Me. R. Prof. Cond. 1.13
Me. R. Prof. Cond. 1.13
COMMENT
The Entity as the Client
[1] An organizational client is a legal entity, but it cannot act except through its officers, directors, employees, shareholders and other constituents. Officers, directors, employees and shareholders are the constituents of the corporate organizational client. The duties defined in this Comment apply equally to unincorporated associations. "Other constituents" as used in this Comment means the positions equivalent to officers, directors, employees and shareholders held by persons acting for organizational clients that are not corporations.
[2] When one of the constituents of an organizational client communicates with the organization's lawyer in that person's organizational capacity, the communication is protected by Rule 1.6. Thus, by way of example, if an organizational client requests its lawyer to investigate allegations of wrongdoing, interviews made in the course of that investigation between the lawyer and the client's employees or other constituents are covered by Rule 1.6. This does not mean, however, that constituents of an organizational client are the clients of the lawyer. The lawyer may not disclose to such constituents information relating to the representation except for disclosures explicitly or impliedly authorized by the organizational client in order to carry out the representation or as otherwise permitted by Rule 1.6.
[3] When constituents of the organization make decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful. Decisions concerning policy and operations, including ones entailing serious risk, are not as such in the lawyer's province. Paragraph (b) makes clear, however, that when the lawyer knows that the organization is likely to be substantially injured by action of an officer or other constituent that violates a legal obligation to the organization or is in violation of law that might be imputed to the organization, the lawyer must proceed as is reasonably necessary in the best interest of the organization. As defined in Rule 1.0(f), knowledge can be inferred from circumstances, and a lawyer cannot ignore the obvious.
[4] In determining how to proceed under paragraph (b), the lawyer should give due consideration to the seriousness of the violation and its consequences, the responsibility in the organization and the apparent motivation of the person involved, the policies of the organization concerning such matters, and any other relevant considerations. Ordinarily, referral to a higher authority would be necessary. In some circumstances, however, it may be appropriate for the lawyer to ask the constituent to reconsider the matter; for example, if the circumstances involve a constituent's innocent misunderstanding of law and subsequent acceptance of the lawyer's advice, the lawyer may reasonably conclude that the best interest of the organization does not require that the matter be referred to higher authority. If a constituent persists in conduct contrary to the lawyer's advice, it will be necessary for the lawyer to take steps to have the matter reviewed by a higher authority in the organization. If the matter is of sufficient seriousness and importance or urgency to the organization, referral to higher authority in the organization may be necessary even if the lawyer has not communicated with the constituent. Any measures taken should, to the extent practicable, minimize the risk of revealing information relating to the representation to persons outside the organization. Even in circumstances where a lawyer is not obligated by Rule 1.13 to proceed, a lawyer may bring to the attention of an organizational client, including its highest authority, matters that the lawyer reasonably believes to be of sufficient importance to warrant doing so in the best interest of the organization.
[5] Paragraph (b) also makes clear that when it is reasonably necessary to enable the organization to address the matter in a timely and appropriate manner, the lawyer must refer the matter to higher authority, including, if warranted by the circumstances, the highest authority that can act on behalf of the organization under applicable law. The organization's highest authority to whom a matter may be referred ordinarily will be the board of directors or similar governing body. However, applicable law may prescribe that under certain conditions the highest authority reposes elsewhere, for example, in the independent directors of a corporation.
Relation to Other Rules
[6] The authority and responsibility provided in this Rule are concurrent with the authority and responsibility provided in other Rules. In particular, this Rule does not limit or expand the lawyer's responsibility under Rules 1.6, 1.8, 1.16, 3.3 or 4.1. Paragraph (c) of this Rule does not modify, restrict, or limit the provisions of Rule 1.6(b)(1) - (6). If the lawyer's services are being used by an organization to further a crime or fraud by the organization, Rules 1.6(b)(2) and 1.6(b)(3) may permit the lawyer to disclose confidential information. In such circumstances Rule 1.2(d) may also be applicable, in which event, withdrawal from the representation under Rule 1.16(a)(1) may be required.
[7] Paragraph (d) makes clear that the authority of a lawyer to disclose information relating to a representation in circumstances described in paragraph (c) does not apply with respect to information relating to a lawyer's engagement by an organization to investigate an alleged violation of law or to defend the organization or an officer, employee or other person associated with the organization against a claim arising out of an alleged violation of law. This is necessary in order to enable organizational clients to enjoy the full benefits of legal counsel in conducting an investigation or defending against a claim.
