Tuesday, April 14, 2009

Who is the client? A comment on the Irell & Manella sanction order.


I read Kevin LaCroix’s blog post about the conflict of interest issues that got one of California’s prominent large law firms in trouble. As Mr. LaCroix notes, the opinion itself is noteworthy in its severe critique of the firm’s violations of California’s Rules of Professional Conduct.

What I find amazing is the fact that such an obviously prohibited situation even occurred. The lawyers in that case appear to have either completely fallen asleep at the wheel or acted maliciously to deceive their clients for their own pecuniary interests.

Here’s why. The American Bar Association’s Model Rules of Professional Conduct, as well as almost every state’s specific rules that govern the legal profession, has a specific rule that addresses the situation where an organization is the client (rather than a single human being). In this case, the ABA Model rule is number 1.13 and you can read the text there yourself as well as the Rule Committee’s Comments about the rule.

The rule contains these basic tenets:
» The organization is the client, not the people working there
» The lawyer’s duty is to the best interests of the organization
» When working with employees of the client, the lawyer must remind the employees who his or her client actually is
» A lawyer cannot represent two clients who have a conflict of interest unless each client gives written consent AND they do not have claims against each other

Clear, logical and pretty darn easy for most non-lawyers to understand. There are sticky situations and very strange facts that can be less clear, but not so in this particular court case.

Under the facts in the U.S. v. Nicholas case, the law firm was retained to represent both the company and its Chief Financial Officer. All three legal matters were about stock options and accounting. (Red flag #1; Strike 1.) The lawyers interviewed the CFO on the allegations against him personally and the internal investigation into the accounting practices that were also at issue in the lawsuits, but did not remind him that they were representing the company. (Red flag #2; Strike 2.) Then the company instructed the law firm to turn over to the SEC and U.S. Attorney the information the CFO provided them in that interview. (Another red flag; Strike 3!) The firm should have been “outta there!” The federal district judge agreed.

Here’s what you need to know as a potential client:

1. Lawyers have strict duties of confidentiality as to information you provide in order to seek or during representation. Very limited exceptions apply.
2. When a firm represents your business, you have to designate a primary point of contact for that firm, but the firm’s duty is to the company, not you or any other officer, director, shareholder or employee.
3. If one of your officers or employees appears to need representation, always resist the temptation to have the same firm represent him or her. Get another law firm. Period.

It comes down to a simple rule: the only thing you know for certain about anything is that you never know everything about it. What you do not know can, in too many cases, come back to hurt you.

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