Outside counsel guidelines are standard business practice for many corporate and organizational clients who use them to control every aspect of the attorney-client relationship. Outside counsel guidelines regulate not just how law firms can bill their time and staff their cases but also contain provisions governing ethics, professional liability, data privacy and security, and, increasingly, social responsibility issues important to the client. Outside counsel guidelines are particularly troublesome for law firms when they contain provisions that are more expansive, and in some instances, incompatible with a lawyer’s ethical responsibilities under the Rules of Professional Conduct. Law firms should always review a client’s outside counsel guidelines in their entirety, regardless of how lengthy the document, as problematic language may lurk in unexpected areas.
Extension of client language
Hypothetical… a lawyer blindly signs off on a corporate client’s dense, 20-page outside counsel guidelines. The lawyer was too busy to pay attention to all of that fine print and was unfamiliar with outside counsel guidelines. The lawyer also really wanted the client’s business and was not going to rock the boat. Several months later, in-house counsel for the corporate client notifies the law firm that it has a conflict of interest relating to one of the corporate client’s affiliates. The lawyer inadvertently failed to realize that he had agreed to represent not only the corporate client but also its numerous affiliates when he signed the outside counsel guidelines. The law firm did not know that it needed to screen the affiliates for conflicts. Had the firm done so, it would have noted that one of the affiliates was adverse to another firm client in a contract dispute progressing towards litigation. Another lawyer in the law firm had recently served a complaint on the affiliate. The law firm now has to deal with the fallout of the corporate client alleging a conflict of interest as well as a possible loss of business from both clients. How did this happen?
Many outside counsel guidelines contain “extension of client language” where the definition of who/what constitutes the “client” has been extended beyond the immediate client retaining the law firm. Usually, the definition of the client is extended to include subsidiaries, affiliates, or parent organizations but it can also include agents, employees, and insureds of insurance clients. Outside counsel guidelines sometimes include a list of subsidiaries and affiliates within the document but many times they do not include the actual names. Some outside counsel guidelines direct the law firm to view a list available on the client’s website. Other times the law firm will need to specifically ask the client to provide the list, which may or may not be completely up to date. Once this list is obtained, a law firm may be surprised to find a lengthy list of entities that need to be screened for conflicts. Law firms can only ethically agree to accept representation of subsidiaries and affiliates after running a conflict check to make sure there are no prohibitive conflicts of interest with any of the entities. Additionally, the law firm will need to add all affiliates and subsidiaries into its conflicts database and regularly screen for conflicts of interest on all related entities. This “corporate family tree” needs to be updated regularly as subsidiaries and affiliates can change with divestiture, mergers, and acquisitions. A law firm will have to remember to get updated information from the client, which usually cannot be counted on to proactively inform the firm.
Extension of client language in outside counsel guidelines may be desirable for the client, but it provides less flexibility to law firms by expanding the identity of a client beyond the definition contained in the ethics rules. Rule 1.13(a) provides that a lawyer who is retained to represent an organization represents that entity. A lawyer who represents an organization does not by default represent all corporate affiliates. Rule 1.7 provides the lawyer can undertake representation adverse to the affiliates in unrelated matters barring an “understanding” with the organization that the lawyer will avoid representation adverse to the client’s affiliates and the situation presents no material limitation on the lawyer’s representation of the organization. See Comment 21 to Rule 1.7 and ABA Formal Opinion 95-390 (noting that whether a lawyer represents a corporate affiliate is dependent upon “particular circumstances.”). Ultimately, extension of client language can eliminate many business opportunities for a law firm and prove too unwieldy for conflict screening. While not always successful, it often makes sense for a law firm to try to negotiate with the client to limit the identity of the client to the one utilizing its legal services. A law firm can also include language in the firm’s engagement letter stating that its terms supersede any outside counsel guidelines from the client. Ultimately, the law firm will have to make an economic and risk management decision whether the business with the client is worth the hassle of tracking all of those subsidiaries and affiliates for conflicts of interest. Law firms can consider the duration of the legal engagement for which the client is hiring the firm. From a risk management perspective, it might be worth accepting the terms without any negotiation on small legal matters that will be completed quickly.
