An Ethical Overview for the Corporate Counsel: The Conflicts, Privilege and Ethics Rules That Every In-House Attorney Needs to Know Simon R. Malko Partner & Firm General Counsel

Hypothetical No. 1 Elizabeth Grace is general counsel of Arsenal Financial Corp. (“AFC”), an investment company. AFC primarily relies on one firm, Ozil, Monreal & Giroud (“OMG”), for outside legal work. Grace receives a conflict waiver request from OMG regarding a transaction in Florida. AFC hired a different firm to handle that deal. OMG wants to represent the lender on the deal. Grace is concerned that OMG knows too much about the covenants that AFC usually agrees to with its lenders.

Questions 1.Is OMG proposing to be “adverse” to AFC? 2.Does this create an impermissible conflict of interest?

Relevant Authority Ga. R. Prof. Conduct 1.7 An adversary is any person or entity with whom a lawyer interacts other than his/her client. A conflict is any situation where the lawyer’s interests to another will “materially and adversely affect the representation.”

Hypothetical No. 2 Grace calls her point of contact at OMG, Aaron Ramsey, to discuss the waiver request. She tells Ramsey that she is uncomfortable with the request because OMG knows too much about AFC’s strategy and what points they will or will not concede. Ramsey responds by directing Grace to OMG’s engagement letter which includes a prospective waiver of any potential conflicts.

Questions 1.Are prospective waivers ethical? 2.Are prospective waivers enforceable?

Relevant Authorities Model Rule 1.13, cmt. [22] ABA Formal Ethics Opinion Prospective waivers are permissible, but not necessarily enforceable. WorldSpan, L.P. v. Sabre Group Holdings, Inc., 5 F. Supp. 2d 1356 (N.D. Ga. 1998) The prospective waiver must be specific and the court will analyze whether there is a material and adverse impact.

Hypothetical No. 3 Grace is served with a lawsuit that was filed against one of AFC’s subsidiaries. The lawsuit was filed by Laurent, Mikel, Francis, Alexis & Olivier (“LMFAO”), a firm that currently represents AFC in an unrelated corporate matter. Although AFC’s subsidiary is a separate legal entity from AFC, it does not have separate offices or a separate legal staff. Grace works with LMFAO regularly on unrelated corporate matters.

Question 1.Does LMFAO’s representation of AFC create a conflict of interest?

Relevant Authorities Ga. R. Prof. Conduct 1.13 Model Rule 1.7, cmt. [34] Rest. (Third) of Law Governing Lawyering, § 96(1) As a general matter, if a lawyer represents an entity, he or she does not also represent the entity’s subsidiaries and affiliates. GSI Commerce Solutions v. BabyCenter, Inc., 618 F.3d 204 (2d Cir. 2010) Lawyer prohibited from being adverse to corporate affiliate where there is substantial organizational overlap.

Hypothetical No. 4 Grace calls LMFAO’s managing partner, Jack Wilshere, to discuss the new lawsuit. She tells him that she believes there is a conflict because of the close relationship between the two corporate entities. Wilshere says the lawsuit is too big for LMFAO to pass up, so LMFAO will be terminating its engagement with AFC to resolve the conflict.

Questions 1.Can LMFAO terminate the representation of AFC? 2.Does terminating the attorney-client relationship cure the conflict?

Relevant Authorities Ga. R. Prof. Conduct 1.16, cmt. [7] Lawyer can withdraw from representation unless it will have a “material adverse effect on the client’s interests.” Ga. R. Prof. Conduct 1.9 Lawyer may be adverse to former client without consent unless it is the “same or a substantially related matter.” Snapping Shoals v. RLI, 2006 WL (N.D. Ga. 2006) Lawyer cannot fire a client to cure a Rule 1.7 conflict.

Hypothetical No. 4.1 Assume that LMFAO has represented AFC for many years and worked on a number of different matters, but does not have any active open matters for AFC at the time it files suit against AFC’s subsidiary.

Question 1.Is AFC a current client or former client of LMFAO?

Relevant Authorities Ga. R. Prof. Conduct 1.3, cmt. [4] If the engagement is limited to a “specific matter,” it terminates when the matter is resolved. If the engagement is over a substantial period of time involving several matters, the client may assume the engagement is continuing. SWS v. Salomon Bros., 790 F. Supp (N.D. Ill. 1992) Holding that attorney-client relationship existed even though no billable work performed for six months.

Hypothetical No. 5 AFC’s IT Director s Grace regarding a dispute over a contract with an IT service provider. Grace responds with a detailed analysis of the issue, including the strengths and weaknesses of AFC’s position. Grace’s conclusion is that AFC is likely to prevail in the event of litigation and should take a hard line with the vendor. AFC’s IT Director forwards Grace’s to the vendor with a note saying, “See below. Our lawyer says you are wrong, so pay up or else.”

Questions 1.What should Grace do immediately? 2.Does this constitute a waiver of the attorney-client privilege? 3.What steps could Grace take in the future to prevent a similar mishap?

Relevant Authorities Model Rule 4.4 Fed. R. Civ. P. 26 Protects against inadvertent disclosure to lawyers. Alston & Bird v. Mellon, 706 S.E.2d 653 (Ct. App. Ga. 2011) Ordering return of inadvertently disclosed documents.

Hypothetical No. 6 AFC recently acquired all the assets of Chelsea Corporation (“Chelsea”). Under the asset purchase agreement, AFC acquired all tangible and intangible assets of Chelsea. The agreement included a representation by Chelsea that it was not aware of any material adverse changes in its relationship with its top 10 customers. Shortly after the closing, Chelsea’s largest customer terminates its contract. AFC suspects that Chelsea hid this fact during diligence. As part of the acquisition, AFC obtained Chelsea’s server.

Questions 1.Can AFC search Chelsea’s server for relevant information? 2.Would s between Chelsea and its counsel regarding whether to disclose potential issues with the customer be admissible?

Relevant Authorities Medcom Holding v. Baxter, 689 F. Supp. 841 (N.D. Ill. 1988) Court held that sale of intangible corporate assets included attorney-client privilege, unless expressly carved out.

Thank You Simon Malko, Partner Morris, Manning & Martin, LLP Direct: