As the world has been asked to “reduce, reuse and recycle,” so too has the climate changed for in-house counsel. “In the past, there may have been one or two hot button issues, but today, there are a myriad of issues confronting in-house practitioners that run the gamut from attorney-client privilege and electronic social media to employment law and the environment,” said Allison Hoffman, senior vice president and chief legal officer of Incisive Media-North America, the parent company of the New York Law Journal. “Everything that we do as in-house counsel has a liability component to it.”

Although no new claim trends against in-house counsel have emerged in 2009, the atmosphere is polluted with an unemployment rate of 9.5 percent,[FOOTNOTE 1] liquidity crisis, congressional investigations, collapse of industry giants, massive frauds via Ponzi schemes, regulations to help the planet “go green,” shrinking legal departments, pandemics, an explosion of online modes of communication, and new rules for a broad cross-section of industries.

Inasmuch as the Securities and Exchange Commission has turned its attention on the financial crisis, there has seemingly been less focus on in-house counsel with respect to the typical high-profile issues of insider trading and backdating stock options. Rather, newsworthy activities of in-house counsel have included resigning upon learning that the corporate client may be involved in a Ponzi scheme; reapplying for their own positions following a reduction in force; uncontrolled social networking and blogging; and preparing companies for pandemics and a green economy.

Following discussions with numerous in-house practitioners, this article presents topics frequently cited by the in-house bar as affecting the ways in which they practice law now and into the sustainable future. It concludes with highlights of insurance coverage protection available to in-house attorneys.

CONGRESSIONAL INVESTIGATIONS

Today’s heat stress derives from a Congress whose oversight and investigatory panels take a “slash and burn” approach to uncover truths. In fact, a growing number of general counsel continue to be identified in congressional hearings. Congressional committees possess broad oversight and investigatory jurisdiction. Oftentimes, the investigative process is a precursor to legislative action to remedy wrongdoing. These investigations may adversely impact the reputations of a company, its officers, and products or services, as well as wreak havoc with shareholder confidence.

Inasmuch as Congress views in-house counsel as “gatekeepers,” their inability to effectively manage this role represents significant exposure to themselves and the organizations they serve. “There is increased pressure on corporate counsel to act as regulators on management, but they must maintain their independence, because without independence, they cannot do their jobs,” advises Paul Davis, vice president and general counsel of Tampa Bay Lightning and St. Pete Times Forum. “The primary concern here is that corporate counsel often view themselves as upper management, fearful that others in management may view them as adversarial if they maintain their independence, and this is particularly problematic in the context of investigations.”

It is incumbent upon in-house counsel to understand the rules of congressional investigations, know the political figures involved, prepare their organizations, and recognize that cooperation needs to be balanced with attorney-client privilege. Although Congress does not have to recognize confidentiality privileges, congressional members may not seek to harm a company by needlessly revealing privileged information. See generally, Watkins v. United States, 354 U.S. 178 (1957); Eastland v. United States Servicemen’s Fund, 421 U.S. 491 (1975); 2 U.S.C. 192 et seq.; 18 U.S.C. 1505; In re Provident Life & Accident Co., No. CIV-1-90-219 (E.D. Tenn. June 13, 1990).

As such, the disclosure of privileged information may be negotiated prior to a congressional hearing or investigation.

COMMUNICATIONS AND PRIVILEGE

“A primary problem in large organizations are ‘information traps’ where the business professionals in a company do not communicate with the legal department about issues in which corporate counsel should be involved,” observes Henry T. French Jr., general counsel for Global Litigation and compliance director of XL Global Services Inc. a member of the XL Capital Group. “Oftentimes business people work in corporate silos and in-house counsel need to know how to navigate those silos so that they can stay informed about the activities occurring in the corporation — in-house lawyers should really have the ultimate backstage pass.” Interestingly, Davis commented, “[B]usiness people may purposely not talk to the general counsel’s office, because they don’t want to be subject to restrictions that the legal department may place upon them. It’s often not until the ‘thunderclap’ from out of the blue hits them with something unexpected that they get corporate counsel involved.” Unfortunately, from a liability perspective, in-house counsel themselves are exposed to the extent that they are not advised of legal issues requiring their involvement.

Inasmuch as corporate counsel frequently perform business functions in addition to dispensing legal advice, their roles can be blurred, which places attorney-client privilege in jeopardy. “We need to educate non-lawyers about privilege, because dressing up business communications with privilege markers makes for sloppy communications which are not confidential,” explains French. “Business people cannot use the legal department as a cloak; they need to understand who owns the attorney-client privilege and how it works.”

