In-House Counsel: Conflicts and Other Complexities

1. Stephen Crain January 10, 2017 In-House Counsel:Conflicts and Other Complexities

2. Who are you?And, who do they think you are?

3. First: Basic ConceptsThen: How Conflicts Arise And How To Resolve ThemThen: The Attorney Client Privilege And In-House CounselLast: A Few Other Things (Related Issues)

4. Basic Concepts • The Texas (in this case) Disciplinary Rules of Professional Conduct apply to in-house counsel • Problems arise (conflicts and privilege) because of uncertainty as to the identities of your clients • What you are doing (not who your are or what your title is) determines your role and obligations • Your clients probably do not understand your role with any degree of sophistication • It is your duty explain your role

5. Fundamental Obligations

6. Fundamental Obligations It’s the end of the day on Friday when a demand letter arrives on your desk. You are late to get to a school event and have been working hard to clear your desk before the week-long trip that starts tomorrow. The letter threatens a large claim against the company and individual executives. Because you don’t have to respond for a few weeks you leave it to deal with when you return. While you are gone, executives and others delete and destroy key documents. Do you have a problem?Does it matter if the documents were deleted as part of a standard document retention program?

7. Fundamental Obligations

8. Fundamental Obligations The safe harbor of Rule 37(e) of the Federal Rules of Civil Procedure for litigants who fail to preserve electronic information due to normal business operations does not apply where a party fails to suspend the routine operation to prevent loss of information when that information is subject to a preservation obligation. Therefore, in order to take advantage of the good faith exception, a party needs to act affirmatively to prevent the system from destroying or altering information, even if such destruction would occur in the regular course of business. Toussie v. County of Suffolk, No. CV 01-6716(JS)(ARL), 2007 WL 4565160 at *7 (E.D.N.Y. Dec. 21, 2007)

9. Fundamental Obligations Your CFO approaches you and asks that you prepare documents “papering” payments to an agent in a remote foreign country. You discover that the payments are for extraordinary amounts to an entity about which you can find no records. You approach the CFO about the payments and ask whether they are legitimate. The CFO explains “that’s how everyone does business there – just write the contract, I will protect you.” Do you have a problem? (Really: How big is your problem?)

10. Fundamental Obligations

11. Fundamental Obligations Same scenario except you say, “I am having no part of this.” CFO says, “You’re right, we should not make these payments.” Have you done enough? Same scenario except you say, “I’m having no part of this.” CFO says, “Ok, you are being ridiculous, I will get Bob to handle it. Keep your mouth shut, what we discuss is privileged.” Have you done enough? (Bonus Question: Is he right about the privilege?)

12. Fundamental Obligations

13. Fundamental Obligations

14. Fundamental Obligations You get a call from your outside auditor to discuss the CEO’s expense reimbursements. It seems the CEO has submitted requests for reimbursement in excess of $20,000 per month, many times without appropriate backup documentation. The auditor tells you that the issue is not material with respect to the financial statements as a whole. Many of the requests are arguably personal – bar tabs, Astros tickets, purchases of watches and computer equipment characterized as client gifts. You also recall the CEO recently fired a member of the accounting staff after a dispute which you seem to remember involved expense reimbursement. You call the Chairman of the Board who says “let me handle it.” The Chairman calls you back a week later and says he has investigated the situation, is comfortable doing nothing and that the CEO will “clean up his act in the future.” Have you done enough?

15. Fundamental Obligations

16. Fundamental Obligations

17. Conflicts of Interest You need to hire an additional lawyer for your staff. Your best candidate works for a law firm that is currently adverse to your employer on a major piece of litigation. Can you hire her? Let’s assume the answer is “Yes”; what steps do you take to protect the interest of your client?

18. Conflicts of Interest

19. Conflicts of Interest You need to hire an additional lawyer for your staff. Your best candidate works for a competitor corporation with whom your company has had contentious relationships over an issue or several issues in the past. Can you hire her?

