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With criminal actions filed against a growing number of companies whose names have become synonymous with financial scandal, many are still asking, “Where were the lawyers?” As those cases now work their way through the courts, specific inquiries are being raised about the proper role and responsibilities of lawyers who were paid to counsel these companies. This article is not about whether any of these folks can or should be held liable for some part in these corporate debacles; I don’t know the facts and don’t care to opine. Rather, I want in-house counsel to focus on the issue of their liability for the actions of their clients, and especially their lack of cover for their counseling and business services in today’s corporate client relationship. While some know the danger is out there, I don’t think most in-house counsel think much about the issue: They seem to presume that competence is the best defense. Unfortunately, with 20/20 hindsight working against you, legal competence and even reasonable business judgment may not save you. So what’s changed that warrants revisiting your thinking about liability issues? For one thing, there are new rules regulating the behavior of corporate lawyers: The American Bar Association has changed its Model Rules of Professional Conduct, and the Securities and Exchange Commission has promulgated its own rules for lawyers who are “appearing and practicing” before the commission on behalf of public company clients. These rules may have a significant impact on your practice if you, or lawyers who report to you, uncover allegations of significant financial misconduct in your company. But frankly, that’s not the most likely situation that could snare you for liability problems. THE SIN OF OMISSION What’s emerging is an ever-closer scrutiny of the corporate lawyer’s role and responsibility to detect things he has no knowledge of; to put into place compliance programs that will prevent wrongdoing by corporate executives (or at least set off alarms); and to counsel clients who never asked for advice about issues that later turn out to be damaging to the company. These are issues of 20/20 hindsight and not necessarily related to incompetence or unethical decisions. Courts are moving toward holding corporate lawyers liable for the actions of other corporate officials (whom the lawyer represented or counseled), rather than just looking at lawyer liability for actions the lawyer took himself. In other words, corporate lawyers now face liabilities for omissions, rather than just commissions. And in recent cases, such as Pereira v. Cogan (decided in the Southern District of New York and on appeal to the U.S. Court of Appeals for the 2nd Circuit), this kind of omission was adjudged without affording the involved counsel the shield of either professional or business judgment protections that presumably would have applied to any other corporate official or outside lawyer under scrutiny for the same “inactions.” There’s lots of guidance out there for lawyers whose “commission” of an activity leads to a problem. There are well-established theories regarding criminal behavior, malpractice liability, and the prosecution of inappropriate professional behavior. But liabilities based on “omissions,” or the failure to take some kind of action that might have prevented a problem, is not one that many courts, until now, have addressed in the context of determining a lawyer’s liability for the actions of others. PROFESSIONAL OBLIGATIONS Despite our inability to create a template for those representation requirements that should or should not be the “proactive” duty of the in-house lawyer, the model rules provide some guidance. While the model rules clearly state that lawyers have a general duty to be informed, Model Rule 2.1 makes it clear that the lawyer is not required to give advice unless and until asked by the client. The only exception to that rule is when the lawyer knows that a client is proposing a course of action that is likely to result in substantial adverse legal consequences to the client; in that circumstance, if the client’s course of action is related to the lawyer’s representation of the client, the lawyer may be required to act. In addition to this “limited” professional obligation, the in-house lawyer who is a corporate manager (and sometimes a top corporate executive) has general client fiduciary duties. Lawyers who carry corporate titles such as vice president, CLO, secretary, or compliance officer must remember that they will be judged not only by the tightly drawn prescriptions of their professional responsibilities but also by their more general and widely drawn fiduciary responsibilities as corporate executives. For either the staff lawyer or the legal officer who is under the microscope of a corporatewide investigation, there’s not much in the way of protection. Unfortunately, malpractice insurance for corporate counsel does not cover as much as most lawyers would like, either in terms of the scope of the policy or what the insurer will pay to defend. Corporate officials in today’s turbulent times are seeking protections beyond what insurance policies can provide. Many negotiate with their corporate employers for indemnity and prospective limitations of liability in a wide range of situations. While a corporate counsel may be entitled to contract for indemnity from the corporation for past conduct, there is conflicting authority about whether in-house lawyers can contract with the company regarding the company’s ability to hold the lawyer personally liable for future legal malpractice or other corporate liabilities. Indeed, such agreements are addressed by Model Rule 1.8(h): “A lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement. . . .” A few states, including Virginia, have ruled that an agreement limiting an in-house attorney’s liability for personal malpractice committed in the course of his employment would violate the disciplinary rules. The D.C. Bar reached the opposite result in Ethics Opinion No. 193, where it held that the rule was “promulgated to prevent lawyers, either through their own overreaching or their client’s ignorance, from escaping liability for their negligent acts.” Noting that the organizational client was a sophisticated business entity that freely waived its right to sue its own attorney-employees for acts of malpractice committed against the organization, the bar found that the corporation made a business judgment it would respect. IN A TIGHT SPOT Corporate counsel thus find themselves between a rock and a hard place in the majority of states: They can’t get malpractice insurance for everything that they need protection from (even though corporate counsel policies are available for limited kinds of activities); indemnity is not an option on which they can rely for anything related to their provision of legal services to the client (which might later be construed to include even business responsibilities that the lawyer is asked to provide, since their primary function is as lawyers); and they will not be covered by directors and officers policies, even for actions that they might claim arose out of business, not legal, responsibilities they have fulfilled. Carriers omit professionals from coverage under D&O policies, and argue that lawyers for the company, no matter what role they may perform, are always legal professionals. The result: increased scrutiny; increasing liability for the actions of others that corporate counsel did not prevent (even when the counsel had no knowledge of the underlying wrongdoing); insufficient malpractice coverage; relatively meaningless or no indemnity from the company; and now � strike the final blow! � reduced likelihood of protection under the business judgment rule, which otherwise insulates corporate fiduciaries from liability to the corporation for negligence, breach of the duty of care, and even some more aggravated conduct. While these aren’t cheery thoughts, the good news is that corporate counsel have been flying without cover for many years, and these risks have not adversely affected many among us. The reason our attention is firmly fixed on the liability issue currently is that the headlines are reporting public corporate failures almost daily. So the basic message is worth repeating: Think carefully about how you and your client define your role and responsibilities, consistent with the affirmative and implied duties owed to your client. And wait and see how the courts deal with this murky but emerging area in future cases. Susan Hackett is senior vice president and general counsel of the Association of Corporate Counsel (ACC) and the Association of Corporate Counsel � America (ACCA) (formerly known as the American Corporate Counsel Association). She may be reached at [email protected].

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