Hoffman, of Incisive Media, adds, “[A]s a threshold matter, it is imperative that corporate counsel understand that they represent the company first and foremost — and not any particular individual.” Earlier this year, the issue of “who is the client” surfaced in a number of cases involving senior level corporate officers[FOOTNOTE 2] who claimed that they were represented by defense counsel for their respective corporations, and as such, the attorney-client privilege attached to the communications that they made to such counsel. These cases alerted the in-house bar that all employees must be cautioned that the corporation is their only client, and only the corporate entity has the power to assert or waive the attorney-client privilege.

In-house counsel may also be exposed to legal liability for the inadvertent waiver of attorney-client privilege whether it be within the context of discovery or disseminating information through other channels such as press releases or online communications. Inasmuch as e-mail and other electronic forms of communication are utilized in glacial proportions, they pose substantial liabilities for in-house counsel.

ELECTRONIC MEDIA EXPLOSION

Perhaps more powerful than all alternative energy sources combined is the power of the World Wide Web. More than 60 million Americans read blogs and approximately 15 percent of Fortune 500 companies have blogs with links to corporate Twitter accounts.[FOOTNOTE 3] Facebook progressed to blogging, and catapulted to the new “sunspot,” Twitter. To capitalize on the popularity of evolving social media, many companies now choose to disseminate information to shareholders, clients, and personnel via alternative modes of communication.

As the communication ozone layer reaches new heights, the potential liabilities include divulging proprietary information or trade secrets; defamation and violations of other privacy rights; infringement of intellectual property rights; false advertising; violations of e-commerce regulations; indirect liability for third-party acts; inadvertent release of attorney-client privileged information; data security breaches; and violating rules established by regulatory bodies that govern corporate communications. Perhaps most problematic for in-house counsel is that all information transmitted through blogs, Twitter, and social networking Web sites is discoverable.

Yet, organizations that do not embrace the new forms of communication risk losing market share, reputation, and revenue to their more technologically sophisticated competitors. As such, as gatekeepers, corporate counsel have seemingly been charged with the responsibility and liability of monitoring content, privacy issues, and other legal aspects for marketing in the new social mediums. Moreover, and despite that there are no laws that specifically regulate blogging nor any specific case law to offer guidance, in-house attorneys oftentimes are the drafters of corporate social networking and blogging/Twitter policies, hence making them targets if policies prove to be ineffective.

French explains: “Most companies haven’t had to start to think about blogging or Twitter, but now, there is a clear need to have a robust all encompassing social networking policy — to protect the outside world from comments of employees as well as to protect employees from each other as defamation and even cyber-bullying (harassment electronically) or other types of very public tirades are already finding their way into the corporate realm.”

DOWNSIZING AND UPSIZING

Skyrocketing unemployment continues to have significant implications for in-house practitioners. Two theories seem to have emerged relative to corporate legal departments, both of which lead to an increase in potential liability for in-house counsel. There are organizations that unilaterally seek to terminate all non-revenue generating employees, and those in-house attorneys who remain must take on broader responsibilities. “The pitfall here is that legal department heads must make certain that they have enough staff to cover the workload effectively. Otherwise matters will fall through the cracks, and in-house attorneys may be exposed to claims for malpractice,” says French. Alternatively, companies may seek to increase legal department staff, but reduce spending on outside counsel. An increased in-house workload translates into increased exposure.

In-house counsel specializing in labor and employment issues are experiencing a sharp increase in the demands of their positions as a result of reductions in force and heightened legislative activity. Corporate counsel have been enlisted to assist in planning reductions in force by evaluating and developing internal company policies, training senior level staff as to proper procedures for employment termination, analyzing severance pay and releases, counseling terminated employees regarding employment benefits, conducting litigation risk assessments, and monitoring corporate compliance with existing laws.

Notably, the number of lawsuits brought pursuant to the Workers Adjustment and Retraining Notification Act (WARN),[FOOTNOTE 4] which governs notice requirements for plant closings and mass layoffs, has reportedly tripled. Additionally, an enhanced WARN Act bill called the Federal Oversight, Reform and Enforcement of the WARN Act has recently been proposed.[FOOTNOTE 5] Further, many corporate counsel must be familiar with the Employee Retirement Income Security Act of 1974 as amended (ERISA) which governs employee benefits,[FOOTNOTE 6] as well as the Consolidated Omnibus Budget Reconciliation Act[FOOTNOTE 7] (COBRA), which provides terminated employees with the right to continue health insurance sponsored by their employers. COBRA has become particularly challenging due to new rules regarding government subsidization.