[8] [Reserved]
Government Agency
[9] The duty defined in this Rule applies to governmental organizations. Defining precisely the identity of the client and prescribing the resulting obligations of such lawyers may be more difficult in the government context and is a matter beyond the scope of these Rules. See Scope [18]. Although in some circumstances the client may be a specific agency, it may also be a branch of government, such as the executive branch, or the government as a whole. For example, if the action or failure to act involves the head of a bureau, either the department of which the bureau is a part or the relevant branch of government may be the client for purposes of this Rule. Moreover, in a matter involving the conduct of government officials, a government lawyer may have authority under applicable law to question such conduct more extensively than that of a lawyer for a private organization in similar circumstances. Thus, when the client is a governmental organization, a different balance may be appropriate between maintaining confidentiality and assuring that the wrongful act is prevented or rectified, for public business is involved. In addition, duties of lawyers employed by the government or lawyers in military service may be defined by statutes and regulation. This Rule does not limit that authority. See Scope.
Clarifying the Lawyer's Role
[10] There are times when the organization's interest may be or become adverse to those of one or more of its constituents. In such circumstances the lawyer should advise any constituent, whose interest the lawyer finds adverse to that of the organization of the conflict or potential conflict-of-interest, that the lawyer cannot represent such constituent, and that such person may wish to obtain independent representation. Care must be taken to assure that the individual understands that, when there is such adversity of interest, the lawyer for the organization cannot provide legal representation for that constituent individual, and that discussions between the lawyer for the organization and the individual may not be privileged.
[11] Whether such a warning should be given by the lawyer for the organization to any constituent individual may turn on the facts of each case.
Dual Representation
[12] Paragraph (f) recognizes that a lawyer for an organization may also represent a principal officer or major shareholder.
Derivative Actions
[13] Under generally prevailing law, the shareholders or members of a corporation may bring suit to compel the directors to perform their legal obligations in the supervision of the organization. Members of unincorporated associations have essentially the same right. Such an action may be brought nominally by the organization, but usually is, in fact, a legal controversy over management of the organization.
[14] 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.
REPORTER'S NOTES:
Model Rule 1.13 (2002) addresses issues that arise when the client is an organization. There is no corresponding provision under the Maine Bar Rules.
When the client is an organization, the interests at stake do not reside in a single person; accordingly, the lawyer for the organization owes his or her professional duties to the organization, not the organization's constituents. Because, however, a lawyer who represents an organization necessarily interacts with individuals-officers, directors, board of directors and employees-there is the risk that a lawyer will view them as the "client." This has often been referred to as the "client-identity paradox." Lawyers who represent organizations must be mindful that their duties as lawyers are owed to the organization itself, notwithstanding the lawyer's interactions with the client through its individual agents. Model Rule 1.13(a) and (f) (2002) make explicit a lawyer's duty to be both forthright about whom the lawyer represents, and be diligent in his or her analysis of any existing or potential conflicts of interest. Restatement § 96 is in accord with Model Rule 1.13 (2002) (lawyers represent an organization's interests "as defined by its responsible agents acting pursuant to the organization's decision-making procedures). The client-identity paradox becomes especially problematic when an agent of the client is engaged in, or plans to engage in, activities that violate the law and cause substantial injury to the organization.
Rule 1.13 has been very controversial with respect to what steps a lawyer should take when the lawyer discovers that an agent of the client is engaged in, or plans to engage in, activities that violate the law and cause substantial injury to the organization. See subsections 1.13(b), (c) and (d). States have articulated a variety of standards regarding when the lawyer is required to act, and, most contentiously, when the attorney is permitted to breach the confidentiality mandates of Rule 1.6 in order to protect the corporation's interests. In 2003 the ABA Task Force on Corporate Responsibility revised Model Rule 1.13 to expand the lawyer's responsibilities and to provide for permissive disclosure of a corporate client's confidences. While some states have incorporated those 2003 changes, many states have declined to permit the lawyer to disclose any client confidences that are otherwise protected by Rule 1.6, including Massachusetts, New York, Delaware and California. The difficult issue is which version of Rule 1.13 would best suit Maine practice. The Task Force decided against recommending the permissive disclosure provisions proposed by the ABA Task Force on Corporate Responsibility and decided to follow more closely the standards set forth in the original Rule 1.6 as well as a comparable rule adopted in Massachusetts.
When a lawyer is deemed to have "knowledge" of the wrongdoing, is a question fundamental to the analysis under this rule. "Knows" and "Known" are defined in Rule 1.0(f) as "actual knowledge of the fact in question. A person's knowledge can be inferred from circumstances." It is not always easy, however, to determine when a hunch about a transgression ripens into actual knowledge. Moreover, in a large organization, it may not always be clear how to confirm when and whether the suspected misconduct has actually occurred. Nonetheless, a lawyer may not stay willfully uninformed. Lawyers have a duty to investigate potential wrongdoing, if they have the concern that such wrongdoing may harm the client.
