Law and Ethics of Lawyering
Spring 2004 Final Exam “Sample Answer”
By Eric Goldman
18 of you used computers and 13 of you wrote bluebooks. There were 4 As, 4 ABs, 19 Bs, 3 BCs and 1 D.
(maximum word count: 1,200. Average word count: 806. Range: 340-1180 words)
There are two main issues: client identity and conflicts.
You already represent Chapera in the financing transaction. But who might you represent in the contract negotiations? (We’ll turn to question of whether you can permissibly represent that person/entity in a bit). There are at least five possible clients here:
- Chapera the corporation
- Rob as a shareholder
- All shareholders as a group
- Rob as an individual employee/officer
- Rob as a business partner (owner of the doublevision technology)
Notice that all of these possible clients have a common spokesperson—Rob. So even if you are clear in your mind who you are representing, you need to clearly set Rob’s expectations. Best practices would suggest no-engagement letters to all non-clients. Since the letters will all be going to the same person, you can roll them all into one (perhaps even combined with the engagement letter for the matter). Clarity is the key.
With respect to representing parties in the contract negotiations, four options seem most likely:
Option #1: represent Chapera adverse to Rob as business partner
Option #2: represent Rob as business partner adverse to Chapera
Option #3: represent Chapera and Rob jointly
Option #4: represent no one in the contract negotiations (this is discussed in conjunction with the other options)
Option #1—Represent Chapera Adverse to Rob as Business Partner
This option creates no conflicts under Rule 1.7(a). Under this option, you have two separate representations for a single client (Chapera adverse to investors; Chapera adverse to doublevision owner). But do we have an issue under Rule 1.7(b)? 1.7(b) is triggered by responsibilities to another client or a third person or by the lawyer’s own interests. You might have some concerns about responsibilities you have to the prospective investors or the 5% shareholders, but I had a tough time coming up with a scenario where those responsibilities materially limited the representation.
You might conclude that there is no conflict under Rule 1.7. Even so, you might decide not to take this representation.
First, you have difficulty taking instructions from Rob as decision-maker for Chapera because of his divided loyalties. Thus, any deal that Chapera cuts with Rob may risk violating a fiduciary duty to the 5% shareholders. This fiduciary duty might be imputed to you as their attorney (compare Fassihi with Skarbrevik) or might attach to Rob in his role as CEO or as a majority shareholder. You run the risk of advising Rob in his personal capacity about how to manage those fiduciary duties, blurring the representational lines.
Second, you cannot have a confidential conversation with your client (Chapera) because, in so doing, the other side (Rob as business partner) will learn everything you say. This makes it hard for you to fulfill your competence duties under Rules 1.1, 1.3 and 1.4.
If you do decide to take on this representation, you need to clarify your role as company counsel per Rule 1.13(d). In addition, you have duties under either Rule 4.2 or Rule 4.3. If Rob doesn’t get his own attorney, you must also clarify your role under Rule 4.3. If Rob does get his own attorney, then Rule 4.2 applies. However, as a practical matter, you will need that attorney to waive Rule 4.2. Otherwise, technically you cannot talk to Rob as Chapera’s decision-maker without also having Rob’s attorney in the same conversation.
Another solution is to have Chapera appoint a decision-maker other than Rob. This may or may not be practical depending on the skills of Chapera’s other employees and the degree of autonomy Rob vests in them. If the Chapera decision-maker has no authority and is really just a data-collector for Rob, a separate client contact may not help.
Rob’s retention of his own attorney should negate the risk that Rob perceives you as his personal attorney. However, it does not cure the confidentiality problem (and, as indicated by the Rule 4.2 reference, may compound it). Also, a new attorney will increase the transaction costs generally, and may require extra time/hassle by adding a new player at the table.