Further, a slew of new pro-employee legislation has been passed inclusive of the Lilly Ledbetter Fair Pay Act of 2009[FOOTNOTE 8] and the ADA Amendments Act.[FOOTNOTE 9] Numerous labor/union bills are before Congress including the Employee Free Choice Act.[FOOTNOTE 10] In-house counsel will likely play a significant role in labor negotiations and compliance efforts, and as such, expose themselves to liability.

Internationally, guidance is sought from in-house counsel regarding pandemics for reasons of workplace safety, employee privacy rights and employment law issues. In fact, the EEOC issued a technical guidance document geared toward pandemics,[FOOTNOTE 11] which evidences its concern that employers may engage in conduct prohibited by the Americans with Disabilities Act in order to minimize risks of workplace infection.

Although passage of new laws and regulations to protect employees persists, in-house counsel must be cognizant that the administration’s commitment to saving jobs may be compromised by other initiatives, such as global warming, which could give rise to job loss via plant closings and the shutdown of renewable energy companies.

GLOBAL WARMING

If greenhouse gas emissions, melting polar ice sheets, rising sea levels, traumatic weather events, loss of wildlife, and retreating glaciers don’t make the “top concern” list of in-house counsel, the threat of claims by litigants, regulators and shareholders may.

What began with SEC disclosure obligations requiring publicly traded companies to report any material effects that compliance with environmental laws may have on their financial and competitive positions[FOOTNOTE 12] has escalated into the Obama administration’s call for a “green economic revolution” and a reinvigorated Environmental Protection Agency (EPA) poised to establish a new regulatory scheme.

Pursuant to the responsibility conferred upon it by the U.S. Supreme Court in Massachusetts v. EPA,[FOOTNOTE 13] the EPA recently issued a proposed “endangerment finding” stating that greenhouse gases, including carbon dioxide, endanger public health and welfare as defined by Section 202(a) of the Clean Air Act.[FOOTNOTE 14] The EPA also issued a proposed rule requiring mandatory reporting of greenhouse gases from large sources in the United States.[FOOTNOTE 15] If accepted, this proposed rule may cause an increase in litigation against entities seemingly responsible for adverse environmental impacts from greenhouse gas emissions.

Earlier this year, the American Clean Energy and Security Act of 2009 (ACES), also known as the Waxman-Markey Bill,[FOOTNOTE 16] was introduced. The bill includes a proposed “cap and trade” program, which sets mandatory limits on carbon emissions and requires businesses to purchase permits to pollute. The bill has not yet passed through the Senate, and Congress is still debating how to distribute the pollution permits. In addition to carbon emissions, in-house counsel must also be aware of rules involving water pollution and airborne toxins. In view of current and proposed regulations, in-house attorneys are compelled to consult with engineers and environmental specialists to determine the magnitude of their companies’ pollution.

State attorneys general, pension funds, environmental groups and investors now relentlessly demand information, transparency and accountability. Currently, litigation and investigations revolve around disclosure rules and compliance by the SEC and state attorneys general. We have also seen an escalating number of shareholder resolutions and increased mutual fund support of those resolutions as well as demands by asset managers, shareholder activists and institutional investors all seeking more stringent disclosure rules for climate-related liabilities. There have also been lawsuits against various entities alleging that their operations contribute to global warming; this demonstrates that reputational risk is of significance as companies may suffer damage to their brands if they are idle while their competitors take action to mitigate their contributions to global warming.

The federal goal of reducing emissions by 80 percent by 2050 signals that legislation and regulation impacting virtually every industry sector will be developed at an aggressive pace. As such, it is likely that in-house attorneys will interface with multiple disciplines within their organizations to establish protocols, and provide regulatory guidance, legal advice and strategies. They must manage fiduciary responsibilities, establish internal systems to measure risks and liability, and minimize future litigation as well as supervise communications with shareholders, employees, and regulators. In-house counsel who are not educated as to the issues expose themselves and the corporations they serve to liability.

INSURANCE FROM THE ELEMENTS

While “going green” is the wave of the future, turning green from fear of mounting exposures shouldn’t be. Realizing that the evolving times have a significant impact on in-house practitioners, approximately 20 percent of Fortune 1000 companies purchase insurance coverage for their in-house counsel, commonly known as employed lawyers professional liability insurance (“employed lawyers insurance”). This insurance is specifically designed to provide coverage for any negligent act, error or omission committed with respect to the provision of legal services by in-house counsel and their staffs.

