The Application of the Rules of Professional Conduct To In-house Lawyers

ISSUE 2, 2024

Written by Neil J Wertlieb^*

Since you took an in-house attorney position and no longer work for a law firm, you don’t have to worry about the nuances and application of all of California’s ethical rules, right? Ok, fine, there’s still the general duty of loyalty to consider, and, of course, confidentiality, but most of the other ethical rules—just like time sheets and billings—no longer apply, right?

Sorry, but that’s just not the case. In fact, you might be surprised to learn which ethical rules apply to you in your in-house position, and how such rules apply.

THE BROAD REACH OF THE CALIFORNIA RULES

The ethical rules that govern lawyers in the State of California are the California Rules of Professional Conduct (the "Rules"). The Rules do not just apply to lawyers in private practice, but they also apply to in-house lawyers. Further, the application of such Rules to how lawyers in private practice behave while at a law firm also applies to in-house lawyers, as paragraph (c) of Rule 1.0.1 [Terminology] defines "law firm" (or "firm") to include "the legal department, division or office of a corporation, of a government organization, or of another organization." The State Bar of California has disciplinary authority over all State Bar licensees, and yet in-house attorneys are often surprised at how several of the Rules are applicable to their duties when their client is also their employer.

Even in-house attorneys who are not licensees of the California State Bar but who practice in California may be subject to the Rules. The California State Bar permits non-California admitted lawyers to practice as in-house counsel in the state under certain circumstances. An attorney who resides in California and who is licensed to practice law in another U.S. jurisdiction may register to provide legal services as in-house counsel for a single "qualifying institution" in California without becoming a licensee of the State Bar of California.⁰¹ To be eligible to do so, an in-house attorney who is not a licensee of the State Bar of California must meet the eligibility requirements of California Rules of Court rule 9.46,⁰² which includes the requirement to abide by all laws and rules governing California State Bar licensees, including the Rules. In-house attorneys residing in California, including those who are not admitted to practice in California, must therefore abide by the ethical rules applicable to all licensees of the State Bar of California.

While it is clear that the Rules apply to all in-house attorneys in California, how those Rules actually apply is not always clear. Attorneys are generally familiar with the application of the ethical rules to their practices when they work in private practice. In fact, many of the Rules contemplate the attorney as an outside legal advisor with multiple clients—not an employee of a single client. Some of the Rules are obvious in their application to in-house attorneys (such as the duty of confidentiality contained in

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rule 1.6). Other Rules don’t really apply to the in-house attorney as a practical matter (such as the obligation to maintain trust accounts pursuant to rule 1.15 [Safekeeping Funds and Property of Clients and Other Persons], and the limitations on advertising and solicitation contained in rules 7.1 [Communications Concerning a Lawyer’s Services], 7.2 [Advertising], and 7.3 [Solicitation of Clients]).

But the application of some of the Rules may have a different or surprising application to many in-house attorneys, due in part to the nature of the employer-employee relationship where the employer is the client (and perhaps the only client) of the in-house attorney, and also due to the mixed role of some in-house attorneys who serve as both a lawyer for the organization and also as a businessperson or principal of the organization. This article focuses on several familiar topics of legal ethics and how they apply to the in-house lawyer.

CONFLICTS OF INTEREST⁰³

CURRENT CLIENTS

Although the Rules makes clear that an attorney employed or retained by an organization represents the organization acting through its duly authorized constituents (e.g., officers, directors, etc.), the Rules also makes clear that the attorney may represent any such constituent in addition to the organization. Paragraph (g) of rule 1.13 [Organization as Client] provides that a "lawyer representing an organization may also represent any of its constituents." However, such dual representation may present a conflict of interest between current clients. The Rules preclude an attorney from representing two or more clients if the representation of one client is directly adverse to another client, or if there is a significant risk that the representation of a client will be materially limited by the attorney’s responsibilities to or relationships with another client (unless, among other requirements, the attorney secures informed written consent from each affected client).⁰⁴ If the organization’s consent to the dual representation is required by rule 1.7, the consent is required to be provided by an appropriate official of the organization other than the individual constituent who is also being represented.⁰⁵

This type of situation often applies to outside attorneys, and may apply to in-house attorneys as well, for example, in connection with litigation defense and corporate investigations, where the attorney may be called upon to represent both the organization and certain named individuals. Such dual representations may require the informed written consent of each client to the extent the interests of the clients are in conflict. As a result, the in-house attorney may be required to secure such consents from both their employer and a colleague at the company.