Option #2—Represent Rob As Business Partner Adverse to Chapera
Many of you did not discuss option #2, presumably because you ruled it out of hand (or didn’t even think of it). However, you should not dismiss this option so quickly. In some cases, this may prove to be a good solution. However, to pursue this option, you need to determine who will represent Chapera’s interests in the licensing transaction. As a practical matter, the investors’ lawyer will protect Chapera shareholders’ interests to some degree because, if the license agreement is unfavorable to shareholders, the shareholders won’t invest. However, this lawyer probably will not want to represent Chapera directly in the negotiations as this will set up a Rule 1.7(a) problem for that lawyer. Chapera could get a new lawyer to handle the licensing negotiations while you continue to represent Chapera in the investment. Or Chapera could go without a lawyer, although that again raises the Rule 4.2/4.3 dilemma discussed previously. If you don’t represent Chapera on the licensing agreement, a non-engagement letter will again be necessary.
If you pursue representing Rob in the licensing negotiations instead of Chapera, Rule 1.7(a) is immediately triggered as you are representing Chapera in one transaction (adverse to investors) and representing Rob adverse to Chapera in a second transaction (the license agreement). To comply with Rule 1.7(a), both Chapera and Rob would need to sign a waiver.
This raises a tricky issue about waivers. Rob’s consent on behalf of Chapera is tainted (as he is the beneficiary of the waiver on the other side). When there are other logical people to approve the waiver (an independent board of directors, or some other autonomous officer), their signature may cure the taint. However, if not, there are no clean ways to get a bulletproof signed waiver.
Along with Rule 1.7(a), you could make arguments that Rule 1.7(b) and Rule 1.8(b) also apply to this situation. The Rule 1.7(a) waiver should also satisfy the requirements for these provisions.
In assessing the conflicts, you would also want to consider if the representation would require you to disclose confidential information about Chapera to Rob as business partner. Of course this disclosure is inconsequential as a practical matter because it’s all going to the same person, but from a legal standpoint you may also need a Rule 1.6 waiver as well.
In the waiver, you would probably want to discuss the risks of confidential disclosures in both directions under Rule 1.6 and any associated detrimental impacts (loss of attorney-client privilege, strategic behavior in adverse negotiations). Some of the disclosures discussed in Option #3 below may also be applicable.
If you go down this path, two additional observations. First, if Chapera pays your fees (a not-uncommon arrangement when this transaction is ancillary to a financing that Chapera benefits from), then Rule 1.8(f) applies and further disclosures are required. Second, if you consider Chapera your “primary” client (i.e., the one whose relationship should continue indefinitely), you may want to consider a prospective waiver so that Rob as business partner cannot conflict you out of some future representations for Chapera. (I’m not sure a prospective waiver will work here, but it’s something to consider—see the Brennan case).
Option #3—Joint Representation of Chapera and Rob.
This choice implicates a host of rules: Rule 1.7(a), Rule 1.7(b), Rule 1.8(b), Rule 1.13(e). Once again, waivers are required, and once again, the waivers may be tainted. For example, Rule 1.13(e) specifies who can consent for Chapera. But turning to the shareholders doesn’t help here—Rob owns 95%, so he controls the shareholders.
Also, you need to inquire if the conflicts are too fundamental to waive. With Rob at the epicenter of all decisions, you might decide that the conflicts are fundamental unless you can find a legitimate decision-maker for Chapera other than Rob.
If you decide to proceed, then the waiver should include items like:
- you can’t be as zealous for either side as you would in other circumstances
- each party does not have an attorney-client privilege against the other party for information communicated to you
- risks of fiduciary liability to the 5% shareholders
- risks that you will use confidential information to the detriment of a party (at minimum, you know both parties’ business objectives)
- you will have to withdraw if the deal goes sour (and maybe in other circumstances too—any subsequent matter that relates to the subject matter?)
Note that the facts tell you that the agreement only need to be codified and renegotiated. Depending on the contentiousness of the renegotiation items, could you try to take the position that you are principally going to act as a “scrivener” for the parties? Here, there’s less risk of that status backfiring because Rob is the decision-maker on both sides. However, I believe that an attorney never gets a free pass from his/her RPC duties by claiming to be a scrivener. See Callahan.
This question illustrates a relatively common situation in closely held/family businesses, especially in the Silicon Valley. In the Valley, many inventors keep their patent rights individually and then license them to the companies they start up. This arrangement creates an ethics minefield for the lawyer representing the company, although these minefields can be found to some degree in every closely-held business. The rules really do not fit apply to representing closely-held businesses with complex arrangements.