20. Conflicts of Interest

21. Conflicts of Interest – Real Consequences • Dynamic 3D Geosolutions, LLC v. Schlumberger Ltd., (Fed Cir. 2016) • Dynamic (really, non-practicing patent holder, Acacia) hired Charlotte Rutherford, Schlumberger’s former deputy general counsel for intellectual property. Dynamic sued Schlumberger for patent infringement. • Key Findings: • There was a rebuttable presumption that Rutherford had shared Schlumberger's confidential information with her current in-house peers • Screening had not worked; Rutherford has participated in some meetings regarding the patent (open question as to whether screening would work) • Rutherford’s conflict imputed to entire legal department – definition of a "firm" includes corporate legal departments • Because Rutherford had communicated with outside counsel, outside counsel was disqualified too • Case dismissed: had been drafted by disqualified counsel

22. Conflicts of Interest You are approached by a vice-president and friend. He asks, “I don’t understand my [stock grant/employment contract]; can you walk me through it?” You answer, “Sure, off the record.” First: Who is your client? (Have you established an attorney client relationship with the VP?) Second: To whom do you owe a duty of loyalty?

23. Conflicts of Interest To establish an attorney-client relationship, the parties must explicitly or by their conduct manifest an intention to create such a relationship. LeBlanc v. Lange, 365 S.W.3d 70, 79. “An attorney-client relationship may be implied ‘when (1) a person seeks advice or assistance from an attorney, (2) the advice or assistance sought pertains to matters within the attorney’s professional competence, and (3) the attorney expressly or impliedly agrees to give or actually gives the desired advice or assistance.’” DeVaux v. American Home Insurance Company, 444 N.E. 2d 355 (1983).

24. Conflicts of Interest You are approached by a vice-president and friend. He asks, “I don’t understand my [stock grant/employment contract]; can you walk me through it?” You answer, “I can’t do that.” The VP asks, “Why not?” What do you say?

25. Conflicts of Interest

26. Conflicts of Interest You are the in-house lawyer responsible for labor and employment matters. The CEO tells you that the government is investigating the company for allegedly discriminating against minorities in its sales efforts. The CEO suspects that one particular sales manager may have engaged in activity that prompted the complaints. The CEO asks that you quietly set up an interview with the sales manager and interview him. Although the CEO knows that you cannot lie to the sales manager or misrepresent your role, he asks that you interview the sales manager “without arousing any suspicions.” Can you conduct that interview?

27. Upjohn Warning We are conducting an investigation for the Company into certain events related to [X]. You may have facts and/or documents that may be relevant to our investigation and we appreciate you meeting with us. To be clear, we serve as counsel to the Company. We are not your personal counsel and cannot give you legal advice. If you wish to obtain separate counsel, we will re-schedule this interview so that you may do so. In addition, your communications with us, as part of this investigation, are confidential and protected by, among other things, the attorney-client privilege. As the Company is our client, the attorney-client privilege belongs solely to the Company. Accordingly, the Company, in its sole discretion, may elect to waive the privilege and reveal your communications with us to third parties, including the government. May we continue?

28. Conflicts of Interest Do I need a lawyer? Am I under investigation? What happens if I refuse to cooperate?

29. Conflicts of Interest You work for an oil company. You deal mostly with one of the vice presidents in charge of Latin American operations. You have always explained to your contacts that you owe duties of loyalty and confidentiality to the corporation and not to them personally. Yesterday, the VP asked you to meet him for lunch to talk about what he said was a "personal matter." You knew that his marriage was on shaky ground, so you assumed that it was about a possible divorce. The VP confesses over lunch that he has been fixing prices with other oil companies active in the Latin American market. What should you do (immediately and immediately after)?

30. Conflicts of Interest Your company and three individuals are under investigation by the SEC. You gather information from the company and the individuals, including statements. The SEC seeks the statements of the individuals. Because the individuals are not your clients, you provide the statements to the SEC. Are you on solid ground? Would it make a difference if the individuals had their own lawyers? If you are wrong, are there personal consequences?