Conflicts of interest may also exist among entities within the corporate family. Parent and subsidiary business entities are generally considered separate legal entities. Thus, representing a parent entity does not necessarily lead to an attorney-client relationship with a subsidiary for the purposes of the conflict of interest analysis, or vice versa. However, where an in-house attorney does legal work for multiple entities within the corporate family, the conflict of interest rules may be implicated when the entities have differing ownership or after a subsidiary is sold. If the in-house attorney did substantive legal work for that subsidiary in addition to the corporate parent, the in-house attorney may have a conflict of interest being adverse to that former subsidiary (such as in connection with a subsequent dispute between the corporate parent and such former subsidiary).

FORMER CLIENTS

The Rules generally preclude an attorney from working on a matter on behalf of a client if that client’s interests are materially adverse to the interests of a former client of the attorney and the attorney represented that former client in the same or a substantially related matter (unless the attorney secures the informed written consent of the former client). This preclusion is contained in paragraph (a) of rule 1.9 [Duties to Former Clients]. The Rules also generally preclude an attorney from using confidential information relating to the representation of a former client to the disadvantage of that former client.⁰⁶

While compliance with these ethical obligations may have been obvious and routine at a law firm—with conflict checks being run on each new engagement—an attorney’s obligations are no less applicable after moving in-house. An in-house attorney may be asked or expected to work on a matter on behalf of their employer organization that is adverse to, or otherwise relates to, a former client of the in-house attorney—either from when the attorney was in private practice or at a prior in-house counsel position. This could happen, for example, if the attorney’s employer organization is commencing litigation against a former client of the attorney—one in which the attorney represented that client in a matter substantially related to the litigation or where the attorney has confidential information pertaining to the former client that is relevant to the litigation. In such event, the in-house attorney may be precluded from working on the litigation due to the conflict of interest with a former client. Similar issues may arise in other types of legal work as well, such as an acquisition or business transaction on behalf of the employer organization with a

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former client, where such confidential information might be relevant to the transaction.

IMPUTATION OF CONFLICTS

It may be challenging enough for an in-house attorney to manage conflicts of interest with former clients, especially without the infrastructure of a law firm conflicts check system and a database of prior engagements to reference, but it gets even more challenging when there are multiple in-house attorneys working together in the same legal department. This is due to the possibility of imputation of conflicts of interest.

Rule 1.10 [Imputation of Conflicts of Interest: General Rule] generally provides that the conflict of interest of one attorney in a law firm (again, defined in the Rules to include a legal department) is imputed to all other attorneys in the firm, such that none of them may represent a client when any one of them practicing alone would be prohibited from doing so.⁰⁷ As a result, if any attorney in the legal department is precluded from working on a matter adverse to a former client as described above, then all other attorneys in the legal department may also be precluded from working on such matter, because that attorney’s conflict of interest might be imputed to each of them. Case law in California has made clear that this requirement applies to in-house attorneys.⁰⁸

The Rules provide for an exception to the preclusion by imputation, where the conflicted attorney is "timely screened from any participation in the matter," but strict compliance with the requirements for an ethical screen, including providing written notice to the affected former client, would be required for such exception to apply.⁰⁹

In an in-house legal department, just as in an independent law firm, attorneys often collaborate with one another, discuss confidential information, and work together to achieve the goals of their client (i.e., their common employer). Since the ethical considerations for attorneys in a law firm and for attorneys in an in-house legal department are the same with respect to conflicts of interest, the potential disqualification of entire legal departments should be the same as it would be for law firms.

While few legal departments utilize a system for checking conflicts and approving new engagements—let alone maintaining a list of former clients of each in-house attorney—such a system might be advisable to avoid potential violations. Further, whenever a conflict becomes apparent, the in-house attorney may need to consider some form of prophylactic or remedial action, such as creating an ethical screen, securing the informed written consent of the affected former client, or perhaps even having a non-lawyer colleague interface with outside counsel on the matter (thereby avoiding the need for in-house attorneys on such matter where all such attorneys are conflicted by imputation).

