Ethics Opinion 382
Lawyer-Directors Representing Entity-Clients
Introduction
The Legal Ethics Committee has received several inquiries regarding whether a lawyer who represents an entity-client may also serve as a member of the client’s board of directors.1 The Committee is aware that acting in such dual capacities is a common practice that often accrues to the benefit of both lawyer and client and is not generally prohibited2 but, as former Supreme Court Justice Potter Stewart warned, there are significant ethical issues implicated by such dual service’s intertwining “the function of the lawyer in giving professional counsel” and “the function of corporate management . . . in the profit-making interests of its stockholders.”3
At its core, the essential ethical issues relating to a lawyer representing a client-entity also serving as a director on the entity’s board are conflicts of interest that may arise between two or more of: (1) the lawyer’s duties to the entity as its counsel; (2) the lawyer’s fiduciary duties to the entity as a director; and (3) the lawyer’s personal self-interest inherent in simultaneously serving in both roles.4
For example, a personal conflict might arise for the lawyer-director when:5
- the lawyer-director is asked for legal advice regarding her own acts or omissions that she took in her directorial capacity;
- the lawyer-director is asked for legal advice regarding different potential courses of action, and she prefers one option as a board member;
- the lawyer-director is asked to represent a client whose interests are directly adverse to the entity;
- the lawyer-director is, or may be, called as a witness by those bringing lawsuits against the entity-client;6
- the lawyer-director is employed by a law firm and serves as outside counsel to the entity, and the board must deliberate with respect to the relationship between the firm and the entity, including deciding whether to retain the firm, the fees to be paid to the firm, when and whether to retain the firm’s services, etc.;
- a lawsuit is brought against the corporation and its directors, and the interests of the board are adverse to those of the corporation or adverse to the interests of the lawyer-director.7
The purpose of this Opinion is to create a roadmap for practitioners to navigate the ethical and practical issues of such dual service.
The Committee concludes that while there is no per se proscription against a lawyer representing an entity while simultaneously serving as a director of that entity, the lawyer must first carefully determine whether the additional fiduciary or other responsibilities related to serving on the entity’s board creates a material risk of compromising the lawyer's independence of professional judgment on behalf of the client or otherwise creates a personal or other conflict of interest. This determination must include full and frank discussions with the client of all material risks inherent in the lawyer serving in such a dual role and obtaining the entity-client’s informed consent thereto.8
The Committee notes that it may be more practical for the lawyer-director to recuse herself from representing the entity-client or from giving it legal advice while serving on its board as an effective way to avoid most, but not all,9 of the types of conflicts discussed herein. Where consistent with the rules, the lawyer-director may suggest that the client agree to a different lawyer from her firm representing it while she serves as a director, which would minimize, but not eliminate, the ethics issues discussed herein.
Applicable Rules
- Rule 1.0 (Terminology)
- Rule 1.1 (Competence)
- Rule 1.2 (Scope of Representation)
- Rule 1.4 (Communication)
- Rule 1.6 (Confidentiality of Information)
- Rule 1.7 (Conflict of Interest)
- Rule 1.8 (Conflict of Interest: Specific Rules)
- Rule 1.10 (Imputed Disqualification: General Rule)
- Rule 1.13 (Organization as Client)
- Rule 5.7 (Responsibilities Regarding Law-Related Service)
General Discussion
Unlike accountants, who are prohibited by the Code of Professional Ethics for Certified Public Accountants from serving on boards of directors of their entity-clients,10 neither the ABA Model Rules of Professional Conduct nor the D.C. Rules bar lawyers from serving in such a dual capacity, but they warn lawyers to decline such representations in circumstances where there exists a material risk that the lawyer’s independent judgment will be compromised or where there is a disqualifying conflict.11
The duties of a corporate director to shareholders do not overlap cleanly with the duties that a lawyer owes a client under the D.C. Rules of Professional Conduct. As such, the lawyer must provide information to the entity-client sufficient for it to be aware of the potential risks inherent in an attorney serving such dual roles and make clear to the client at all times “which hat she is wearing.”
