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Conflict of interest issues exist in corporate practice because, although the attorney represents the entity, the attorney actually deals with various constituents within that entity. The types of conflicts that exist in corporate practice mirror those that exist in conflicts generally, and the resolution of those conflicts turn on the same general themes - loyalty, preservation of confidential information and exercise of independent professional judgment by the attorney.
It is clear that a "'corporate attorney' - whether an in-house lawyer or a law firm that serves as counsel to the company, owes a duty to act in accordance with the interests of the corporate entity itself. His client is the corporation." Evans v. Artek Systems Corp., 715 F.2d 788, 792 (2d Cir. 1983); see M.R. 1.13(a). In a conflict context, this means that a lawyer employed to represent an organization represents the interest of the organization as defined by its responsible agents acting pursuant to the organization's decision-making procedures. See Restatement § 212, Comment b. Thus, the attorney's duty to preserve confidential information and to exercise independent professional judgment run to the entity, and not to other constituents within the organization.
As previously noted, confidentiality issues arise where the attorney, albeit representing a corporation, is dealing with constituents members whose interests may or may not diverge from those of the entity itself. Since information must be obtained from these individuals, but has the potential to be used adversely to them, conflict is possible. The key for the corporate attorney is to deal with these constituents fairly while at the same time advancing the corporation's interests in obtaining necessary information and protecting its institutional interests. See Hazard & Hodes, at 243. This can pose a challenge for corporate counsel.
In dealing with constituents of the corporation, whether they be management, employees, directors or others, the lawyer must be clear in his or her role. Pursuant to Model Rule 1.13(d) and Rule 4.3, the corporate lawyer must make clear to those with whom he or she is dealing that the corporation is the client and that information provided by those individuals is privileged outside the corporation but not as to the corporation itself.10 The lawyer's role as counsel for the entity should be clarified in any situation where the interest of the constituent has the potential of being adverse to the interest of the corporation.
Normally, a lawyer who obtains information from and advises a corporate constituent will not be disqualified from representing the corporation if a conflict between the organization and the constituent arises. See Lane v. Chowning, 610 F.2d 1385 (8th Cir. 1979). Where, however, the lawyer has failed to make his or her role clear, it is possible that the lawyer may be disqualified from representing the corporation in a matter adverse to that constituent in the future. Courts have recognized that "in particular circumstances and in the absence of warning from the lawyer, an associated person (constituent) may reasonably rely on the lawyer's apparent willingness to provide legal services for the associated person in addition to the entity, thus creating an implied client-lawyer relationship. E.g., Everson v. Koons, F. Supp. , 7 ABA/BNA Lawy. Man. Prof. Conduct 175 (D.N.C. 1990)." Restatement of the Law Governing Lawyers (Preliminary Draft No. 8 August 14, 1992) §194, Reporter's Notes Comment g, reprinted in Wolfram, Ethical Considerations for Corporate Counsel: Advising and Disclosing in an Uncertain Legal World, 796 PLI/Corp. 235 (1993).
A corporate lawyer may, subject to the internal policies of the corporation, concurrently represent both the corporation and one or more of its existing or former constituents. Model Rule 1.13(e); see ABA/BNA Lawyers’ Manual, at 91:2601-2602; Hazard and Hodes, at 264-265. In order to do so, the attorney must insure that the general conflict of interest provisions of Rule 1.7 are scrupulously followed. This requires first that the attorney reasonably believe that he or she can adequately represent both the corporation and the constituents. In determining whether that is possible, the attorney must analyze what effect the dual representation will have on the attorney's ability to exercise independent professional judgment on behalf of the corporation. In addition, the attorney must obtain the consent of the organization. In order to obtain such consent, the attorney must clearly explain the impact of such dual representation, and the consent must be obtained from an appropriate official other than the person who is to be jointly represented.
Multiple representation in shareholder derivative actions presents special problems. In such cases, where the lawyer may be required "to defend not only the corporation but also (if they have not retained separate counsel) individual constituents whose actions have allegedly harmed the company, the lawyer's loyalty to the individuals may be impaired by his [or her] representation of the entity, for whose benefit, ostensibly, the derivative action was brought." ABA/BNA Lawyers’ Manual, at 91:2602. In light of this increased potential for conflict, "motions for the disqualification of corporate counsel in derivative actions have been granted." Id; see also Annotated Rules, at 212-213; see generally Note, Multiple Representation in Shareholder Derivative Suits: A Case-by-Case Approach, 16 Loy. U. Chi. L.J. 613 (1985).
