Identifying Conflicts when Representing Businesses and their Employees
By: White Collar Criminal Lawyer John Floyd and Paralegal Billy Sinclair
Issues surrounding joint representation by attorneys in criminal cases are fairly straightforward. The U.S. Supreme Court three decades ago, in Cuyler v. Sullivan, held that a defendant in a criminal case may demonstrate a denial of effective representation of counsel, guaranteed under the Sixth Amendment, by satisfying a dual criteria: 1) defense counsel was actively representing conflicting interests, and 2) the conflict(s) had an adverse impact on counsel’s performance while representing the defendant.
Rule 44 of the Federal Rules of Criminal Procedure permits a trial court in cases where multiple defendants are represented by the same counsel to promptly hold a hearing to determine the existence of potential conflicts and to advise each defendant of their right to separate representation. The trial court’s failure or refusal to conduct a Rule 44 hearing is not reversible error unless it is established that there was an actual conflict of interest. That’s because Rule 44 is not a mandatory “shall” statute prohibiting the joint representation in a criminal case because such representation is not per se violation of the right to effective assistance of counsel. Although the statute does not use a mandatory “shall,” lawyers who represent clients with potential conflicts are treading on very thin ice and should seriously consider referring one of the clients to another lawyer, possibly working under a joint defense agreement.
Joint representation in quazi-criminal situations, such as government regulatory investigations, is far more complex and complicated. This is especially so in cases where an attorney represents both a corporation and its individual officers, or employees, in government investigations or court proceedings. This was underscored in a 2009 United States District Court ruling in the case of United States v. Nicholas involving the suppression of privileged communications. In 2006 the law firm of Irell & Manella LLP (“Irell”) undertook joint representation of Broadcom Corporation (“Broadcom”) and its Chief Financial Officer, William J. Ruehle. Irell was representing Broadcom in an “internal investigation of its stock option granting practices” while simultaneously representing Ruehle against two shareholder lawsuits “regarding those same stock option granting practices.” Significantly, prior to undertaking these multiple representations which had clear “adverse interests,” Irell did not obtain an informed written consent from Ruehle agreeing to the joint representation.
One month after undertaking the multiple representations Irell lawyers met with Ruehle to discuss the “stock option granting practices at Broadcom.” Before the meeting got underway, the Irell lawyers did not inform Ruehle that they were there representing “only Broadcom” and that “whatever he said to them could be used against him by Broadcom or disclosed by the company to third partied.” As a consequence, Ruehle freely told the lawyers how the practices worked and his role in them. Following the meeting Broadcom instructed Irell to disclose what Ruehle had told them to the company’s auditors, the Securities and Exchange Commission (“SEC”), and the U.S. Attorney’s Office (“Government”) without obtaining the CFO’s consent.
In the subsequent criminal case brought against Ruehle the Government sought to use his statements to the Irell lawyers. The trial court blocked that attempt, saying that Ruehle’s statements to Irell’s lawyers were “privileged attorney-client communications. Ruehle reasonably believed that the Irell lawyers were meeting with him as his personal lawyers, not just Broadcom lawyers. Mr. Ruehle had a legitimate expectation that whatever he said to the Irell lawyers would be maintained in confidence. He was never told, nor did he ever contemplate, that his statements to the Irell lawyers would be disclosed to third parties, especially not to the Government in connection with criminal charges against him. Irell had no right to disclose Mr. Ruehle’s statements, and Irell breached its duty of loyalty when it did so. Accordingly, the Court must suppress all evidence reflecting Mr. Ruehle’s statements to the Irell lawyers regarding stock option granting practices at Broadcom.”
With the legal issues put in proper context, the district court made it clear that it did not address the ethical issues raised by Irell’s conduct in the case. The court opened its ruling with the observation that the California Rules of Professional Conduct “protect clients, promote public confidence in the legal profession, and ensure the fair administration of justice.” The court added that “the most fundamental of these rules is a lawyer’s duty of undivided loyalty to his client. A lawyer can never assume a position adverse to the client or disclose client confidences without the client’s knowing, intelligent, and voluntary consent in writing. Unfortunately, in this case, a law firm breached its duty of loyalty to a client in several respects.”
Against this backdrop, the district court concluded that it could not “overlook Irell’s ethical misconduct” and that it had to “refer Irell to the State Bar for appropriate discipline.” This action is consistent with longstanding case law by the U.S. Supreme Court which, in 1976 in Fisher v. United States, held that the attorney-client privilege protects “[c]onfidential disclosures by a client to an attorney made in order to obtain legal assistance.” Two decades later the Seventh Circuit, in United States v. Evans, ruled that the existence of an attorney-client relationship “hinges upon the client’s belief that he is consulting a lawyer in that capacity and his manifested intention to seek professional legal advice.” As the Supreme Court observed three decades ago in Upjohn Co. v. United States, “the privilege exists to protect not only the giving of professional advice to those who can act on it but also the giving of information to the lawyer to enable him to give sound and informed advice. The first step in the resolution of any legal problem is ascertaining the factual background and sifting through the facts with an eye to the legally relevant.”
The Upjohn court established what is known as the “Corporate Miranda” warning which is given to inform “a constituent member or an organization that the attorney represents the organization and not the constituent member.” The “Corporate Miranda” warning was put in place to advise an employee or the officer of a corporation that the corporation is the client and, therefore, controls “the privilege and confidentiality” of any communication given by the employee/officer. The warning is designed to give “non-client” employees/officers who are communicating with the corporation’s attorney(s) notice that no attorney-client relationship exists between them; and that any information disclosed to the corporate attorneys can be disclosed to third parties if such disclosures serve the best interests of the corporation.