An attorney-client relationship may unintentionally arise when the entity reasonably believes that the lawyer-director is acting as its counsel in providing legal advice. As such, it is important for a lawyer to take every reasonable step to avoid such misconceptions and to clarify his role at every stage. When acting pursuant to his duties as a board member, the attorney must make clear that he is not acting as a lawyer or giving legal advice. On the other hand, when the lawyer is acting as counsel to the entity-client, he must take every reasonable step to ensure that it understands that he represents only the entity and that he does not represent any of its board members, officers, employees, or anyone else.12 Best practices include specifying this important point to the client both through specific and unambiguous language in the retainer agreement consistent with Rule 1.5 and thereafter when required by Rules 1.4 and 1.13.
There are several additional ethical issues that arise in the context of a lawyer serving a dual role on behalf of the entity-client, particularly the risk that her professional judgment could be compromised. As a stark – but not at all uncommon – example, a lawyer-director might be required to determine the legality of the board’s decisions in which she directly participated; in such situations, her ethical obligation to provide competent, diligent, objective, and independent legal advice could be at odds with her personal and managerial interests.13 Moreover, while it is not uncommon for an entity to agree prospectively to limit the liability of its directors, a lawyer who decides to also serve as a director could not make any agreement that prospectively limits the lawyer’s liability to a client for malpractice.14
As such, a lawyer considering assuming a dual role on behalf of an entity must first assess whether assuming such a dual role is ethically permissible and, if so, discuss these issues with the client-entity and, together with it, determine, based upon a risk-benefit or other appropriate analysis, if assuming a dual role is appropriate under the circumstances.15
Discussion
Rule 1.2 (Scope of Representation)
Pursuant to Rule 1.2(a):
A lawyer shall abide by a client’s decisions concerning the objectives of representation … and shall consult with the client as to the means by which they are to be pursued. . . A lawyer shall abide by a client’s decision whether to accept an offer of settlement of a matter. In a criminal case, the lawyer shall abide by the client’s decision, after consultation with the lawyer, whether to waive a jury trial, and whether the client will testify.
Thus, the Rule carefully distinguishes between the objectives of the representation, such as whether to accept a settlement or request a jury trial or plea, which vest generally in the client, and the means of obtaining those objectives, which vest generally in the lawyer: As Comment [1] to the Rule elaborates:
Both lawyer and client have authority and responsibility in the objectives and means of representation. The client has ultimate authority to determine the purposes to be served by legal representation, within the limits imposed by law and the lawyer’s professional obligations. Within these limits, a client also has a right to consult with the lawyer about the means to be used in pursuing those objectives. At the same time, a lawyer is not required to pursue objectives or employ means simply because the client may wish that the lawyer do so. A clear distinction between objectives and means sometimes cannot be drawn, and in many cases the client–lawyer relationship partakes of a joint undertaking. In questions of means, the lawyer should assume responsibility for technical and legal tactical issues, but should defer to the client regarding such questions as the expense to be incurred and concern for third persons who might be adversely affected . . .
This distinction creates an issue for the lawyer-director, who at all times must be conscious of this important “objectives vs. means” distinction. As counsel to the entity, he must abide by the decisions of his client regarding the objectives of the representation16 even if, as a director, he powerfully disagrees with the client’s decision in that regard. Moreover, as counsel, he may exercise his best legal judgment and decline to follow the entity’s instructions with respect to the means of the representation, even if the client urges such action. However, so long as the decision of the entity acting through its duly authorized constituent(s)17 is both legal and ethical, the lawyer, in his capacity as a director, must follow the client’s directions regarding even the means of the representation, even if he strongly believes that such action is not in the client’s best interests.
As discussed more fully below, this dichotomy on the objectives-means continuum between a lawyer-director’s prerogatives and duties as a lawyer and as a director creates potential personal conflicts of interest for lawyers wearing both hats.