Legal ethics professor Geoffrey Hazard has identified the danger of a lawyer receiving what he calls "water-cooler information": Information that may be casually or inadvertently communicated to a lawyer. This may more often be the case when lawyers work as in-house business counsel. See also Restatement § 96 comment b (noting that in-house lawyers may have greater access to corporate information than outside counsel and therefore gain more knowledge about constituents). When a lawyer is working in-house in an organizational legal department, he or she should inform the general counsel about the suspected wrongdoing. If the general counsel's actions qualify as "a reasonable resolution of an arguable question of professional duty," Rule 5.2(b) provides the lawyer a safe harbor from discipline for failing to act in the organizational client's best interests under Rule 1.13(b).
Rule 1.13 recognizes that it is not a lawyer's function to second-guess the business judgments or manager or corporate employees. Comment [3] to Rule 1.13 states, "when constituents of the organization make decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful. Decisions concerning policy and operations, including ones entailing serious risk, are not as such in the lawyer's province." A lawyer's duty to take action to protect the interest of his or her organizational client is triggered in two separate instances under Rule 1.13. The first instance is when there is an act or omission that breaches the organizational agent's duty to the organization, resulting in harm. A flagrant example of such an act is embezzlement. The second instance is an act or omission that creates vicarious civil or criminal liability for the organization. The act or omission must be that of "an officer, employee, or other person associated with the organization." The phrase, "violation of law" in Rule 1.13(b) appears to include the contravention of any source of law (e.g., statutes, regulations and municipal codes).
If the lawyer concludes that a manager or employee's misconduct threatens substantial injury to the organization, the lawyer must then determine how to proceed. As recommended by the Maine Task Force, Rule 1.13(b) includes three non-exclusive, non-exhaustive actions available to lawyers in these circumstances. After much discussion, the Maine Task Force decided not to follow the 2003 version of Model Rule 1.13(b), which articulates only the general principle that the lawyer must proceed "as is reasonably necessary in the best interests of the organization" and intentionally omits any specific guidance. The Task Force reached the conclusion that some specific guidance on this thorny problem was useful and thus recommended their inclusion in the text of the Rule. In essence, the lawyer is required to "refer the matter to higher authority in the organization . . . ." This is known as taking the issue "up the ladder." In some cases this may mean the highest authority, which in many instances is the board of directors.
As noted above, the most controversial issue with respect to Rule 1.13 has involved the question of whether the Rule should include a provision allowing a lawyer, in certain narrowly prescribed circumstances, to reveal the confidences and secrets of a client that would otherwise be protected under Rule 1.6. The pre-2003 version of Model Rule 1.13 limited the attorney's discretion to reveal confidences to the general rules of Rule 1.6, which are applicable to all clients. However, in 2003, the ABA House of Delegates voted to amend paragraphs (b) and (c) of Rule 1.13 to allow attorneys to operate outside the bounds of Rule 1.6 in the corporate context, by permitting the attorney the discretion to disclose corporate confidences and secrets "to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization." The language proposed by the ABA Task Force, and adopted by the ABA House of Delegates in 2003 is as follows:
(c) Except as provided in paragraph (d), if
(1) despite the lawyer's efforts in accordance with paragraph (b) the highest authority that can act on behalf of the organization insists upon or fails to address in a timely and appropriate manner an action, or a refusal to act, that is clearly a violation of law, and
(2) the lawyer 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.1
The ABA Task Force on Corporate Responsibility described the reasons for recommending the "reporting out" rule as follows:
The [ABA] Task Force agrees with the Reporter to the ALI Restatement that Model Rule 1.6 ". . . should not be understood to preclude controlled disclosure beyond the organization in the limited circumstances where the wrongdoing is clear, the injury to the client organization is substantial, and disclosure would clearly be in the best interest of the entity client." The Task Force considers this especially important in the circumstance in which the board of directors or other highest authority of the organizational client is disabled from acting in the best interest of the organization, e.g., because of self-interest or personal involvement in the violation. (Footnotes omitted.)
1Model Rules of Professional Responsibility Rule 1.13(b).
Because such disclosure may reveal client information otherwise protected under Rule 1.6(a), the proposed addition to Rule 1.13 contains strict conditions that must exist before any "reporting out" is allowed. The lawyer must have a heightened level of certainty as to the violation of law, and the actual or threatened violation must be "clear." Moreover, there is no permission to "report out" when the organizational governance failure involves a violation of legal duty to the organization but is not otherwise a violation of law. As under Rule 1.6, communication of client information outside the organization must be limited to information reasonably believed to be necessary to prevent substantial injury to the organization that is reasonably certain to occur. In most circumstances, this limitation would permit communication only with persons outside the organization who have authority and responsibility to take appropriate preventive action.
