrate that the in-house counsel kept the interests of the company first and acted within the scope of his or her role, thus allowing him or her to maintain the coverage of any applicable insurance policies.

Conclusion

In sum, accepting an in-house attorney position means taking on great responsibility, and with this responsibility comes the risk of significant potential personal liability and exposure. While it is a challenge for in-house counsel to navigate the waters in a corporate culture, general counsel and their in-house legal staff will better serve the corporation and more effectively shield themselves from any such liability when difficult liability issues arise, if they have appropriate and adequate insurance coverage, do not lose sight of the fact that the company is the client, keep an open dialogue with all corporate players, speak up when necessary to oppose actions that a company is taking, retain and consult with outside counsel, and document any advice given.

Ronald J. Levine ([email protected]), a member of this newsletter's Board of Editors, is the Co-Chair of the Litigation Department at Herrick, Feinstein LLP, with offices in New York and Newark, NJ, where he concentrates in class action litigation. Sharon A. O'Shaughnessy ([email protected]) is a litigation associate with the firm. Briana Rose Pigott of Georgetown University Law Center was a summer law clerk at the time this article was written.