Rule 1.1 (Competence)
Pursuant to Rule 1.1, lawyers must provide competent representation to their clients and must possess the “legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” Some courts have ruled that a director for an entity who is also a lawyer is held to a higher standard of care than a non-lawyer director and, as such, must be careful to recognize “red flags” for potential legal issues in a company’s operations which may not be apparent to a non-lawyer director.18
Moreover, unlike lawyers who advise a company but do not also serve as directors, lawyer-directors might know the intimate details of the entity-client’s internal operations.19 This heightened standard of care means that the lawyer-director faces a greater potential risk of violating Rule 1.1 when the lawyer is also representing the entity.
Finally, although it is generally outside the scope of the authority of the Legal Ethics Committee to comment on matters of substantive law, it is important to remind practitioners that they are bound by the substantive law,20 and that their duty of competence under Rule 1.1 includes the duty to be familiar with all applicable laws and regulations. Again, in this regard, lawyer-directors should be aware that courts have often held them to substantially higher standards of care and due diligence under various SEC Rules than other directors.21
Rule 1.13 (Organization as Client) and Rule 1.4 (Communication)
Rule 1.13 establishes that a lawyer for an organization represents only the entity itself, “acting through its duly authorized constituents,” who could be any person or persons designated by the entity-client to act in that capacity. As such, the duly authorized constituent is merely an agent for the entity with respect to the representation, and the full scope of the lawyer’s ethical duties run directly to the entity itself, and not to any of its directors, officers, owners, employees, shareholders, or to any other persons or constituents.
There may be situations where one or more fellow directors is engaged in an action, intends to act, or refuses to act in a matter related to the lawyer-director’s representation that is a violation of law which reasonably might be imputed to the organization and is likely to result in substantial injury to the organization. Under such circumstances, Rule 1.13(b) mandates that the lawyer proceed “as is reasonably necessary in the best interests of the organization,” including referring the matter “to higher authority in the organization, including, if warranted by the circumstances, to the highest authority that can act on behalf of the organization as determined by applicable law.”22
When a lawyer is also a director, it may be particularly uncomfortable and difficult for her to “report up” on her fellow directors – perhaps even as to the acts or omissions of the duly authorized constituent – with whom she has established a working relationship and perhaps friendships. Nevertheless, when the interests of management or the board or any of its directors diverge from that of the entity, the lawyer-director is bound by Rule 1.13 to prioritize the interests of the entity and to act only in its best interests.
Moreover, above and beyond Rule 1.13, a lawyer-director has the same duty as any other lawyer to ensure that all client decisions be made “only after the client has been informed of all relevant considerations.”23 Thus, if a lawyer who represents an entity-client is also considering serving on the client’s board, he must provide all information that the entity will need to make an informed decision as to whether to invite the lawyer to serve as a director for the entity as well. Such information that must be discussed with the entity-client includes, at the very least, the fact that certain communications with the board by a lawyer who is also a director may not be protected by the attorney-client privilege.24
By virtue of the close working relationship with her fellow directors, the lawyer-director may actually obtain more information to communicate to the client and to draw on when advising the client. However, some confusion may result when a lawyer also serving as a director learns information that a non-director lawyer would not have known; again, Rule 1.4 would also require that the lawyer-director relay this information to the client to the possible detriment of the board.
Rule 1.6 (Confidentiality of Information) and Rule 5.7 (Responsibilities regarding Law-Related Services)
The duty of a lawyer to protect client confidences and secrets under the D.C. Rules is a fundamentally important obligation which, subject to very few exceptions, generally takes priority over other ethical imperatives. That particularly broad duty extends not only to confidential attorney-client communications but also to “secrets,” which Rule 1.6(b) defines as “other information gained in the professional relationship that the client has requested be held inviolate, or the disclosure of which would be embarrassing, or would likely to be detrimental, to the client.” However, the client holds the privilege and the entity-client and/or its directors may waive the attorney-client privilege and consent to the disclosure of the entity’s confidences and secrets.
There are any number of communications by a lawyer that are legally protected from disclosure by applicable substantive law of attorney-client privilege but which are not afforded similar protection for communications from a director to his entity. As such, confusion may arise regarding which hat the lawyer--director is wearing; under which circumstances, in his role as lawyer, he is obligated to protect certain private information; and when, in his role as director, he is required to make disclosures.