When I ran into this situation, we were representing a company in a financing and discovered the undocumented license agreement to the technology. We ended up representing the company in the license agreement, while the CEO/entrepreneur retained his own attorney. In retrospect, I’m not sure we documented the waivers correctly. The transaction went comparatively smoothly, but nevertheless we ruffled a few feathers as the CEO progressively realized how much he’d have to give up his IP rights to the company to placate investors, and thus we had to suffer through some petulant phases when the CEO felt we were beating him up on behalf of the company.
As for scoring, generally answers that discussed only Option #1 scored more poorly than those that considered other options.
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There is a threshold inquiry here—is the payment to Troy illegal? Most of you assumed without discussion that it was, but you generally got a little extra scoring credit for recognizing that it might not be. In this fact patterns, your assumptions are critical to your relationship with your client and potentially its long-term future. If you just assume that this payment is illegal without investigation, you might be unnecessarily and detrimentally alarmist.
If Payment is Illegal
If the payment is illegal, then a host of rules are triggered. You cannot counsel your client to commit illegal activities (Rule 1.2(d)), so you would need to advise your client not to make the payment, and you could not help them do so. Because Protégé is a corporation, under Rule 1.13(b), you also would be expected to escalate the matter up-the-ladder to higher levels of management if your client contact continued down a lawbreaking path and the path is likely to result in a substantial injury to the corporation. If the corporation didn’t change its behavior, you would be permitted/required to withdraw under Rule 1.16.
Rule 1.16(a)(1) would also be implicated if your representation on the matter was tainted by an illegal payment. If you take the position that Rule 1.16(a)(1) doesn’t apply (for example, because you never help the corporation with the payment, only the resulting contract), you are probably still permitted to withdraw under Rule 1.16(b).
If the client persisted in making the illegal payment, then Rule 1.6(b) may also be triggered, in which case you would have to rat out the client. This depends on whether the payment results in substantial financial injury to “another.” I’m not sure who the “another” would be in this circumstance. If Protégé wins the business and Versacorp gets a fair deal from Protégé, I’m not sure who has suffered a financial injury. (Perhaps some competitor who doesn’t get the business? This is a little speculative). Nevertheless, if Protégé uses your advice to illegally procure the business, you might be permitted to rat them out under Rule 1.6(c)(1).
In all cases, note that Rule 8.4 applies—at minimum, subsection (a), but arguably (b), (c) and (g) as well. As a result, if you fail to handle this matter properly, you could be subject to professional discipline. Depending on the applicable law, your involvement could subject you to criminal liability as well.
If the Payment is Not Illegal
If no law prohibits the payment, then what? This is a legal “bribe,” and you have no mandatory obligations. You might still object and withdraw per Rule 1.16(b)(3).
Here, the consequences of your decision are dramatic. If you counsel your client to make the payment, your client (and its investors) have a big financial win, and your client stays in business. If you advise your client not to make the payment, and this costs them the contract, your client may go out of business and the investors and employees lose everything. So this is a situation where you will not want to be unduly conservative. On the other hand, if the payment is illegal, you need to have a backbone and resist their pressure to break the law. This may cause some resentment towards you and cost you Protégé’s business, but being a professional may require you to make hard choices.
Also, consider the circumstances where you would go after Troy and rat him out. Rule 1.6 may require your client consent to make the ratting out. However, if no one ever blows the whistle on him, he can continue to victimize in the future. I hope some of you will be willing to take a stand against this type of behavior, even if it is not illegal.
Believe it or not, this situation actually happened to me. A marketing manager at a major Internet company (you’ve all heard of it) was feathering his nest for a nice Hawaii trip. Fortunately, my client was not dependent on the business in the extreme way that the question’s facts were presented. Therefore, the answer was simple—we weren’t going to play this way, even if it cost us the contract. (The situation was a little too multi-faceted for me to say whether this ended up costing the client the contract—in the end, the parties’ relationship ended, but for many reasons). Needless to say, I was not amused by the venality of our business partner.
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This question presents an accidental overbilling and a subsequent discovery of the error. Did the initial overbilling break any rules? Once discovered, do you have a duty to correct it?