As the customer base for employed lawyers insurance has grown, the number of insurers offering this coverage more than doubled in 2009. Generally, most policy forms provide coverage for: investigations, ethical violations, disciplinary or licensing proceedings, violations of SOX and securities laws,[FOOTNOTE 17] administrative and regulatory proceedings, criminal actions, claims brought by the corporate employer (defense costs only), counseling regarding employment practices, providing advice to ERISA fiduciaries, copyright and trademark infringement, violations of privacy rights, and defamation.

Given the competition, certain insurers have provided customized or new enhancements which include:

• Two-year policy periods;

• Choice of counsel;

• Six-year extended reporting period to report claims made after the policy expiration date for wrongful acts that occurred during the policy period;

• The option for individuals to purchase tail coverage following employment termination or retirement;

• Defense cost coverage for: claims alleging misappropriation of trade secrets, violations of COBRA, unpaid wages/overtime pay, and claims by bankruptcy trustees/liquidators;

• Deletion of all sublimits so that all claims eligible for coverage are entitled to the policy’s full limit of liability;

• First dollar coverage, in exchange for subrogation rights, where the corporate employer wrongfully refuses to indemnify in-house counsel;

• Not applying the pollution exclusion to non-indemnifiable loss where the company cannot or will not indemnify in-house counsel;

• Waiver of 50 percent of the policy’s deductible/retention if a claim is settled with the consent of the individual insured at a mediation;

• An extended reporting period at no additional cost for in-house counsel who become totally and permanently disabled;

• Coverage for counseling regarding antitrust issues;

• Considering temporary attorneys as insureds;

• Making legal work provided to non-profit organizations eligible for coverage;

• Coverage for counseling human resource representatives regarding workers’ compensation, social security and disability benefits; and

• Making non-compensated personal legal services to directors, officers and employees eligible for coverage.

THE FINAL FOOTPRINT

The volatility of the global economy presents risks as well as opportunities for in-house counsel. Their ability to communicate, initiate and mitigate will greatly impact the footprints that they leave. A comprehensive assessment of their roles, responsibilities, and exposures is vital to placing them in a better position to protect themselves and the corporations they serve before the climate changes again.

Susan F. Friedman is a senior vice president, claims advocate, and the practice leader for employed lawyers professional liability insurance at Marsh. She can be reached at Susan.F.Friedman@marsh.com.

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FN1 U.S. Bureau of Labor Statistics as of June 2009. See www.bls.gov. FN2 See e.g., United States v. Nicholas, Docket No. 338, Case No. 8:08-00139 (C.D. Cal. April 1, 2009) and Texas Lawyer Blog, “Pendergest-Holt Switches Courts, Adds Former GC as Defendant,” April 16, 2009 at http://texaslawyer.typepad.com. FN3 See http://www.socialtext.net/bizblogs and Pew Internet & American Life Project Surveys at www.pewinternet.org. FN4 29 U.S.C. §§2101 et. seq. (1988). FN5 H.R. 3042/S. 1374, (2009). FN6 29 U.S.C. §§1001 et. seq. (1974) as amended. FN7 Id. at Part 6 of Title I. See also 29 C.F.R. 2590, Pub. L. 99-272, 100 Stat. 82 (1985). FN8 42 U.S.C. §§12111 et. seq., 29 U.S.C. §§621, 626, et. seq. (2009); see also S.181 at www.govtrack/us/congress/billtext. FN9 42 U.S.C. §§12101 et. seq. (2008). FN10 H.R. 800/S. 1041 (2007). FN11 See http://www.eeoc.gov/facts/h1n1. FN12 Regulation S-K Items 101 and 103, 17 C.F.R. Sec. 229 (2007). FN13 549 U.S. 497 (2007). Here, the Court held, among other things, that greenhouse gases were air pollutants within the meaning of Section 202(a) of the Clean Air Act. FN14 42 U.S.C. 7401-7671 (1970) as amended by the Clean Air Act Amendments Pub. L. 101-549 (1990); see, www.regulations.gov under Docket ID No. EPA HQ-OAR 2009-0171: Proposed Endangerment and Cause or Contribute Findings for Greenhouse Gases Under the Clean Air Act (PDF) or www.epa.gov/climatechange/endangerment.html. FN15 See www.regulations.gov under Docket ID No. EPA-HQ-OAR-2008-0508. FN16 H.R. 2454/S.2191 (2009). FN17 Employed lawyers insurance policies are excess to directors and officers liability insurance for claims involving the violation of securities laws to the extent that allegations are not for legal malpractice in which case, employed lawyers insurance is primary coverage.