Law Firms Creating In-House Ethics Counsel

Posted in: Law Practice

It is easy for a young associate or even a partner to be anonymous in a large firm. Many lawyers do not even know many their colleagues. In the old days, at least a common parking lot bound the law firm together, but that’s no longer true because a firm’s offices often stretch out over many cities. Lawyers also know that the ones who do not contribute sufficiently to the firm’s bottom line will find themselves shown the exit door. This large turnover does not encourage loyalty to the firm.

If one of the anonymous lawyers in a large firm (concerned about the ethical judgment of another) challenges a senior associate or junior partner, that may be risky, or the young lawyer may mistakenly believe that it would be risky to challenge a superior. To whom, then, should the lawyer raise his concerns? If the lawyer does raise the ethical question to one of the supervisory lawyers, what does that lawyer do if she is also concerned but is not certain of the right course of action? If the ethical question is difficult (and the most interesting questions are), the law firm could hire outside counsel to consider the issue. However, that is not the first alternative that many firms would choose because the decision to hire outside lawyers is costly.

Add to this mix the fact that, according to psychologists, we tend to follow orders. Granted, the ethics rules [ABA Model Rule of Professional Conduct, Rule 5.2(a)] tell us that simply following orders is not a defense to unethical conduct. Despite that rule, it is still not easy for the associate to challenge the partner or for the partner to challenge his major client and tell him, for example, that either he will turn over the document, or else the client can walk out the door. To address this dilemma, law firms should create structures that make encourage the associate or the partner to do the right thing in these types of situations.

Establishing General Counsel of the Law Firm

Because of the realistic possibility of tort suits against law firms based on alleged violations of the ethics rules, including the firm’s lack of reasonable supervision, a growing number of law firms are designating one partner as the “general counsel of the law firm.” This arrangement heightens ethical awareness by fixing responsibility in one lawyer to whom other lawyers may turn for a more objective evaluation of legal ethics issues. A law firm’s general counsel must stay up to date on the developments of the case law and regulations that govern the practice of law. Lawyers who practice in creditors’ rights, or antitrust, government contract law, and so forth, have an economic incentive to keep up with the latest law in their areas. However, unless a lawyer is practicing in the area of legal ethics, he or she does not have the same incentive to keep up with the ever more complicated law governing the practice of law.

It is increasingly common for ethics specialists to advise law firms to create an “ethics partner” or in-house lawyer to advise on matters of legal ethics. These general counsel are typically in-house counsel because it is more expensive to hire an outside general counsel. Moreover, lawyers within the law firm are more likely to consult with an in-house counsel than with someone outside the firm. They just have walk down the hall or pick up the phone for an intra-firm consultation.

The in-house counsel whom the lawyer consults is also more likely to be more objective than the lawyers initially involved with the matter. For one thing, in-house counsel will not be personally involved with the particular matter. If the client is the problem, the in-house counsel should be viewing the client as a client of “the firm” rather than a client of the particular billing partner. The in-house counsel will thus make the decision more objectively because the client’s billings may represent only a minute percentage of the billings of the entire law firm, as compared to 20 percent or more of the billings of the individual partner or associate. If necessary, in-house counsel can decide whether the issue is such that she should kick it upstairs to the relevant law firm committee (such as the committee that decides whether there is a disqualification issue or a conflict of interests). The existence of an in-house general counsel should encourage junior partners or associates to report suspicions in a way that does not disadvantage those who do report.

A survey of the largest 197 law firms in 2005 reported that nearly 70 percent now have a designated general counsel, up from 63 percent in the prior year. Each is an inside counsel rather than an outside general counsel (i.e., a lawyer in another law firm), and 92 percent of these general counsel are partners in their firm. The little empirical evidence that exists suggests that an inside general counsel reduces malpractice liability. Both lawyers and clients have the same interest in reducing the lawyers’ mistakes. One study showed that, over a five-year period, law firms that employ a general counsel (or similar position, such as ethics advisor or loss prevention counsel) spend $1 million less on defense costs and indemnity payments in connection with malpractice claims.

Rule 1.6(b)(4) of the ABA Model Rules of Professional Conduct authorizes lawyers to seek confidential advice from other lawyers about their ethical duties. Although the ABA Model Rules do not use the title “in-house counsel,” Rule 5.1, Comment 3, does specifically contemplate that law firms, particularly larger firms, may designate a senior lawyer as a designated ethics lawyer.