I had a tough time coming up with a clear rule that governed accidental overbilling. You could argue that Rule 1.5(a) is implicated because, by definition, any charge for work not actually performed is unreasonable. My suspicion is that OLR would be very reluctant to prosecute a case if the firm could show that the overbilling was truly an accident, although failing to remedy an accident after it was discovered might lead to recourse.
There is a technical violation of Rule 1.8(f) because Saboga paid for work performed for Mogo. There may also be a technical breach of Rule 1.6(a) depending on the information contained in the bill [although I took confidentiality issues out of the question]. Again, I suspect the OLR would not be interested in pursuing an accidental case for either technical violation.
So the duties under the RPC are a little unclear. However, at minimum we have a breach of contract. Should Saboga pursue a legal claim, they will get the money back. In addition, arguably, the failure to correct an error breaches the implicit fiduciary relationship between attorney and client. This could give rise to a claim for breach of fiduciary duty. I also wonder if failure to return funds that are owed, knowing that they are owed, breaks some statutory obligation of vendors or rises to the level of criminal theft. Under some of these situations, Rule 8.4(c) would be triggered when the error is not corrected.
If you conclude that the firm has a duty to correct the error, then what? You might propose offering Saboga a refund, you might offer to give them a credit against future work, or you might ignore it. The latter comes at some peril. Further, if you know that the firm has a duty to correct the error but doesn’t, you may have a duty to rat out one or more of your firm’s attorneys under Rule 8.3(a).
As a practical matter, you will have lots of reasons to ignore the problem. You may not want to spend your personal (non-billable) time to correct an error, especially if you didn’t create it. You may not want to question the responsible attorney’s practices for fear that he/she will resent your intervention. You may be concerned what the client will think when it realizes that your billing processes are error-prone (they may lose confidence in the firm or audit prior bills). Or you may relativistically make some judgments based on your own moral compass—if it is a small error and a big client, you might feel the harm is dismissible as “noise.” Your duties under the law don’t vary based on the size of the client or the amount of the error, but your thinking may. No matter what the reason, isn’t doing nothing consistent with Schlitz’s prophecy?
Fortunately for me, I discovered the error on a client for whom I had some authority to make billing adjustments, so I credited the overbilled amount. However, if I had lacked this authority, I may very well have been tempted to do nothing based on inertia and the administrative hassle. I would like to think that I would not give in to such temptation, and that you wouldn’t either.
Some of you discussed Rule 5.3(a). A true accident doesn’t necessarily violate Rule 5.3(a), but it could be implicated depending on the overall systems and practices of the firm.
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This question really was as easy as it seemed. You have an outsider potentially exposed to company confidential information. Disclosing this information to her implicates Rule 1.6(a), and you need to obtain the company’s consent to make the disclosure after consulting with them. I think the board could authorize the disclosure if you explained the risks to them. You just need to do so to fulfill your Rule 1.6(a) duties.
Also, having the outsider at the meeting would cause the firm to permanently lose the attorney-client privilege for the material that’s discussed. Remember, we hammered on this point when discussing the Togstad case. The loss of the attorney-client privilege is the core risk you need to explain to the board to fulfill your 1.6 duty. (You could argue that Rules 1.1, 1.3 and 1.4 also mandate your explanation of this risk to the board).
So what should you do? The most obvious option is to preclude Heidi from the entire meeting or close the meeting to Heidi during the confidential report. Alternatively, you could advise the board to waive the privilege and let her stay if they wanted her to, or you could defer the discussion until a subsequent meeting when Heidi isn’t around.
Note that you will not enjoy raising this issue. Donnie has probably brought Heidi around because he feels like he giving something back to society, and you are implicitly criticizing his way of doing so. Furthermore, an inner-city youth will already feel uncomfortable and excluded prior to the meeting, and singling her out for special treatment and then kicking her out will only further disenfranchise her.
For grading purposes, I downgraded any answer that did not contain the words “attorney-client privilege.” Merely referencing Rule 1.6 or an abstract confidentiality obligation was not enough to avoid the downgrade.
In my case, I found out about the board member’s plans in advance of the meeting and was able to phone the board member beforehand. Fortunately, the board member understood the problem and did not bring the mentee to the meeting.