A recent ethics rule change makes it easier for in-house counsel to report potential violations of the law without violating the attorney-client privilege – and that could strain relations with upper management and exclude company attorneys from core company decisions, experts tell New England In-House.

But experts also say that in-house counsel can ease any strain by assuring company leaders that they are not required to reveal anything and that divulging confidential information would only be a last-ditch measure to help the company avoid criminal wrongdoing.

The controversy was triggered in August, when the American Bar Association modified Model Rule 1.6 to allow, but not require, in-house counsel to skirt the attorney-client privilege if doing so would stop a client from committing a financial crime or fraud.

The ABA also modified Model Rule 1.13 to let in-house lawyers reveal wrongdoing by officers or employees to upper management or outside authorities.

Mario Mandina, CEO of the National Lawyers Association, opposed the changes.

“Turning lawyers into the eyes and the ears for the government is just plain wrong,” said Mandina. “Corporations are going to start keeping lawyers out of the boardroom because they can squeal on them.”

The 2,800-member National Lawyers Association argued in opposing the revisions that doing so would erode client relationships and create a dangerous precedent.

Another leading opponent, Lawrence Fox, said that, over the past year and half, lawyers “have seen changes in the way society and the regulators tell us how we are expected to act. They are asking us to be more interested in the rights of third parties than we are our clients.”

Fox, a Philadelphia attorney and former chair of the ABA Ethics Committee, said that this development “can’t help client relationships. Which master are you supposed to serve? Clients will be less likely to view their lawyer as their champions or confessors than they did before.”

However, other experts downplay the potential fallout and say the permissive nature of Rule 1.6 on divulging confidential information to outsiders gives in-house counsel a powerful tool to cajole clients into compliance.

Proponents of the new model rule — which would have to be adopted state by state — say there’s no evidence that these permissive tools have been deleterious in the states that already allow some disclosure.

“In the 42 states that allow disclosure, the sky hasn’t fallen in,” said David Curtin, chief disciplinary counsel for Rhode Island, which is one of eight states that currently does not allow disclosure except if a client threatens severe bodily harm to another. “I favor greater disclosure because I have not seen a fundamental erosion of attorney-client relationships.”

Rhode Island is currently studying the new model rules as part an ethics overhaul.

Susan E. Hackett, senior vice president and general counsel of the Association of Corporate Counsel America, said in-house attorneys could leverage the permissive right to report illegal activities to make sure their companies comply with the law.

A mandatory requirement would be much more troublesome, Hackett said.

“If you’re mandated, you’re never going to get invited to the party, it emasculates the lawyer and lawyers don’t like to be left out of conversations,” she said.

Heading Off ‘Noisy Withdrawal’?

Thomas Gottschalk, general counsel at General Motors Corp. and a member of the ABA Task Force on Corporate Responsibility, said the overarching reason for the rule change “was the loss of investor confidence after Enron and WorldCom and the others. We needed to show changes were being made to guard against it ever happening again. We recognized the bar was being perceived as having aided and abetted these actions.”

James H. Cheek III, chair of the task force, said another primary reason for the change was to hopefully head off the Securities and Exchange Commission before it implements the controversial “noisy withdrawal” proposal, which would require lawyers — who have failed to convince their client to mend their ways — to withdraw their representation and notify the SEC of the action.

“We are hoping the SEC will decide the profession has acted appropriately by adopting these model rules,” said Cheek, a partner at Bass, Berry & Sims in Nashville. “But it’s too early to tell.”

But Is Anyone Paying Attention?

Boston attorney Richard M. Zielinski, who represents lawyers and law firms who run afoul of professional conduct rules, said ethics issues will arise with greater frequency in the wake of the Sarbanes-Oxley law and hyper-aggressive investigations by government regulators.

“There are some in-house counsel who aren’t even aware these laws apply to them,” said Zielinski, a partner at Goulston & Storrs. “But they need to get a game plan in place.”

But Hackett questioned whether that would happen short of a crisis.

“I don’t know if many lawyers pay attention to new rules, so I don’t think CEOs are looking at them that closely,” she said. “People don’t generally look at the rules until they need to. People generally operate from their gut. It’s unrealistic to think they have the rules tattooed to their forehead.”

The model rules aren’t binding until the highest court in a state adopts them, but in the current climate of cracking down on corporate wrongdoers states could very well adopt the modified rules with little or no changes.

The ABA Board of Delegates at the association’s annual meeting in August voted 218-201 in favor of allowing lawyers under revised Rule 1.6 to breach client confidentiality if they believe their services are being or will be used to facilitate a fraud that could cause financial harm to third parties.

According to J. Charles Mokriski of Day Berry & Howard in Boston, the discussions at the ABA meeting were polarized.

“The debate at the ABA had one side saying it’s the end of the world and other side saying it’s about time,” said Mokriski, an ethics expert.