The general rule is that legal advice is protected by the attorney-client privilege and Rule 1.6, but business-related advice is not always protected and is potentially discoverable in litigation.25 The repercussions of this distinction may be dire; for example, given the different scopes of the fiduciary and attorney-client privileges with regard to confidential information, the lawyer-director may be forced to turn over information during discovery or potentially testify as to information that would have been covered by attorney-client privilege had the lawyer not also been a director.26
Distinguishing between these roles can be complex because the discussion may oscillate between legal advice and business discussions and also because a bright line between “legal” and “business-related” may not always exist, making legal advice provided by a lawyer-director more vulnerable to involuntary disclosure or subject to mandatory disclosure than that of a lawyer who is not also a director.27 As such, when the lawyer-director must discuss legal matters which he would like to make subject to the attorney-client privilege, it may be insufficient to declare that “I am speaking now in my capacity as legal counsel.” Rather, he must take affirmative and substantive steps to make plain the strictly legal nature of the discussion.
Although often impractical and difficult to achieve, the lawyer-director could consider having entirely separate sessions with his entity-client where only legal issues are discussed and where other firm lawyers and inside general counsel are purposely included in such meetings. Though the subject of attorney-client privilege substantive law is beyond the scope of this opinion, the lawyer-director might consider the crafting of meeting minutes so as to avoid revealing client confidential information in privileged discussions with entity counsel.
Moreover, Rule 5.7, which imposes additional duties upon a lawyer who provides "law related services," applies particularly to lawyer-directors. Rule 5.7(b) defines law-related services as “services that might reasonably be performed in connection with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.” As Comment [9] explains:
A broad range of economic and other interests of clients may be served by lawyers engaging in the delivery of law-related services. Examples of law-related services include providing title insurance, financial planning, accounting, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax preparation, and patent, medical or environmental consulting.
When a lawyer provides general legal services to the entity, but also provides only business advice to the entity in a particular case, Rule 5.7 will apply:
- (a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:
- (1) By the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients; or
- (2) In other circumstances if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services are not legal services and that the protections of the client–lawyer relationship do not exist.
Thus, Rule 5.7 creates an additional mandate under the D.C. Rules that a lawyer-director be careful at all times to remember which "hat" he is wearing – lawyer or director – and to be meticulous in communicating with the entity-client to make clear which role he is playing at a particular time.28 This is particularly important, and the risk of confusion is particularly severe, where the recipient of services lacks sophistication.29
Rule 1.7(b)(4) (Conflicts of Interest: General Rule)
Many lawyers think of “conflicts” as those that arise between two or more current clients or between a current and former client.30 It goes without saying that, in undertaking any representation of an entity-client – whether as only in his capacity as lawyer or as a lawyer-director – the lawyer must always conduct a competent and thorough conflicts check against current and previous representations as he would ordinarily do in every representation. However, for a lawyer-director, disqualifying conflicts may not involve conflicts between two or more clients but, rather, conflicts that are personal to him.
The analysis of such conflicts begins with Rule 1.7(b)(4):
(b) Except as permitted by paragraph (c) below, a lawyer shall not represent a client with respect to a matter if: . . .
(4) The lawyer's professional judgment on behalf of the client will be or reasonably may be adversely affected by the lawyer's responsibilities to or interests in a third party or the lawyer's own financial, business, property, or personal interests.
(Emphasis added).
This rule has very broad applicability; a lawyer has a Rule 1.7(b)(4) conflict not only where there exists an actual personal conflict, but even in cases where the lawyer’s professional judgment on behalf of a client “may be adversely affected by the lawyer’s responsibilities to or interests in a third party or the lawyer’s own financial, business, property, or personal interest.” (Emphasis added). Such personal conflicts undermine the lawyer-director’s capacity to render objective, detached advice because he will be – or even may be – personally affected by the legal advice he renders.31
However, even when a lawyer-director has a personal conflict, it may still be ethically permissible for him to represent the entity-client if he can meet both requirements of Rule 1.7(c):
(c) A lawyer may represent a client with respect to a matter in the circumstances described in paragraph (b) above if
(1) Each potentially affected client provides informed consent to such representation after full disclosure of the existence and nature of the possible conflict and the possible adverse consequences of such representation; and
(2) The lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client.