Obstacles to Firms Designating In-House Counsel

Oddly enough, some courts discourage this development by denying the attorney client privilege to communications between a lawyer within the law firm and the law firm’s inside counsel. In re Sunrise Securities Litigation, 130 F.R.D. 560, 597 (E.D. Pa. 1989), said that “a law firm’s communication with in-house counsel is not protected by the attorney client privilege if the communication implicates or creates a conflict between the law firm’s fiduciary duties to itself and its duties to the client seeking to discover the communication.” The alleged conflict occurs because the firm would like to avoid malpractice liability. Of course, all law firms should endeavor to avoid malpractice liabilty; they do that by not making mistakes. Yet, these cases do not appear to be concerned if the law firm consulted with outside counsel about possible ethical questions.

More recent cases are more supportive of the need for an in-house law firm counsel. When the law firm creates an in-house general counsel, that does not shield all communications if a disgruntled sues for malpractice. Still, it should be able to consult in confidence with its in-house lawyer in the same way that it could consult in confidence with an outside counsel.

The Massachusetts Supreme Judicial Court, in RFF Family Partnership, LP v. Burns & Levinson, LLP, 465 Mass. 702, 703, 991 N.E.2d 1066, 1067–68 (2013), adopted a useful test to determine when a court will allow a law firm to assert the attorney client privilege. The court will protect the law firm’s internal communications under the privilege provided that—

(1) the law firm has designated an attorney or attorneys within the firm to represent the firm as in-house counsel, (2) the in-house counsel has not performed any work on the client matter at issue or a substantially related matter, (3) the time spent by the attorneys in these communications with in-house counsel is not billed to a client, and (4) the communications are made in confidence and kept confidential.

The court went on to conclude that the law firm in that case had met its criteria. Hence, it affirmed the trial court’s order allowing the defendant law firm and its lawyers to invoke the attorney-client privilege to preserve the confidentiality of these communications.

Georgia is another jurisdiction that now recognizes that law firms can have an attorney-client relationship with its inside counsel. St. Simons Waterfront, LLC v. Hunter, Maclean, Exley & Dunn, P.C., 293 Ga. 419, 746 S.E.2d 98 (2013) held that the attorney-client privilege applied to communications between the law firm’s lawyers and its in-house counsel regarding a client’s potential claims against that firm, as long as there was an actual attorney-client relationship and the relationship meets the other requisites of the privilege. Once the law firm establishes the attorney-client relationship with its in-house counsel, materials that the in-house counsel generates in connection with those efforts enjoy the normal work product protection against discovery.

If a law firm designates one of its lawyers as the in-house or inside counsel to the law firm, when law firm personnel consult that in-house lawyer for legal advice, the attorney-client evidentiary privilege should protect those communications. When the consultation includes the topic of ways the firm might defend against a possible claim by a current client, the existence of such a possible claim can create a conflict of interest between the firm and the client. However, that conflict does not forfeit the privilege otherwise attaching to the consultation, if the law firm gives adequate notice to its client of the potential claim, so that the client can take whatever action it wishes.

The ethics rules already require the law firm to advise the firm’s client of its possible malpractice. ABA Model Rules of Professional Conduct, Rule 1.4 and Comment 3 provide that the lawyer has the duty to inform the client of “significant developments affecting” the representation. Comment 7 adds that the “lawyer may not withhold information to serve the lawyer’s own interest.” It does not matter whether inside counsel or outside counsel has advised that there is malpractice. In both cases, the lawyers must advise the client that it committed (or may have committed) malpractice. The reason the court allows the privilege is the same reason any court respects the attorney-client privilege: to encourage candid conversation with the lawyer that may keep the client from doing something that is wrong.

The hope and expectation is that when the young associate feels no reprisal when consulting with the law firm’s in-house counsel, that counsel will nip some problems in the bud. The empirical evidence discussed above—that firms with in-house counsel are spending $1 million less on indemnity than those without, over a 5-year period—indicates that this hope is realistic.

  • HGLtraveling

    Having law firms be “policed” by in-house ethics counsel, is like hiring the fox to guard the chicken coop. Sorry to say, from where I sit, his is not a great idea.