Schnader Harrison Segal & Lewis LLP Ethical Considerations When An Executive’s Interests Are Adverse To The Company’s Interests Karen Baillie Alice S. Johnston Keith E. Whitson Schnader Harrison Segal & Lewis LLP

Basic ethical rules which apply – please see handout ABA Model Rules of Professional Conduct Pennsylvania Rules of Professional Conduct

Upjohn Co. v. United States, 449 U.S. 383 (1981) Important cases Upjohn Co. v. United States, 449 U.S. 383 (1981) Superior Court opinions arising out of the recent Penn State litigation (Schultz, Curley and Spanier)

Overview of recent rulings involving Penn State University

Scenario #1 You are in-house counsel for a privately owned partnership in the food processing industry – local market share leader in the Italian grated hard cheese segment Outside counsel and your operations manager (the minority partner) are in your conference room preparing for his deposition in a hotly contested civil case You receive a call from a news reporter asking about wood pulp in grated cheese and indicating that you will be the subject of an FDA investigation

You call the conference room to let outside counsel know that you’d like them to take a break so you can talk to the operations manager Outside counsel says, “That’s perfect - we were just about to call you. He is uncomfortable with some of the anticipated topics for this deposition and he said he wanted to talk to you because this is the moment where he needs to talk to his lawyer.” What do you do next??

Lack of clarity about the lawyer’s role can lead to confusion

It’s very important for the lawyer in this situation to continually ask “who is my client?”

It actually matters which “hat” the individual is wearing

How is Upjohn like Miranda?

One important reason to always remember to treat Upjohn warnings like Miranda warnings ̶ ̶ have you heard about the new DOJ policy on individual accountability for corporate wrongdoing?

Sometimes joint representation (of company and its executive) is preferable

Potential Benefits of Joint Representation More economical More control over strategic decision Benefits of presenting a united front

Rule 1.13(e) A lawyer representing an organization may also represent any of its directors, officers, employees, members, shareholders or other constituents, subject to the provisions of Rule 1.7. If the organization’s consent to the dual representation is required by Rule 1.7, the consent shall be given by an appropriate official of the organization other than the individual who is to be represented, or by the shareholders. Rule 1.13(g) in ABA MR

Rule 1.7(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: The representation of one client will be directly adverse to another client; or There is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

Rule 1.7(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: The lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; The representation is not prohibited by law; The representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and Each affected client gives informed consent, confirmed in writing.

Comment 8 to Rule 1.7 The mere possibility of subsequent harm does not itself require disclosure and consent. The critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer’s independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.

It’s a delicate balance

Scenario # 2 President, the CEO of Corporation, has been charged with discussing prices with the president of a competing firm. If found guilty, both President and Corporation would be subject to civil and criminal penalties. Lawyer, who is representing Corporation, has concluded after a thorough investigation that no such pricing discussions occurred. Both Corporation and President plan to defend on that ground. President has asked Lawyer to represent President as well as Corporation in the proceedings.

Inhouse counsel for parent and its subsidiary is involved in discussions with both entities about a strategic investment by subsidiary and funding by parent. Parent begins to second-guess investment and decides to withdraw support. Because Subsidiary is without funding, it files for bankruptcy. Subsidiary files an adversary action against Parent for breach of contract and breach of fiduciary duty, and seeks all communications between Parent and inhouse counsel. Scenario # 2a

Potential ramifications Disqualification “Ordinarily, the lawyer will be forced to withdraw from representing all of the clients if the common representation fails.” Comment 29 to Rule 1.7 May pose conflict for future matters between company and that employee Employee gets AC privilege, which may limit counsel’s ability to report facts learned from that employee to government sources

Consent cures many potential problems In many instances, there is at least a potential for a future conflict of interest. Some commentators believe there is always a potential conflict of interest. Best course of action is to identify potential risks up front and obtain consent. If actual conflict exists and is severe enough, conflict may not be consentable.

Informed Consent Rule 1.0 (e) "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. Comment 18 to Rule 1.7: For the consent to be “informed,” each client must “be aware of the relevant circumstances and of the material and reasonably foreseeable ways that the conflict could have adverse effects on the interests of that client.”

Sometimes counsel is a witness to wrongdoing

Scenario # 3 In advance of the new overtime regulations, you work with a director of compensation to audit the workforce. You learn that for many years, a large group of employees have been misclassified and not paid overtime that they deserve. Under the new regulations, this is clear: the misclassified employees do not earn the salary threshold and they do not perform exempt duties. Therefore, you recommend that the company rectify this mistake going forward by asking these employees to keep track of their time and paying overtime.