Conflicts of Interest
Clients use outside counsel guidelines to try to reshape a lawyer’s ethical responsibilities, particularly as it relates to conflicts of interest. Clients use anti-competitor provisions to prevent a law firm from representing other clients who are viewed as business competitors. Overreaching conflict of interest prohibitions and waiver requirements can be the equivalent of a client generated noncompete agreement for law firms. For example, a client’s outside counsel guidelines may require that the law firm notify and obtain the client’s consent prior to accepting any potential representation of a competitor. Often clients do not define specific competitors and instead use vague language prohibiting a law firm from representing others with “interests adverse to the business or public interests of the client.” This can be ethically problematic from several standpoints as it requires the disclosure of confidential information in circumstances that may not rise to the level of a conflict of interest under Rule 1.7. Economic interests alone are generally insufficient to create a conflict of interest between two current clients in unrelated matters. Comment 6 to Rule 1.7 notes “representation of competing economic enterprises in unrelated litigation, does not ordinarily constitute a conflict of interest” between clients in unrelated matters. Similarly, a lawyer’s representation of a client who asserts public positions adverse to another client’s interests is generally not considered the type of positional interest that can create a conflict under Rule 1.7. Positional conflicts of interest implicate a Rule 1.7 concern when a lawyer is taking inconsistent legal positions on behalf of different clients in the same tribunal and there is a possibility that it could materially limit the lawyer’s ability to effectively represent one of the clients.
Additionally, outside counsel guidelines that require a law firm to disclose the possible representation of any competitor inherently require disclosure of the identity of another client or prospective client along with basic information sufficient to define the matter. Rule 1.6(a) broadly protects all information relating to the representation including a client’s identity. If a law firm has agreed to such a notification provision in an OCG and a client or prospective client will not consent to the disclosure of its identity or the general nature of a matter, the law firm effectively has no choice but to forgo the representation. These kinds of notice and waiver provisions can also get a lawyer into trouble if they do not understand they need to obtain the client or prospective client’s consent to disclose confidential information before notifying another client’s pursuant to the terms of its outside counsel guidelines. In some instances, the fact that a prospective client even consulted with a law firm might be sensitive confidential information that could potentially harm a client if disclosed, especially amongst clients in the same industry.
Data privacy and security concerns
Outside counsel guidelines may require that the law firm give the client access to the law firm’s data security measures in order to perform what is known as a client security audit. Client security audits can include not just the law firm’s systems but also those of any vendors that the law firm uses. Client audit access provisions need to be highly scrutinized. Many of these types of provisions were created for a client’s use with non-legal vendors and do not comply with a lawyer’s ethical obligations. For example, a client may require access for the client or a third party to conduct “penetration or vulnerability testing of the Firm’s network systems.” The law firm needs to understand the exact scope of what the client is asking to do. If the client is requesting access to audit the law firm’s system in any way that exposes other clients’ data or the firm’s communications with clients, such provisions conflict with a lawyer’s ethical obligations to safeguard confidential client information under Rule 1.6(a). These kinds of audits also run the risk of compromising attorney-client privilege by providing third party access to documents.
Overreaching outside counsel guidelines create real problems for lawyers in private practice. Law firms have an interest in professional autonomy but also have to deal with the reality that this is how many corporate and organizational clients now do business. Since outside counsel guidelines are not going away anytime soon, the best risk-management plan that law firms can implement is to not be caught unaware. Law firms need to have a plan in place to identify and track clients who have outside counsel guidelines. Law firms should develop a policy whereby all lawyers are required to submit a client’s outside counsel guidelines (or client generated engagement letters which often contain OCG equivalent terms) to the firm’s general counsel or a designated individual with responsibility for reviewing, negotiating, and approving them. Law firms should educate their lawyers on problematic provisions in outside counsel guidelines. Under no circumstances should a lawyer blindly sign or skim through a client’s outside counsel guideline, as tempting as that may be with a really long one! Law firms also now have outside options to help them navigate outside counsel guidelines. Professional and financial services companies are getting into the game by developing products that can help law firms track client mandates. There are even platforms that employ artificial intelligence to sort through a document and identify provisions within outside counsel guidelines that a firm identifies as problematic. Not every law firm will benefit from leveraging automation, but they can certainly develop a uniform policy for handling outside counsel guidelines that will prevent unfortunate surprises down the road.
Cassie Hanson is a legal ethics lawyer with substantial experience in the field of ethics and professional responsibility. As conflicts and ethics counsel at Fredrikson & Byron, P.A., Cassie is focused on legal ethics, conflict prevention and resolution, legal malpractice/loss prevention and trust account compliance. Additionally, Cassie worked for 20 years as a senior litigator and adviser at the Office of Lawyers Professional Responsibility. Cassie investigated and prosecuted high-level attorney discipline cases. She is an experienced trial attorney and appellate advocate who regularly argued complex attorney discipline cases in front of the Minnesota Supreme Court. She has advised various government agencies, law firms and other stakeholders on legal ethics and professional responsibility. Cassie is a frequent public speaker on ethics and lawyer well-being.