The Maine Task Force reviewed the language of the original Model Rule 1.13(b) and (c) and the versions adopted in other states, and engaged in a detailed discussion of the arguments put forth by the ABA Task Force on Corporate Responsibility. Members of the Maine Task Force expressed concern about several consequences of adopting the 2003 version of 1.13 (c).
First, any further erosion of the protection of confidences and secrets was particularly troublesome because the version of Rule 1.6 proposed by the Maine Task Force already significantly expands the circumstances in which a lawyer is permitted to disclose "confidences" and "secrets." Because Rule 1.6 already represents a significant substantive departure from the prior limited exceptions, the Task Force was unwilling to recommend yet another exception in the protection of client confidences.
Second, concern was expressed that under Model Rule 1.13(b) and (c), a lawyer is allowed to disclose confidences and secrets when the client is an organization in more circumstances than when the client is an individual. Thus, it was articulated, if the 2003 version of Model Rule 1.13(b) and (c) were adopted, organizational clients would be afforded less protection against disclosure than are individual clients, a result the Task Force could not recommend.
Third, concern was expressed about whether the lawyer's failure to take steps outside the organizational client in order to protect the organization from the bad acts of its agents was more appropriately determined between lawyer and the client (e.g. the lawyer's civil liability to the organization for malpractice) rather than in the context of professional discipline. The counterargument is that the scope of information that the 2003 version of Rule 1.3(b) and (c) allows to be "reported out" is in actuality a very narrow: information about a harm that could befall the organization (knowledge that a "violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization"- and then only when the lawyer has referred the matter to the highest authority in the organization). However, there is no such disclosure permitted if the lawyer is acting for the benefit of an individual or individuals as opposed to the benefit of the organizational client.
The Maine Task Force recommended adoption of the language of the original Model Rule 1.13 rather than the new language recommended by the ABA Task Force on Corporate Responsibility. The Maine Task Force recommended that, lawyers, in their representation of organizations, not be permitted to "report out" confidences and secrets, beyond the disclosures already allowed, for all clients, under Rule 1.6.
Rule 1.13(b) and (c) must be read in light of Rule 1.16, which requires lawyers to withdraw "if further representation will result in the lawyer's violation of the law or rules of ethics" (meaning if the client is using the lawyer's services for criminal or fraudulent purposes). See also Comment [7], Rule 1.6 (duty of confidentiality does not prevent lawyer from giving to interested persons notice of fact of withdrawal, and disaffirming any opinion or document that lawyer previously rendered). In addition, ABA Formal Ethics Opinion 92-366 (1992) permits a client to make a "noisy withdrawal" if the lawyer's work product is being used in the commission of an ongoing crime or fraud.
The Maine Task Force recommended that Model Rule 1.13(e) not be adopted as part of the Maine Rules of Professional Conduct. It was thought that this subparagraph requiring the discharged attorney to "report out" his discharge opens a Pandora's box: lawyers would be placed in the uncomfortable position of publicly justifying their conduct.
Withdrawal may not be a lawyer's final obligation; other ethics rules (e.g., securities laws, including the Sarbanes-Oxley Act and banking laws) may allow-and in some situations require, that a lawyer to reveal the organization's ongoing or future criminal or fraudulent activity. The Maine Task Force recommended inclusion of subparagraph (g), to make clear that a lawyer who is required to "report out" pursuant to other law should not deemed to be in violation of the Maine Rules of Professional Conduct.
Finally, the Task Force discussed one of the more vexing issues that has arisen in the context of organizational representation: the identification of the client when a lawyer is organizing the entity. While this is not directly addressed in Model Rule 1.13 (2002), the Rule does emphasize the importance of clarity in the lawyer's own mind about who the client is, and communication of this clarity with the organizer, in order to avoid misunderstandings. A lawyer should reach an express understanding with the organizer of the entity at the outset of his or her involvement, and document that understanding in a formal engagement letter. Restatement § 14 addressing the "Formation of a Client-Lawyer Relationship" makes clear in Comment f., that "[w]hen the client is a corporation or other organization, the organization's structure and organic law determine whether a particular agent has authority to retain and direct the lawyer. Whether the lawyer is to represent the organization, a person or entity associated with it, or more than one such persons and entities is a question of fact to be determined based on reasonably expectations in the circumstances."