ABA President Dennis W. Archer of Detroit said the new model rules were designed to clarify the national standard.

Lawyer disciplinary rules of 42 states, according to the ABA, permit a lawyer to disclose confidential information to prevent a client from perpetrating criminal fraud, and 19 states permit such disclosure to ward off substantial loss resulting from client crime or fraud in which the client used the lawyer’s services.

Revised Rule 1.6(b)(2) reads: “A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary: 1) to prevent reasonably certain death or substantial bodily harm; 2) to prevent the client from committing a crime or fraud that is reasonably certain to result in substantial injury to the financial interests or property of another and in furtherance of which the client has used the lawyer’s services; 3) to prevent, mitigate or rectify 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 service.”

And lawyers, under newly modified Rule 1.13, must divulge to top management illegal actions of employees.

Rule 1.13 now states: “If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and that is likely to result in substantial injury to the organization, then the lawyer shall proceed as is reasonably necessary in the best interest of the organization. Unless the lawyer reasonably believes that it is not necessary in the best interest of the organization to do so, the lawyer shall refer 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.”

(The complete model rules with commentary can be found in the “important documents” section of the New England In-House’s website, www.newenglandbizlawupdate.com.)

Ethics expert Evan Georgopoulos said attorney-client relationships will likely suffer under Rule 1.13.

“What if in-house counsel finds himself cautioning his clients that he’ll have to report up the ladder? There is that tension that could potentially be exacerbated,” said Georgopoulos, a partner at Greenberg Traurig in Boston. “Are CEOs going to start wondering, ‘gee, do I have a viper in my bosom?'”

The ABA came down on the side of protecting third parties, despite potential breaches of client confidences, stating in the commentary accompanying the new rule, “All of these exceptions could be said to detract from the atmosphere of confidentiality conducive to clients’ disclosure of important information to their lawyers, yet these limitations exist and serve similarly important policy purposes, including the protection of the ultimate client or third parties and the protection policy interests represents a carefully developed system of lawyer regulation.”

Jurisdiction Juggling

Thomas Spahn, an ethics specialist with McGuire Woods in Richmond, Va. said the dizzying differences among the various state rules makes it tough for in-house counsel who oversee offices around the country to keep clients on track.

“They should (be coordinating the different state rules), but I don’t think they are,” Spahn said. “A lot of lawyers use the smell test, but they shouldn’t be.”

Zielinski advised all lawyers to consult ethics experts before they are hit with an ethical conundrum.

Familiarity with the ethics rules is just a starting point, Zielinski said. In-house counsel also have to be well schooled on what constitutes fraud, as well as pertinent criminal and civil laws.

The complexity of these matters can be colossal, he said, and when your client approaches in the middle of a deal with an ethically challenged idea, that’s definitely not the time to bone up. “The heat of the moment isn’t the time to be studying these rules,” he said.

Another planning suggestion to avoid a crisis, according to Elisa Garcia, general counsel for Domino’s Pizza in Michigan, is that lawyers report to lawyers.

“I started the law department here and I have all the lawyers reporting to lawyers. It is such a powerful tool,” she said. “When you have that, you can police things better.”

She said lawyers always know they have a duty not to support a lawbreaker and that decision should be simple.

“As the chief lawyer for this company I am always going to do what is right,” Garcia said. “But if it comes to a point where the CEO doesn’t agree with me, I’m leaving. We run the show together, he runs the company and I advise him on the legal way to do it.”

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State-by-State Summary Of ‘Snitch’ Rules

The American Bar Association’s revised model rule on attorney-client privilege allowing an attorney to breach the privilege if a client is engaged in a crime or fraud is not effective in a particular state until the highest court of that state adopts it. Many states already have ethics rules on the books governing disclosure of client information in the face of criminal fraud.

The ABA indicated that it revised Model Rule 1.6 to clarify the national standard in this area.

According to the ABA, 38 states permit a lawyer to disclose client information in order to prevent a client from perpetrating criminal fraud and four states require such a disclosure. And 16 states permit such disclosure to rectify substantial loss resulting from client crime or fraud in which the client used the lawyer’s services, while three states require such a disclosure.

States That Permit Disclosure To Prevent Crime

Alaska

Arizona

Arkansas

Colorado

Connecticut

Delaware

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Massachusetts

Maryland

Maine

Michigan

Minnesota

Mississippi

Nebraska

Nevada

New Hampshire

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

South Carolina

Tennessee

Texas

Utah

Vermont

Washington

West Virginia

Wyoming

States That Require Disclosure To Prevent Crime

Florida

New Jersey

Virginia

Wisconsin

States That Permit Disclosure To Rectify Substantial Loss Resulting From Client Crime Or Fraud Using The Lawyer’s Services