When Laidlaw International Inc. learned in 2007 that the company and three employees were the target of a New Jersey grand jury investigation, directors responded by initiating a legal version of circle the wagons. The company entered into retainer agreements with four lawyers, three of them representing the three targeted employees and the fourth for all current and former employees who were not targeted.

White-collar criminal defense lawyers say that this practice–companies picking up the legal tab for individual employees who could become witnesses against the company–is not unusual. But in this case, the New Jersey Department of Criminal Justice objected and filed a motion in the trial court to disqualify the company-paid lawyers for the individuals. The trial court rejected the state’s motion on the grounds that the practice is acceptable as long as the agreements satisfy several Rules of Professional Conduct (RPCs), and on Nov. 23, 2009, the Supreme Court of New Jersey affirmed the lower court.

While the ruling in In the Matter of the State Grand Investigation does not constitute new law, lawyers say that it helps to clarify and perhaps strengthen the rules under which companies can create retainer arrangements for the benefit of employees when prosecutors target them.

According to Vincent P. Sarubbi, a partner at Archer & Greiner, the ruling will make it tougher for companies under criminal investigation to “lawyer up” in the same way they did previously.

“It was not uncommon for [companies] to give employees a list of attorneys they know have worked together and with whom they have a loose affiliation,” he says. “I’m not suggesting that [the lawyers] would do anything to breach their duty of loyalty to clients, but I think they would have a tendency to cooperate with corporate counsel and the corporation because they have a relationship.”

One Master Only

The court ruling will make communication between retained lawyers and in-house counsel more difficult, Sarubbi says. In its ruling, the court noted that Laidlaw satisfied the RPCs with language in the retention letters that the lawyers are “not required” to disclose legal strategies or theories and that payment of legal fees does not depend on such disclosures. But the court went a step further, saying, “[T]he better practice is to affirmatively state that the lawyer will not disclose any part of the substance of the representation of the client to the third-party payer.”

“The question defense counsel have to ask themselves now is whether they can pick up the phone and talk with corporate counsel about issues like joint defense,” Sarubbi says. “This could have a chilling effect on the issue of joint defenses.”

But according to Michael Himmel, a member at Lowenstein Sandler, this is the point of the ruling. “The RPCs say you can have one master and one master only,” he says. “When you start doing things to the benefit of another master, you’re breaching your responsibilities under the rules.”

Risky Arrangements

In any event, says Herve Gouraige, a member at Epstein Becker & Green, the practice is always fraught with risk.

“When the company is the target of a criminal investigation and the company is paying lawyers to represent individuals who are potential witnesses against the company, you come pretty close to–if not going over the line of–obstruction of justice,” he says.

Another more practical concern for companies embarking on these retainer arrangements is loss of control over legal costs. The ruling imposes a requirement that a court must approve any stoppage of payments.

Lawyers who are retained to represent individuals in criminal investigations also face risks. “Let’s assume the client is a potentially devastating witness for the company,” Gouraige says. “What the person has to say to the prosecutor or the grand jury could sink the company. It’s going to be very difficult for a lawyer not to consider that in advising his or her client.”

Although the state Supreme Court opinion doesn’t mention other alternatives for provision of legal services for employees who can’t afford it, Gouraige points out that turning to court-
appointed attorneys might be a better option, “particularly when you’ve got an individual who’s going to be a key witness against the company.”

Despite the fact that the court has apparently tightened the rules in these retainer arrangements, Gouraige believes that its approval of them means that companies will use them more often and more cases like Laidlaw International’s will make their way into court.

“I think you’re going to see more cases of companies trying to control who represents the individuals or companies trying to cut off the legal fees. There may even be cases where prosecutors are going to claim that the company’s conduct amounts to obstruction of justice,” he says.

Meanwhile, at least some white-collar criminal-defense lawyers in New Jersey are advising clients to create internal policies that mimic the Supreme Court ruling.

“We’re telling corporate counsel that they may have a duty to make sure that whoever is hired understands this [ruling] going forward and that they expect the attorney to comply with these conditions,” Sarubbi says.