You recognize that this could cost the company a lot of money because these employees tend to work long days. Failure to pay overtime could subject the company to treble damages and criminal penalties. The director of compensation reports back that her boss, the vice president of human resources rejected your recommendation because there is not enough money in the budget to pay these employees overtime, nor to hire additional employees to limit the number of hours each employee must work.

Any obligations under the PA Rules of Professional Liability?

PA Rule 1.13 Is there: a violation of law which reasonably might be imputed to the organization? and that is likely to result in substantial injury to the organization?

A lawyer is obligated to “proceed as is reasonably necessary in the best interest of the organization” Pa Rule 1.13. “Any measures taken shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization” PA Rule 1.13(b). [Not in Model rule].

1.13(b) Recommended Actions include: asking for reconsideration of the matter; advising that a separate legal opinion on the matter be sought for presentation to appropriate authority in the organization; and referring the matter to higher authority in the organization, including, if warranted by the seriousness of the matter, referral to the highest authority that can act on behalf of the organization as determined by applicable law

Rule 1.13(c) “If, despite the lawyer’s efforts in accordance with paragraph (b), the highest authority that can act on behalf of the organization insists upon action, or a refusal to act, that is clearly a violation of law and is likely to result in substantial injury to the organization, the lawyer may resign…”

What do you do if you think you might need to be a whistleblower?

The Lawyer as Whistleblower After the lawyer resigns, does she have an obligation to share truthfully with the SEC? Anyone else? Can she disclose information to the SEC or another third party?

ABA MR 1.13(c) If despite the lawyer’s efforts in accordance with paragraph (b) the highest authority that can act on behalf of the organization insists upon or fails to address in a timely and appropriate manner an action or a refusal to act, that is clearly a violation of law, and the lawyer reasonably believes that the violation is reasonably certain to result in substantial injury to the organization, then  the lawyer may reveal information relating to the representation whether or not Rule 1.6 permits such disclosure, but only if and to the extent the lawyer reasonably believes necessary to prevent substantial injury to the organization.

PA Rule 1.13 Nothing in the PA rule 1.13 permits disclosures. But, the comments explain that nothing in rule 1.13 is intended to “limit or expand the lawyer’s responsibility” under other rules. So look to other rules. For example, under 1.2(d) a lawyer can counsel the client about the consequences of criminal or fraudulent conduct.

PA Rule 1.6 - Confidentiality Under PA 1.6, a lawyer may disclose confidential communications when: The lawyer reasonably believes revealing the information is necessary: to prevent reasonably certain death or substantial bodily harm; OR to prevent the client from committing a criminal act likely to result in substantial injury to the financial interests or property of another (Model Rules make it a little broader (criminal act or fraud) and a little narrower in that the client must have used or is using the lawyer’s services in furtherance of her bad acts); OR to prevent, mitigate or rectify the consequences of a client’s criminal or fraudulent act in the commission of which the lawyer’s services are being or had been used. (The Model Rules would limit this situation to “substantial injury to the financial interests or property of another that is reasonably certain to result or has resulted from the client’s commission of a crime or fraud in furtherance of which the client has used the lawyer’s services.”)

What about SOX? SOX permits, but does not require attorneys to be whistleblowers. See SEC Role 205. Standards for Attorney Professional Responsibility apply to “attorneys who practice and appear before the SEC on behalf of an issuer.” Attorneys are permitted to disclose certain confidential information (in violation of the attorney-client privilege) outside of the organization, but attorneys must first report the information to the company’s chief legal officer who must in turn report up the corporate ladder. Only if internal reporting fails and reporting would prevent harm to the corporation or to the investors may the attorney disclose confidential client information outside the organization. Thus, in order to comply with SOX and its whistleblower protection provisions, attorneys must report any suspected wrongdoing internally. Permissible disclosures: (Mimic the Model Rules of Professional Responsibility) Attorney must believe disclosure is necessary to: (1) prevent the issuer from committing a violation that is likely to cause substantial injury to either the financial interests or property of the issuer or the investors (2) prevent the issuer from committing perjury or perpetrating a fraud in a Commission investigation or administrative proceeding or (3) rectify the consequences of a violation by the issuer that has caused or may cause substantial injury to either the financial interest or property of the issuer or the investors, for which the lawyers services were used.

Thank you so much for participating!

Karen Baillie kbaillie@schnader.com 412-577-5118 Alice S. Johnston ajohnston@schnader.com 412-577-5121 Keith E. Whitson kwhitson@schnader.con 412-577-5220