31. Conflicts of Interest – Real Consequences Yanez v. Plummer, 164 Cal. Rptr. 3d 309 (Cal Ct. App. 2013)In-house counsel gave advice to an employee on his way to the employee's deposition. This created an attorney-client relationship between the lawyer and the employee, which in turn led to a conflict of interest for the lawyer that the lawyer failed to recognize. It also led to a malpractice suit against the in-house lawyer by the (by then former) employee. Dinger v. Allfirst Fin., Inc., 82 Fed. Appx. 261 (3d Cir. 2003) In-house counsel gave officers advice on when to cash in their stock options. “Advice” led to a malpractice suit against the in-house lawyer brought by the (by-then) former officers.

32. Conflicts of Interest – Real Consequences Sandusky Cases Criminal charges were brought against Sandusky and three former administrators of Penn State. The charges were based, in part on the grand jury testimony of Cynthia Baldwin, Penn State’s general counsel. Baldwin testified about admissions the Administrators made to her. Baldwin had appeared with each Administrator when they testified to grand jury. Each Administrator thought Baldwin was their lawyer for purposes of his grand jury testimony. Baldwin subsequently disclosed her communications with them to the grand jury. Baldwin denied that she represented the Administrators. At a hearing, Baldwin stated that she: [E]xplained to [Curley – one of the Administrators] that I could go in [to the grand jury room], but I was general counsel for Penn State, that there was no confidentiality. And I emphasized that there was no confidentiality. . . . [T]here was no confidentiality between Mr. Curley and me because I was the university’s attorney. So what he told me wasn’t going to be confidential . . . . I mean, if the board asked, I would tell them.” The Administrators filed pre-trial motions to preclude the introduction of Baldwin’s testimony and to quash certain criminal charges based on violations of the attorney-client privilege. Court excluded Baldwin’s testimony and dismissed many of the charges. The Court found that “Baldwin did not provide anything akin to Upjohn warnings” and that the Administrators did not know that Baldwin did not represent them in their individual capacities. The Court concluded that “Ms. Baldwin breached [her ethical duty regarding client confidences] by testifying before the grand jury with respect to such communications.”

33. Spotting Issues – Investigations CFO walks into your office and tells you that he believes that the CEO/Chairman of the Board has been diverting money to create a fund to pay bribes to custom agents. He suggests that, right now, you conduct an internal investigation with full interviews of all employees. What are your immediate ethical concerns? What is your next move? Who do you report to?

34. Spotting Issues – Subsidiaries/Affiliates You are AGC for ParentCo which has, among others, a wholly-owned subsidiary, SubCo. The president of SubCo calls you to review the profit sharing agreement between SubCo and ParentCo. Can you? Is SubCo your client if you do? What steps can you take to protect the interests of ParentCo (and you for that matter)? What if SubCo is barely solvent when you are asked?

35. Spotting Issues – Subsidiaries/Affiliates • Generally, no issues when representation of the subsidiary aligns with the interest of the parent company or if the subsidiary: • • Is wholly-owned by the parent, • • Has common directors with the parent, or • • A single legal department administers legal services for both entities • BUT, if the interests of the parent and subsidiary are not aligned, separate counsel should be retained for the subsidiary • • Contract negotiations between parent/subsidiary • • Insolvency of subsidiary (may require management for benefit of creditors) • • Insured claims

36. Privilege Complexities and Conflicts

37. Attorney-Client Privilege Basics The privilege applies if and only if: asserted holder of the privilege is or sought to become a client communication with lawyer, acting as a lawyer for purpose of legal opinion, legal services, assistance in legal proceeding the privilege has been claimed and not waived by the client

38. In-House Complexity: The Attorney If an in-house counsel is acting in her capacity as an attorney, the attorney-client privilege applies. Where, however, counsel is acting as a business advisor or has only limited involvement, the privilege does not apply.

39. In-House Complexity: What Is Your Role? "Copying the Lawyer" does not create a privileged document. An entity cannot shield its business transactions from discovery simply by funneling its communications through an attorney.