As Comment [7] explains:
The underlying premise is that disclosure and informed consent are required before assuming a representation if there is any reason to doubt the lawyer's ability to provide wholehearted and zealous representation of a client . . . Although the lawyer must be satisfied that the representation can be wholeheartedly and zealously undertaken, if an objective observer would have any reasonable doubt on the issue, the client has a right to disclosure of all relevant considerations and the opportunity to be the judge of its own interest.32
Thus, after a good faith effort to determine which conflicts of interest may exist, the lawyer must obtain the client’s informed consent33 before taking on a dual role.34 However, in the context of resolving personal conflicts, it is very important for the lawyer-director seeking to represent the entity-client to carefully consider the implications of Rule 1.6, the duty to maintain and protect client confidences and secrets, in seeking such informed consent. If, for the consent by the entity-client to be “informed,” the lawyer would be required to disclose Rule 1.6-protected information from another client (current or past), the lawyer would be ethically prohibited from doing so. The result would be that the lawyer could not obtain the requisite informed consent; she could not satisfy Rule 1.7(c)(1); she therefore could not remove the taint of her Rule 1.7(b)(4) personal conflict; and she would be precluded from representing the entity-client in that matter.
Moreover, some lawyers erroneously conclude that obtaining the client’s informed consent effectively resolves a personal interest conflict. In fact, pursuant to Rule 1.7(c)(2), the lawyer must also undertake both a subjective self-assessment and an objective analysis35 to determine whether – notwithstanding the client’s informed consent – he will be able to provide competent, diligent, and zealous representation to the client notwithstanding his own interests. In the language of Legal Ethics Opinion 365:
the lawyer must [subjectively] hold such a belief and that belief must be reasonable under an objective standard . . . the prohibition of Rule 1.7(b)(4) is one which is highly dependent on the circumstances of the representation and the lawyer’s own circumstances . . . we can do no more than identify the conflict of interest considerations, and leave it to the inquirer to determine whether the particular circumstance of his representation of his client are such that his judgment “will be or reasonably may be affected . . .”
The analysis is not complete, however, because even when the lawyer-director has a personal conflict such that she cannot satisfy either the objective or subjective test of Rule 1.7(c)(2), she may nonetheless continue to serve as counsel to the entity-client if she can limit the scope of her representation so as to “carve out” the personal conflict.
Pursuant to Rule 1.2, a lawyer may eliminate the taint of a personal conflict by limiting the scope of the representation when such limitation is “reasonable under the circumstances” and the “client gives informed consent.” As such, a lawyer-director may limit the scope of her representation when her directorial role undermines, or has the capacity to undermine, her judgment on behalf of the client-entity. In some circumstances, she may step out of one of her roles on behalf of the entity, or she may either withdraw from serving as counsel for the entity and advising it on the problematic issue (and recommend substitute counsel to advise the entity for that limited purpose) or abstain from her role as a board director when the board addresses and acts on the problematic issue.
In instances involving specific discrete matters, such as determining the lawyer’s compensation and whether to retain the lawyer’s firm to represent the entity in certain matters, such a limitation is both feasible and reasonable. In other cases, however, where the taint of the personal conflict will permeate virtually everything the lawyer does in representing the entity – such as, for example, when she is asked to represent the corporation in a lawsuit in which both she and the board are defendants – such a limitation will generally not remove the taint of the personal conflict, even if the entity-client gives informed consent to the representation.
Finally, pursuant to Rule 1.10(a)(1),36 a lawyer’s personal conflicts are not ordinarily imputed to her firm. Therefore, when the lawyer-director has a personal conflict with respect to a particular matter, another lawyer at the firm may be able to represent the entity-client with respect to that matter – unless the personal interest of the conflicted lawyer “presents a significant risk of adversely affecting the representation of the client by the remaining lawyers in the firm.”