SEXUAL RELATIONS WITH CLIENTS

Rule 1.8.10 [Sexual Relations with Current Client] prohibits an attorney from having sexual relations with a client (unless the sexual relationship existed before the attorney-client relationship commenced). Although this rule appears to be directed toward protecting clients who are natural persons, the rule also applies where the client is an organization. Comment [2] to rule 1.8.10 makes clear that, "[w]hen the client is an organization, this rule applies to a lawyer for the organization (whether inside counsel or outside counsel) who has sexual relations with a constituent of the organization who supervises, directs or regularly consults with that lawyer concerning the organization’s legal matters."

As a result, if an in-house attorney’s colleague, who may work just down the hall from the attorney, "regularly consults with" the in-house attorney concerning the company’s legal matters, the in-house attorney should be mindful of this rule before initiating sexual relations with the colleague.

THE "NO CONTACT" RULE

Attorneys are bound by the "No Contact" Rule (reflected in rule 4.2 [Communication with a Represented Person]), which provides that an attorney may not communicate about the subject of a representation with a person that the attorney knows to be represented by another attorney in the matter, unless the attorney has the consent of the other attorney. Although the No Contact Rule generally prohibits an attorney from communicating with a represented person, the rule does not prevent the parties themselves from communicating with respect to the subject matter of the representation.¹⁰ Accordingly, the rule should not prohibit an attorney who is also a party to a legal matter from communicating on their own behalf with a represented person. Similar to the other Rules discussed herein, the No Contact Rule may apply differently to in-house attorneys than it does to outside attorneys. Because many in-house attorneys serve not only as attorneys but also as businesspersons—with decision-making authority acting as a principal—it is not always clear when an in-house attorney is acting as a lawyer or as a principal or client. When an in-house attorney is communicating in their capacity as a principal or employee of an organization (rather than as the

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attorney for the organization), the in-house attorney may be permitted to communicate with a represented person without the consent of that person’s attorney. However, unless it is clear that the in-house attorney is acting solely in a non-attorney representative capacity on behalf of the employer organization (e.g., as a party contemplated by comment [3]), communication with a represented person may be prohibited.

FAILING TO ACT COMPETENTLY

Of course, failing to act competently could be grounds for dismissal for an in-house attorney. But an in-house attorney may also be subject to discipline as well, for violation of the duties of competence and diligence, as reflected in Rules 1.1 [Competence] and 1.3 [Diligence]. Rule 1.1 obligates a lawyer to provide competent representation to a client, which includes application of the "learning and skill … reasonably necessary for the performance of such service."¹¹ Rule 1.3 obligates a lawyer to act with "reasonable diligence," defined as acting "with commitment and dedication to the interests of the client," without neglect or undue delay.¹² Because the Rules do not distinguish between in-house attorneys and those in private practice, termination of employment may not be the only result for failing to act competently!

A DUTY TO RESIGN (OR NOT RESIGN)?

There are circumstances under which attorneys must withdraw from a representation.¹³ There are also ethical limitations on when and how attorneys may withdraw from a representation.¹⁴ Do these rules apply to the in-house attorney? In other words, do California’s ethical rules dictate when the in-house attorney must—or must not—quit his or her job?

Paragraph (a) of rule 1.16 [Declining or Terminating Representation] mandates withdrawal of the attorney under certain circumstances. For example, the attorney must withdraw if the attorney knows or reasonably should know that the client is asserting a position in litigation for the sole purpose of harassing or maliciously injuring another person, or that continued employment will result in violation of the Rules.¹⁵ Further, rule 1.13, which defines certain ethical obligations where the client is an organization, contemplates that the attorney may have a duty to resign (e.g., where "up the ladder" reporting fails to prevent a violation of law that is likely to result in substantial injury to the organization).¹⁶ But, whether or not withdrawal is mandatory, an attorney cannot simply withdraw from employment at the discretion of the attorney: Rule 1.16(d) provides that a lawyer "shall not terminate a representation until the lawyer has taken reasonable steps to avoid reasonably foreseeable prejudice to the rights of the client, such as giving the client sufficient notice to permit the client to retain other counsel."

Again, the same rules apply to attorneys whether in-house or in private practice—the only difference for the in-house attorney is that the client is the employer. As a result, you should not only be aware that there are circumstances which might mandate resigning your in-house position, but you might also not have the right to resign your position on the timing of your choice.¹⁷

ATTORNEY-CLIENT PRIVILEGE

Finally, although not governed by the Rules, in-house attorneys should also be aware of how the attorney-client privilege applies to their communications with their employer client.