The role of corporate counsel where more than one member of a "corporate family" is involved presents unique difficulties. "When a lawyer represents two or more organizations with some common ownership or membership, whether a conflict exists is determined primarily on the basis of formal organizational distinctions." Restatement, § 212, Comment d. With regard to affiliated organizations, "the lawyer must respect the organizational boundaries of each and analyze possible conflicts of interest on the basis that the organizations are separate entities." Id.
In dealing with affiliated entities, whether they be parent, subsidiary, division, or sister corporation, the first question to be addressed is whether the attorney who represents the corporation also represents that entity. Although normally this question can be resolved by an analysis of the structure of the entities and the reasonable expectation of the parties, some courts have taken a categorical position with regard to affiliated-entity relationships. See, e.g., Strategem Development Corp. v. Heron Int'l, N.V., 756 F. Supp. 789, 792 (S.D.N.Y. 1991) (holding that a lawyer who represents a wholly owned subsidiary will be regarded as representing a parent for current conflict purposes).
"A decentralized division of a single corporation presents certain problems of client identity arising from the nature of the division's management charter. In the case of a subsidiary corporation, the question of client identity presents, in addition, the legal problems of maintaining and recognizing the separate corporate identity of the subsidiary and coping with the possibility that the lawyer who represents both entities may have a conflict of interest." Birdzell, Ethical Problems of Inside Counsel §2.03[2] (1987). Where there is substantial identity of ownership, the risk of conflict is lessened. ABA Informal Opinion 973 (1967). Where, however, outside interests are involved in the subsidiary, the conflict issues have the potential to be more difficult. Birdzell, at §2.03[2]; ABA Informal Opinion 973. Some difficulties can be obviated by carefully clarifying in advance the appropriate lines of communication and decision-making authority among and between constituent entities. This can provide guidance to counsel if and when corporate disputes emerge.
Generally, a lawyer may represent more than one division within an entity, and must resolve differences among them according to the organization’s normal decision-making procedures. Restatement, § 212, Comment d. A parent company's in-house counsel may represent an affiliated company in its dealings with third parties and may represent both parties on the same matter where no conflict of interest exists. Massachusetts Ethics Opinion 83-9 (1983).
Needless to say, care must be taken in representing multiple entities within the corporate structure. The nature of the relationship between the entities must be clarified and the effect on attorney-client privilege anticipated and addressed. Moreover, the attorney must insure that, whenever a potential for conflict exists, the terms of M.R. 1.7 are met.
Serious problems are also raised where an attorney represents an entity and seeks to represent adversely to an affiliate of that entity. Such representation is governed by Rule 1.7 as well. In order to determine whether Rule 1.7(a) or (b) applies, it is necessary to determine whether the attorney actually represents the affiliated entity. ABA Formal Opinion 95-390. That opinion rejected a categorical approach to this question and concluded that "whether a lawyer represents a corporate affiliate of his client, for purposes of Rule 1.7, depends not upon any clearcut per se rule but rather upon the particular circumstances." Among the factors to consider are whether such a relationship has been created under the terms of Restatement § 26, whether the parties have agreed that the attorney is to treat the affiliate as a client, whether confidential information has been disclosed to the lawyer by (or perhaps regarding) the affiliate with an expectation of confidentiality, and whether there is sufficient unity of interests between the entities so as to require the lawyer to regard the affiliate as a client.
Where the attorney is found to represent both a corporation and an affiliated entity, the attorney may not sue one and represent the other, even in unrelated matters, without client consent. Op. 95-390, relying on Rule 1.7(a). In such a situation, the representation would be deemed "directly adverse." Even if the lawyer is not representing the affiliate, however, it is possible that the attorney’s participation in suing the affiliate on behalf of another client will be deemed "directly adverse" to the represented corporation, but this is not, according to 95-390, necessarily so. On this point, the dissenting committee members sharply disagree. Which is the better view? Under what circumstances would there be direct adversity? When would there not be such adversity? See generally Opinion 95-390.
Even if there is not direct adversity, it may be possible that the representation of a corporation and also of a party suing an affiliate of that corporation will cause the attorney’s representation to be "materially limited," thereby triggering application of Rule 1.7(b). The ABA Opinion recognized this possibility as well. If so, consent will be required. If not, the attorney may undertake the representation and is urged, but not required, to consult with the client. Again, the failure to require consultation and consent caused sharp dissents from the majority position.
This is an area of continuing concern as the issues involved arise "with increasing frequency because of ‘[t]he proliferation of national or multi-national public corporations owning or partially owning subsidiaries which may also be national or multi-national [and] the spawning of varied types of corporate affiliates. . . .’" Opinion 95-390, quoting from Pennwalt Corp. v. Plough, Inc. 85 F.R.D. 264, 267 (D. Del. 1980). For cases addressing this issue, see Restatement, § 212, Reporter’s Note Comment d.
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