As such, any firm lawyer seeking to replace a lawyer-director from his firm who has been disqualified from representing the entity because of a personal conflict must undertake his own Rule 1.7(b)(4) analysis as discussed above to determine if he, too, has a conflict. As an obvious example, there is no lawyer at the firm who would not have an irreconcilable conflict representing the client-entity with respect to determining the appropriate compensation for the firm. On the other hand, for example, “a lawyer’s strong political beliefs may disqualify the lawyer from representing a client, but the firm should not be disqualified if the lawyer’s beliefs will not adversely affect the representation by others in the firm.”37
If a lawyer for an entity has a personal conflict or is otherwise uncomfortable assuming a position on the board, then he must “just say no.” However, where an entity is pressuring its lawyer to accept a position on its board, she may be able to mollify the client by agreeing to serve as a director and recommending that a different firm lawyer represent the entity-client going forward.
Conclusion
A lawyer may simultaneously serve as counsel and as a director for an entity as long as, while a lawyer-director, she takes every reasonable step to ensure that the client-entity appreciates the distinction between her duties as counsel and her duties as corporate director and declines any representation of the entity, or recuses herself from further representation of the entity, if a conflict is reasonably foreseeable or arises between two or more of: (1) the lawyer’s duties to the entity as its counsel; (2) the lawyer’s fiduciary duties to the entity as a director; and (3) the lawyer’s personal self-interest inherent in simultaneously serving in both roles. The lawyer-director must engage in full and frank discussions with the entity-client of all material risks inherent in the lawyer serving in such a dual role and must obtain informed consent thereto.
Published: August 2021
1.This Opinion does not apply to lawyers who serve on the boards of entities for whom they do not also serve as counsel. See, e.g., Harris, Micalyn S., and Karen L. Valihura. Outside Counsel as Director: The Pros and Potential Pitfalls of Dual Service (Business Lawyer, vol. 53, no. 2, Feb. 1998, pp. 479-506.)
2.See, e.g., Restatement (Third) of the Law Governing Lawyers, § 135, comment d (2000).
3.Potter Stewart, Professional Ethics for the Business Lawyer: The Morals of the Market Place, 31 Bus. Law. 463, 464 (1975); see The Lawyer as Director of a Client, 57 Bus. Law. 387, 395-96 (2001).
Lawyer-directors of nonprofit entities may also encounter potential issues, some of which are unique to nonprofits. For instance, some state statutes limit liability for uncompensated directors and officers of nonprofit organizations when they are acting in their capacity as directors and officers.
4.Lawyers provide advice on law and legal strategy to an entity client but do not make commercial or other business decisions on the ultimate objectives of the client. Such decisions are made by the entity, usually acting through its directors. See Rule 1.2. A lawyer who serves in both roles runs the risk of confusing and blurring these important distinctions.
5.A lawyer-director may have a conflict of interest in undertaking to provide legal advice to an entity-client regarding a challenge to the legality of actions in which he or she participated as a director. See generally Rule 1.7, comment [4]: “[I]f the probity of a lawyer’s own conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give client detached advice.” However, under certain circumstances where the lawyer concludes that the conflict is consentable, the lawyer-director may provide such legal advice after notifying the entity-client of the conflict and obtaining its informed consent. Rule 1.7(c).
6.Because of the broad scope of insider knowledge and industry information presumably known by a lawyer-director, she may be targeted and called as witnesses by those bringing lawsuits against the corporate client, creating a potential personal conflict. Moreover, Rule 3.7 (Lawyer as Witness) may preclude the lawyer-director from serving as trial counsel. As per Comment [1], “combining the roles of advocate and witness can prejudice the opposing party and can involve a conflict of interest between the lawyer and client.”
7.In this regard, plaintiffs sometimes may aim at strategically disqualifying the lawyer-director and the lawyer-director’s firm from representing the corporation.
8.See Rule 1.8(g)(1) and Comment [13] thereto.