The attorney-client privilege provides that a client generally has the right to refuse to disclose, and to prevent another from disclosing, any confidential communications between the client and the client’s attorney.¹⁸ The privilege applies not only in litigation matters, but may be asserted in any proceeding in which testimony or document production may be compelled. Where the client is an organization, the organization is also entitled to the benefit of the attorney-client privilege even though attorneys typically communicate with individuals acting on behalf of the organization.¹⁹

The law in California does not distinguish between communications by a client with in-house attorneys and with outside attorneys. As a result, the attorney-client privilege should apply in the same manner regardless of whether the client is communicating with an in-house attorney or with an outside attorney. However, in-house attorneys should be cautioned that the attorney-client privilege may in fact apply to their communications in a manner that differs from the application to outside attorneys, in at least two respects.

First, a communication will be protected by the attorney-client privilege generally only if the communication is made under, or predominantly in furtherance of, the attorney-client relationship. In other words, the communication must be made in the context of the professional relationship between the attorney (as attorney) and the client. To the extent an in-house attorney is acting in the capacity as an attorney with respect to the communication, the communication should be protected by the privilege. However, many in-house attorneys serve not only as

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attorneys but also as businesspeople, with decision-making authority acting as a principal. Because of the dual role of many in-house attorneys as both attorney and as principal, it may not always be clear that an in-house attorney is acting in the capacity as an attorney or that the communication was made under, or predominantly in furtherance of, the attorney-client relationship. As a result, to the extent that an in-house attorney is acting in their principal capacity (and not as an attorney) with respect to the communication, the communication is unlikely to be protected by the attorney-client privilege.²⁰

Second, even if California state law provides that any such communication is subject to the attorney-client privilege, it is possible that a contrary law outside of the state may also be applicable to certain communications or in certain contexts. In such event, there may be greater uncertainty or conflict as to the applicability of the attorney-client privilege to communications with in-house attorneys. For example, a 2010 ruling by the European Union Court of Justice essentially found that no communications with an in-house attorney are subject to the protection of the legal professional privilege (the equivalent of our attorney-client privilege). In Akzo Nobel Chemicals Ltd. & Akros Chemicals Ltd. v. European Commission, Case C-550/07 (Sept. 14, 2010), the European Court of Justice held that the legal professional privilege only exists where the attorney is able to exercise professional independence, and that "the requirement of independence means the absence of any employment relationship between the lawyer and his client, so that legal professional privilege does not cover exchanges within a company or group with in-house lawyers." This ruling suggests that in-house attorneys might not even be considered to be attorneys for purposes of the EU’s equivalent to our attorney-client privilege. Since the laws with respect to a proceeding outside of the jurisdiction where the in-house attorney practices could potentially compel disclosure of a confidential communication with the in-house attorney, in-house attorneys should be cautioned that their communications—even if such communication was primarily for legal purposes—might not be as protected as the communications with outside attorneys.

CONCLUSION

In-house attorneys are required to abide by the ethical rules set forth in the applicable Rules of Professional Conduct. While the ethical rules by their own terms apply to all attorneys, whether in private practice or in-house, the application of the rules to in-house attorneys can be awkward in many instances. To avoid a violation of the ethical rules, in-house attorneys—just like attorneys at law firms—must be mindful of the rules and the policies that underlie them, even though the application of some of the rules may be different or surprising in the context of their in-house practice.

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Notes:

^*. Neil J Wertlieb provides expert witness services in litigation and arbitration matters, primarily in disputes involving business transactions and corporate governance, and cases involving attorney malpractice and attorney ethics. He served as the General Counsel of Milbank LLP, where he also practiced corporate law for over two decades. Prior to joining Milbank, he was the in-house general counsel of two different Los Angeles-based companies. He is an Inaugural Co-Chair and a Founding Member of the Ethics Committee of the California Lawyers Association, and a former chair of the ethics committees of the California State Bar and the Los Angeles County Bar Association. He is an Adjunct Professor at UCLA and UC Berkeley Law Schools. The views expressed herein are his own. An earlier version of this article, based on California’s former rules of professional conduct, was co-written by Mr. Wertlieb with Adam S. Bloom, a partner at Wilson Sonsini Goodrich & Rosati.