40. In-House Complexity: What Is Your Role? • "Non-Legal" Functions Performed by In-House Counsel • Conducting (certain types of) investigations • Fact-gathering regarding issues that may later be the subject of litigation • Regulatory compliance issues • Management of entity • Negotiating contracts

41. In-House Complexity: What Can Be Done • Titles • Avoid Dual Functions • Education • Specific reference to advice sought and why; "Headlines" • Address communications to counsel (not just "copied on") • Identify documents as "Confidential" and "Privileged" • Outside counsel if questionable • Policies and Consistency • Organizational structure: legal department v. division counsel • Identify role of lawyer at meeting; segregate meetings

42. Waiver: Who Can Waive? • Client controls application of privilege • Client must choose to waive privilege (default is that privilege is claimed) • Lawyer cannot disclose privileged information without client's consent • True (obviously) even if lawyer is no longer retained or employed by the client • How does a corporation waive? Officers empowered to act on behalf of the company (think "authority to bind")

43. (Mostly Bad) Ways To Waive • Disclose protected materials to third parties • Communicate over an open/monitored channel • Include non-clients on an email trail • Give business, not legal, advice • Share results of counsel's internal investigation • Assert an advice of counsel defense • Designate counsel as a corporate representative deponent • Have counsel verify discovery responses (risk managers too) • Produce protected materials to an adversary (without a clawback) • Fail to control agents

44. In-House Complexity – Privilege As GC, you are made aware of allegations that several company executives and board members received the benefit of backdated stock options. You hire an outside law firm to investigate the allegations. An investigation is done, and a summary report prepared. Now, the entire board wants to hear the results of the outside law firm's investigation. Does the company waive any attorney-client privilege or work product doctrine protection for the outside law firm's report if the report is provided to the entire board of directors? Anything else bug you about this? What’s your best move?

45. In-House Complexity – Privilege and JVs You are asked by your company to serve as GC of a joint venture with OtherCo. You spend three days a week at JVCo and two days a week at your company. Your boss asks you to provide reports of all discussions you are having at JVCo. What concerns do you have about privilege? Same employment scenario, except now there is adversity developing between your company and OtherCo. Can you represent your company in the dispute with OtherCo? Can you represent your company in a dispute with JVCo? Could all of this have been solved with a bit of thought?

46. In-House Complexity – Privilege and Affiliates Common interests among parent and subsidiary: joint client relationship/privilege • "intra-group information sharing" does not amount to a waiver of the attorney-client privilege • the joint client privilege is subject to control by both entities • in the event of adverse litigation between the joint clients, the privilege (generally) is waived

47. A Few Other Things – M&A When a corporation changes ownership, "whether the attorney-client relationship transfers as well to the new owners turns on the practical consequences rather than the formalities of the particular transaction." Postorivo v. AG Paintball Holdings, Inc.

48. A Few Other Things – M&A Merger: Surviving entity has privilege Asset Purchase: Privilege (likely) stays with existing corporation if going concern (what assets?) Stock Purchase: If you buy lock, stock, and barrel (and continue operations), you get the privilege Variations Across Jurisdictions Take Care Of It In The Documents!

49. A Few Other Things – Work Product Doctrine Federal Rule Civil Procedure 26(b)(3)(A): Ordinarily, a party may not discover: 1. documents and tangible things 2. that are prepared in anticipation of litigation or for trial 3. by or for a party or its representative Exceptions: Those materials may be discovered if • They are otherwise discoverable; and • Substantial need and undue hardship is shown Supervised non-attorneys can create work product

50. A Few Other Things – Work Product Doctrine Primary battle: Was the product sought to be protected created "in anticipation of litigation"? • "Because Of" Test • Primary Purpose Test When is litigation "reasonably anticipated"? IMPORTANT: The alignment with document retention • Issue litigation holds as soon as there is a hint of a problem • Harder and harder to claim work product without litigation hold in place (does not yet establish the start date, but thinking is going that way…)