Although the D.C. Rules of Professional Conduct do not require a lawyer to carry professional liability insurance, having such protection is a sound and highly recommended practice. However, under some malpractice insurance policies that exclude non-law-related liabilities, lawyer-directors are entitled to less coverage – or even possibly no coverage at all – for work they perform in that dual role, even if a significant portion of the work performed was legal. See, e.g., Continental Cas. Co. v. Smith, 243 F. Supp. 2d 576, 582 (E.D. La. 2003). As such, lawyer-directors should always check with their insurers to determine if such limitations apply to their coverage.
9.A lawyer-director may not solve all conflict problems by refraining from providing legal advice to the client-entity. For example, she may have a conflict imputable to other members of her firm pursuant to Rule 1.10, or she and/or other firm lawyers may have a personal conflict, as discussed infra.
To be clear, however, it is not the position of the Committee that a Rule 1.7 conflict necessarily arises where the lawyer-director limits herself to serving as director and a different firm lawyer serves as counsel to the entity. Even in the absence of a conflict, lawyers should be aware that some courts have disqualified lawyers in such circumstances.
10.Code of Professional Ethics for Certified Public Accountants, Rule 101.
11.See ABA Model Rule 1.7, Comment [35]. See also ABA Formal Opinion 98-410, pursuant to which:
The lawyer should reasonably assure at the outset of the dual relationship that management and the other board members understand the different responsibilities of legal counsel and director; understand that in some circumstances matters discussed at board meetings with the lawyer in her role as director will not receive the protection of the attorney-client privilege; and understand that conflicts of interest could arise requiring the lawyer to recuse herself as a director or to decline representation of the corporation in a matter. During the dual relationship, the lawyer should exercise reasonable care to protect the corporation's confidential information and to confront and resolve conflicts of interest that arise./p>
12.See Rule 1.13(a) (Organization as Client). There are circumstances when a lawyer may undertake to represent simultaneously and jointly both the entity and one of its constituents in the same matter, but that issue is beyond the scope of this Opinion. See, e.g., D.C. Legal Ethics Opinion 327 (2005) (Joint Representation: Confidentiality of Information Revisited).
13.See, e.g., The Lawyer as Director of a Client (The Business Lawyer, Nov. 2001, Vol. 57, No. 1, at 388); ABA Model Rule 1.7.
14.Rule 1.8(g). See also Comment [13]: “Agreements prospectively limiting a lawyer’s liability for malpractice are prohibited because they are likely to undermine competent and diligent representation.”
15.See, e.g., ABA Formal Opinion 98-410.
16.A basic feature of the lawyer-client relationship, sometimes frustrating to lawyers, is that the client has the right to make foolish decisions. For example, a client might reject an attractive settlement offer that the lawyer believes is greater than a probable judgment were the case to be tried and the client to prevail spectacularly. See, e.g., Rule 1.13, comment [3]: “When constituents of the organization make decisions for it, the decisions ordinarily must be accepted by the lawyer even if their utility or prudence is doubtful. Decisions concerning policy and operations, including the ones entailing serious risk, are not as such in the lawyer’s province.”
Of course, a lawyer has the ethical duty to counsel and advise the client against such foolish decisions but, at the end of the day, the client has the unfettered right to reject the lawyer’s advice regarding the objectives of the representation.
17.See discussion on Rule 1.13, infra.
18.See, e.g., Escott v. BarCharis Constr. Corp., 283 F. Sup. 647 (S.D.N.Y. 1968).
19.See, e.g., Feit v. Leasco Data processing Equipment Corp., 332 F. Supp. 54, 578 (E.D. NY 1971):
Inside directors with intimate knowledge of corporate affairs and of the particular transactions will be expected to make a more complete investigation and have more extensive knowledge of facts supporting or contradicting inclusions in the registration statements than outside directors . . . such stringent requirements of knowledge of corporate affairs [apply to] inside directors that one is led to the conclusion that liability will lie in practically all cases of misrepresentation.
20.When the substantive law is proscriptive and the D.C. Rules are permissive or silent on the matter, then the substantive law will control. On the other hand, when the D.C. Rules are proscriptive and the substantive law is permissive or silent, the Rules will control.