^01. Cal. Ct. R. 9.46(a)(1), (hereinafter "CRC"): "A ‘qualifying institution’ is a corporation, a partnership, an association, or other legal entity, including its subsidiaries and organizational affiliates, which has an office located in California. Neither a governmental entity nor an entity that provides legal services to others can be a qualifying institution for purposes of this rule. A qualifying institution must: (A) Employ at least 5 full time employees; or (ii) Employ in California an attorney who is an active licensee in good standing of the State Bar of California."

^02. For an attorney to practice law under CRC rule 9.46, the attorney must: (a) be an active licensee in good standing of the bar of a U.S. state, jurisdiction, possession, territory, or dependency; (b) meet all requirements for admission to the State Bar of California (except that such attorney need not take the California bar exam or the MPRE, and may practice while awaiting results of an Application for Determination of Moral Character); (c) comply with rules adopted by the Board of Trustees relating to the Registered In-House Counsel Program; (d) practice law exclusively for a single qualifying institution (with a limited exception for certain pro bono services); (e) abide by all laws and rules governing State Bar licensees (including MCLE requirements); (f) satisfy in their first year of practice under CRC rule 9.46 all of the MCLE requirements, including ethics education, that State Bar licensees must complete every three years; and (g) reside in California. Cal. Ct. R. 9.46(c).

^03. Note that the California State Bar’s Standing Committee on Professional Responsibility and Conduct has issued for public comment a proposed formal opinion on the application of the conflicts Rules to certain conduct by in-house lawyers. See https://www.calbar.ca.gov/About-Us/Our-Mission/Protecting-the-Public/Public-Comment/Public-Comment-Archives/2024-Public-Comment/Proposed-Formal-Opinion-Interim-No-21-0003-Ethics-of-In-House-Counsel.

^04. See Cal. Rules of Prof’l Conduct r. 1.7 (Conflict of Interest: Current Clients).

^05. Id. at r. 1.13(g) ("If the organization’s consent to the dual representation is required by any of these rules, the consent shall be given by an appropriate official, constituent, or body of the organization other than the individual who is to be represented, or by the shareholders.").

^06. See id. at r. 1.9(c).

^07. Id. at r. 1.10(a).

^08. See, e.g., City of San Francisco v. Cobra Solutions, Inc., 38 Cal. 4th 839, 847-48 (2006) (the rule is intended to vicariously disqualify attorneys "working together and practicing law in a professional association.").

^09. See Cal. Rules of Prof’l Conduct r. 1.10(a)(2).

^10. Id. at r. 4.2 cmt. [3] ("This rule, however, does not prevent represented persons from communicating directly with one another with respect to the subject of the representation").

^11. Id. at r. 1.1(b).

^12. Id. at r. 1.3(b).

^13. See, e.g., id. at r. 1.16(a).

^14. See, e.g., id. at r. 1.16(b):

[A] lawyer may withdraw from representing a client if [among other reasons]: (1) the client insists upon presenting a claim or defense in litigation, or asserting a position or making a demand in a non-litigation matter, that is not warranted under existing law and cannot be supported by good faith argument for an extension, modification, or reversal of existing law; (2) the client either seeks to pursue a criminal or fraudulent course of conduct or has used the lawyer’s services to advance a course of conduct that the lawyer reasonably believes was a crime or fraud; (3) the client insists that the lawyer pursue a course of conduct that is criminal or fraudulent; [or] (4) the client by other conduct renders it unreasonably difficult for the lawyer to carry out the representation effectively.

^15. Id. at r. 1.16(a), cls. (1) & (2).

^16. Id. at r. 1.13(d).

^17. Note that, depending on the circumstances, an attorney may be able to withdraw from a particular matter for a client, but still maintain an attorney-client relationship with that client. See id. at r. 1.16 cmt. [2] ("When a lawyer withdraws from the representation of a client in a particular matter under paragraph (a) or (b), the lawyer might not be obligated to withdraw from the representation of the same client in other matters."). Similarly, an in-house attorney might be obligated to withdraw from a particular matter, but still retain their in-house position with their employer client.

^18. See Cal. Evid. Code § 954 (subject to certain limitations and exceptions, "the client … has a privilege to refuse to disclose, and to prevent another from disclosing, a confidential communication between client and lawyer").

^19. See In re: Grand Jury, 23 F.4th 1088 (9th Cir. 2022).

^20. See id. at 1090 ("the primary-purpose test governs in assessing attorney-client privilege for dual-purpose communications").

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