The Massachusetts Supreme Judicial Court recently amended Rule 1.13 of the Massachusetts Rules of Professional Conduct to correspond to American Bar Association Model Rule 1.13.
Among the most notable revisions, Rule 1.13 now requires attorneys to report violations of law by officers and employees of their company up-the-ladder within the company and outside of the company, if necessary, to prevent or address wrongdoing.
At first glance, the amendments (which went into effect Jan. 1) could be viewed as undermining the relationship between in-house counsel and their business colleagues within the company, by turning the corporate counsel from an advisor to a law enforcer.
However, the rule changes likely will enhance the quality of the legal services provided to the corporate client by increasing counsel’s independence and ability to report wrongdoing by agents or employees of the corporate client.
As a result, the rule changes also may have the added societal advantage of improving corporate compliance – and may even improve communication between a company’s employees and its lawyers – as the employees develop a better understanding of legal requirements impacting the company’s business. The changes are also consistent with the attorney-conduct provisions of Sarbanes-Oxley, and help establish a consistent code of conduct for business attorneys.
As of the date of this publication, at least 21 states in addition to Massachusetts have adopted some version of ABA Model Rule 1.13, including Connecticut, New Hampshire and Rhode Island.

Up-the-ladder and reporting-out

The premise of Rule 1.13 is that the company, and not its officers or employees, is your client. As a result, you are justified, and in some cases required, to inform your client that its employees or agents are acting unlawfully.
Distilled to its essence, amended Rule 1.13 states that, if in-house counsel knows the company’s officers, employees or agents are engaged in any act (or refusal to act) that violates a law, or breaches a legal obligation resulting in substantial injury to the company, then in-house counsel shall refer the matter up-the-ladder to a higher authority.
If necessary and as warranted by the circumstances, the matter shall be referred to the highest authority that can act on behalf of the company. Former Rule 1.13 was much more discretionary insofar as it stated that a lawyer should proceed as is reasonably necessary in the best interest of the company when faced with the potential for substantial injury.
While it may appear that revised Rule 1.13 has abrogated corporate counsel’s ability to exercise judgment, the rule is not so mechanical. You must still exercise discretion to determine whether the violation is significant enough to warrant further action. However, assuming the answer is yes, you must refer the matter up-the-chain of command.
The second significant component of Rule 1.13 is the reporting-out option. The rule permits a lawyer to reveal client confidences if you reasonably believe the violation of law by the corporate official is likely to result in substantial injury to the company, and the highest authority that can act on behalf of the company insists upon, or fails to address the unlawful action or refusal to act in a timely and appropriate manner.
This entirely new provision supplements Rule 1.6, by providing an additional basis upon which you may reveal information relating to the representation outside the company. (Under former Rule 1.13, an attorney was allowed to resign and make disclosure only in accordance with the then existing rules.)
In addition, an attorney who reasonably believes he has been discharged because he took action under revised Rule 1.13 (or who withdraws under similar circumstances) shall proceed as necessary to ensure that the company’s highest authority is informed of the attorney’s discharge or withdrawal.
You may also disclose what you reasonably believe to be the basis for your termination or withdrawal. Therefore, Rule 1.13 increases the situations in which attorneys may report violations and presumably disclose confidential information outside the company in the best interest of the corporate client.

Sarbanes-Oxley attorney-conduct rule

The standards of Rule 1.13 are not new for securities law practitioners who appear before the Securities and Exchange Commission. Indeed, revised Rule 1.13 likely clarifies expected conduct from such attorneys who previously had been subject to Sarbanes-Oxley, but faced conflicting state ethical rules.
In January 2003, in the wake of corporate scandals such as Enron, the SEC adopted ethical standards for attorneys practicing before the Commission. See 17 C.F.R. § 205, et seq. The SEC rules (which became effective Aug. 5, 2003) required attorneys encountering a material violation of securities law or breach of fiduciary duty within a company to report those violations to a higher authority in the company, and in certain cases, permitted you to report to the Commission itself.
Both the up-the-ladder and reporting-out provisions are similar to the new provisions of Rule 1.13. There are, however, a few key differences that make the SEC rules a bit broader and clearer.
For example, the SEC rules require an attorney to report evidence of a material violation of law or breach of fiduciary duty (determined according to an objective standard) up-the-ladder to the chief legal counsel or the chief executive officer of the company, or, in the case of a subordinate attorney, to that attorney’s supervisor.
In the alternative, the SEC permits a company to establish a qualified legal compliance committee to which you may report evidence of a material violation. Thus, the SEC rule specifies the mechanism by which the violation must be reported, and designates the higher authority to which such reports should be made.
In contrast, the reporting requirement of Rule 1.13 is more ambiguous in that respect.
The SEC also permits an attorney to reveal confidential information related to his or her representation without client consent to the extent you reasonably believe necessary: (1) to prevent a material violation likely to cause substantial financial injury to the economic interests or property of the company or investors; (2) to prevent the company from committing an illegal act; or (3) to rectify the consequences of a material violation or illegal act in which the attorney’s services have been used.
Like Rule 1.13, this reporting-out option is permissive. However, the SEC rule is slightly broader than Rule 1.13, because it identifies additional circumstances in which disclosure is permitted, and expressly contemplates disclosure to rectify past misconduct, as opposed to simply preventative reporting contemplated by Rule 1.13.
While an attorney may notify the company’s board of directors if he believes the company has retaliated against him for reporting violations, to date the Commission has not adopted the “noisy withdrawal” provision which would require you or the company to publicly disclose your withdrawal.
The SEC rules apply in the event there is a conflict with state law that imposes a less stringent reporting or withdrawal standard, but the SEC rules will not preempt a state from imposing more rigorous obligations on its attorneys.

What does it all mean?

How will the changes to Rule 1.13 impact the way in which you do your job? Will employees of corporate clients be less honest because they fear there are fewer confidentiality protections? Will in-house counsel be hypersensitive to what could be construed as client misconduct so as not to run afoul of the rules?
The hope is that the strengthened independence of in-house counsel will raise the corporate consciousness and increase communication between attorneys and their corporate colleagues so that the client, i.e., the company, is better served.
The goal is that adherence to Rule 1.13 will establish appropriate expectations and promote regular discussion, thereby facilitating up-the-ladder reporting if necessary. In addition, for counsel who regularly practice before the SEC, the revisions to Rule 1.13 likely will help them comply with two sets of ethical rules that were at least potentially inconsistent.

Neil McKittrick, a director of Goulston & Storrs, P.C., is a member of the firm’s Litigation, Employment and Labor Law and Professional Liability groups. Elizabeth Schnairsohn is an associate of Goulston & Storrs, P.C. who also practices in the Litigation, Employment and Labor Law and Professional Liability groups.