21.See Blakely v. Lisac, 357 F. Supp. 255, 266 (D. Ore. 1972) (holding a lawyer-director “liable both as a lawyer and as a director” for drafting a fraudulent prospectus under SEC Rule 10b-5, while not holding other directors similarly liable).
22.In the District of Columbia, this is colloquially referred to as the “report up, but not out” rule; that is, a lawyer for an entity has the duty to report such information up to the highest decision maker within the entity, but may generally not report “out” to regulators or others because of the duty to maintain client confidences and secrets. See discussion on the implications of Rule 1.6 (Confidentiality of Information) on a lawyer-director, infra. But see D.C. Rule 1.6 (d) (narrow exception to permit lawyers to “report out” – but only “to the extent reasonably necessary” – when the lawyer’s services were or are being used to perpetrate an economic crime-fraud.)
23.Rule 1.4, Comment [2].
24.See discussion on Rule 1.6 implications, infra.
25.See, e.g., ABA Formal Ethics Opinion 98 – 410, Lawyer Serving as Director of Client Corporation (1998).
26.Some courts have even gone so far as to hold that the attorney-client privilege for communications between a lawyer and the lawyer’s corporate client dissolves entirely when the lawyer becomes a director for the entity. See, e.g., Federal Savings & Loan Ins. Corp. v. Fielding, 343 F.Supp. 537 at 546 (D. Nev. 1972) (When a lawyer “gets into bed together” with the entity by serving also as a director, the lawyer converts the relationship into strictly a business relationship, rendering all communications between the lawyer-director and the entity as “business communications” unprotected by the attorney-client privilege.)
27.There is hardly a courtroom in the land where litigants do not regularly seek to pierce assertions of attorney-client privilege by arguing that the lawyer provided business advice, which is discoverable, and not legal advice, which is not. The courts have employed a wide variety of tests to determine whether a lawyer-director’s communications are privileged, and some have ruled that “when the lawyer becomes a director the privilege essentially evaporates” and that even lawyer-director’s communications which consist only of legal advice may not be privileged. Other courts have held that even non-legal advice is privileged so long as the parties sought purely legal advice from the lawyer-director. See ABA Formal Ethics Opinion 980-410, citing Corp, v. Fielding, 343 F. Supp. 537, 546.
28.For a comprehensive discussion of Rule 5.7, see Singer, Saul Jay, May A D.C. Lawyer Build A Deck (Washington Lawyer, Speaking of Ethics, March 2016).
29.Rule 5.7, Comment [8].
31.See generally Rule 1.7 (Conflicts of Interest: General) and Rule 1.9 (Conflict of Interest: Former Client), respectively.
31.A lawyer who has a personal stake in the outcome of her legal advice may, for instance, be tempted to provide more cautious advice. Even a lawyer-director whose self-interest is wholly congruent with the interests of the entity may nevertheless have a personal conflict if her concern for her own personal interest in any way interferes with her concern for the client’s interest.
32.See also Comment [11]: “The lawyer's own interests should not be permitted to have an adverse effect on representation of a client. For example, if the probity of a lawyer's own conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give a client detached advice.”
33.Informed consent “denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.” Rule 1.0(e) (Terminology).
34.This would apply to both a director who subsequently seeks to represent the entity as counsel, and counsel for the entity who wants to serve on its board.
35.A lawyer-director might undertake the requisite self-evaluation in good faith and subjectively conclude that she will be able to devote herself entirely to the client’s interests and disregard any interest that might pose a personal conflict of interest. However, whether a reasonable person in the lawyer’s position could objectively come to that conclusion under the circumstances is an important question that must always be addressed in personal conflict situations.
36.Rule 1.10(a)(1) provides that:
(a) While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or Rule 1.9, unless:
(1) the prohibition of the individual lawyer’s representation is based on an interest of the lawyer described in Rule 1.7(b)(4) and that interest does not present a significant risk of adversely affecting the representation of the client by the remaining lawyers in the firm . . .
37.Rule 1.10, comment [7].