The Government tried to argue that the Irell lawyers had given Ruehle an “Upjohn warning,” but this argument was forcefully brushed aside by the court who, first, said it did not believe such a warning had been given, and, second, even if Irell lawyers had given such a warning, it was “woefully inadequate under the circumstances.” The court added that the Upjohn warning was actually irrelevant because there was an “undisputed attorney-client relationship between Irell and Ruehle” and the Upjohn warning is designed to protect “non-client” employees/officers in which there is no privilege.
Rule 1.13(a) of the Model Rules of the American Bar Association states that an attorney “employed or retained by an organization, represents the organization acting through its duly authorized constituents.” This provision protects the organization from the actions of an “officer, employee or other person associated with the organization” who may be engaged in, intends to engage in, or otherwise acts in a manner that violates “a legal obligation to the organization” and the provision compels the attorney to take whatever steps he/she deems “necessary in the best interest of the organization.” Subsection 2 of Paragraph C of Rule 1.13 instructs that if the attorney reasonably “believes that the violation is reasonably certain to result in substantial injury to the organization, then the lawyer may reveal information relating to the representation whether or not Rule 1.6 permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization.”
Paragraph F of Rule 1.13 forcefully instructs that “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.”
Rule 1.12 of the Texas Disciplinary Rules also provides that when an attorney is hired by an organization, he/she represents the organization, not its individual officers or employees. The following Rules provides guidance in Texas on how to undergo or avoid multiple representation: 1.01, 1.02, 1.05, 1.06, 1.07, 1.08, 1.09, 1.12, 1.15 and 4.03. In 1996 the Texas Supreme Court, in National Medical Enterprises v. Godbey, held that while these Rules are not determinative of when an attorney should be disqualified in multiple representations, they “do provide guidelines and suggest relevant considerations.”
ABA Model Rule 1.7(a) perhaps provides clearer guidance for attorneys who undertake to represent both the organization and individual employees. The Rule prohibits an attorney from engaging in such a representation if it involves a “concurrent conflict of interest.” A concurrent conflict of interest is defined as a situation where “the representation of one client will be directly adverse to another client” or “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client.”
Does this mean an attorney can never represent both an organization and its employees? No. Subparagraph (b) of Rule 1.7 states that such a representation can be undertaken when there are “concurrent conflicts” if the attorney satisfies the following four conditions:
- The attorney reasonably believes that he/she will be able to provide competent and diligent representation to each affected client;
- The representation is not prohibited by law;
- The representation does not involve the assertion of a claim by one client against another client represented by the attorney in the same litigation or other proceeding before a tribunal; and
- Each affected client gives informed consent, confirmed in writing.
Texas Disciplinary Rule 1.0(c) also permits the multiple representation of clients under certain circumstances; namely, 1) the attorney reasonably believes that the representation of any one client will not materially and negatively affect the representation of any other client; and 2) each client consents after being fully informed of the nature and implications of possible adverse consequences of multiple representation.
The Bloomberg Law Reports, in an article titled “Representing Multiple Parties in a Derivative Litigation,” pointed out that “shareholder derivative actions “represent a narrow exception to the general rule that a corporation’s board of directors has the power to decide whether the corporation should initiate litigation.” In these actions, shareholders bring the litigation on behalf of the corporation for “alleged wrongdoing by corporate officers or members of the corporation’s board of directors, seeking relief for the corporation’s benefit.” Such litigation poses “potential conflicts of interests at various stages” of the litigation when an attorney is representing both the corporation and its directors and officers. Because of the obvious and numerous possibilities of conflicts of interest, is unadvisable for an attorney to undertake joint representation in these cases or the proceeding investigations, except in very limited circumstances.
The “commentary” to ABA Model Rule 1.13 provides instructions relative to shareholder derivative actions: “The question can arise whether counsel for the organization may defend such an action. The proposition that the organization is the lawyer’s client does not alone resolve the issue. Most derivative actions are a normal incident of an organization’s affairs, to be defended by the organization’s lawyer like any other suit. However, if the claim involves serious charges of wrongdoing by those in control of the organization, a conflict may arise between the lawyer’s duty to the organization and the lawyer’s relationship with the board. In those circumstances, Rule 1.7 governs who should represent the directors and the organization.”
The potential pitfalls in joint or multiple representation cases are tremendous and generally lead to numerous headaches for the attorney undertaking such representations. We strongly suggest that before taking on such representations the attorney consult with an “Attorney-Client Agreements Toolkit” like the one offered by the Risk Management Handouts of Lawyers Mutual, Liberty Insurance Company of North Carolina. These toolkits provide sample agreements, as well as advice and instructions, before undertaking joint or multiple representations.
These kits are especially beneficial to smaller law firms who find themselves involved in complex litigation where the corporation is committed to protecting itself against the interests of its employees as was the case with Broadcom and Ruehle. In an excellent article titled “Internal Investigations: What Is At Stake for Employers and Employees” that appeared in The Champion (April 2010, the official publication of the National Association of Criminal Defense Lawyers, Philip S. Kushner also discussed the legal ramifications when corporations are pressured to cooperative with criminal investigations, especially at the expenses of its employees—a situation that creates a myriad of potential conflicts of interest by an attorney representing all the parties involved in the investigation.
The word “think” should be added to the old adage “stop, look and listen” before you act. The dangers and pitfalls are simply too great for most attorneys, especially in small firms, to undertake joint or multiple representations. The money may be good, but the damage to one’s professional reputation, injury to the client and possible malpractice lawsuits that follow are not.
By: White Collar Criminal Attorney John Floyd and Paralegal Billy Sinclair