Ethics Issues in Environmental Practice:
Public Confidence in the Law and Client Confidentiality[1]
Pace Law School
February 20, 2004
Irma S. Russell
Professor of Law
University of Memphis
This presentation discusses two recent developments in the law
governing lawyers and explores the likely effects of these developments in the
context of the practice of environmental law.
Part I describes these developments: (1) the new SEC regulations promulgated
pursuant to the Sarbanes-Oxley Act of 2002 and (2) the recent revisions to the
ABA Model Rules of Professional Conduct.
Part II explores some of the fundamental principles that inform the
applicable law in this area, including environmental statutes, corporation law,
and the law governing lawyers. Part III
describes the changes in the law and discusses likely the significance of the
changes for the role of corporate counsel and environmental lawyers, focusing
on the impact of these changes on the duty of confidentiality and the duty to
advise the client of the law. Part IV
excerpts some of the rules and regulations created by these recent
developments. Part V presents
hypothetical fact situations in the area of environmental law.
I. Recent Developments
Section 307 of the Act, 15 U.S.C. § 7245, requires that the SEC issue
rules requiring lawyers to report evidence of material violations of securities
law, fiduciary duty or similar violations "to the chief legal counsel or
the chief executive of the company."
That section further mandates that the rules also require lawyers, in
some circumstances, to report such violations "to the audit committee of
the board of directors of the issuer or to another committee of the board of
directors comprised of directors not employed directly or indirectly by the
issuer, or to the board of directors."
In compliance with Section 307, the SEC issued proposed rules on
attorney conduct in November 2002. It
issued its final rule on up-the-ladder reporting requirements within the
corporate organization on January 29, 2003.
The SEC also published a new proposed rule regarding noisy withdrawal
and disclosure outside the corporate entity that has not, to date, been
finalized. Rule 205 in its present form
requires lawyers to report within the corporate structure evidence of a
material violation of securities law, a breach of fiduciary duty or other
similar serious violation of the law.
It applies to lawyers appearing and practicing before the
Commission.
ABA Rules of Professional
Conduct
On February 5, 2002, the American Bar
Association House of Delegates amended and passed Report 401, the first
comprehensive revision of the ABA Model Rules in nearly two decades. Report 401 set forth a proposal from the ABA
Commission on Evaluation of the Rules of Professional Conduct, also known as
the “Ethics 2000 Commission.” The Model
Rules provide an important model for state ethics rules, which apply to lawyers
licensed by each state. Shortly after
this comprehensive revision, in August 2003, the ABA again amended Model Rules
1.6 and 1.13, at least partially, in response to the Sarbanes-Oxley Act. Section IV of this presentation discusses
some of the significant changes to the rules.
II. Foundational Principles of
Law and Professional Ethics
Important foundational principles inform all areas of the law. An obvious principle of any system of law is
that compliance with the law is the goal of the system. Legislatures balance the costs and benefits
of conduct and apply sanctions and standards of protection when they deemed
such regulation to be justified in the public interest. For example, environmental
statutes seek to create incentives that will minimize risks created by
environmental hazards in the interest of public health and safety. The common law seeks to reduce risks (both
environmental risks and other sorts of risks) by imposing liability for harm resulting from a defendant's creation of unreasonable risks. The cost-benefit analysis of hazardous
discharges into air and water leads the EPA to set limits and other conditions
on such discharges.
In the area of
corporate law, the fictional
entity of a corporation receives the right to carry on business in the corporate
form and many other rights enjoyed by natural persons. The corporate entity does not receive all of
the rights and protections enjoyed by individuals in our system of justice. For example, the privilege against
self-incrimination is not extended to corporate entities.[2] In cases in which the corporate entity
receives protections, it is not given protections greater than those extended
to natural persons.[3] The law does not grant special protections
to advantage the corporate entity over natural persons or to facilitate or
insulate wrongful purposes of a corporate entity. Indeed, compliance with the law is one of the foundational
principles of corporate governance.[4]
Of significance to this topic are two bedrock principles of the
attorney-client relationship: (1) the confidentiality of client information,
and (2) the lawyer’s duty to advise the client of the law, rather than making
decisions for the client. Although additional
rules are applicable to the lawyer-client relationship, these two basic
principles provide a useful starting place for assessing the role of lawyers in
the corporate setting. Model Rule 1.2
recognizes the general principle that the client determines the objectives of
legal representation and notes the lawyer’s role of determining the appropriate
means of pursuing the client’s objectives.
Even when a client’s business decision will have significant legal
consequences, the decision remains that of the client rather than the lawyer.[5] An important limitation on the relationship
is that the lawyer may not assist the client in a crime or fraud. Counsel’s role is to advise the corporate
representatives who make the corporation’s business decisions about the law,
the legality of different courses of action, and the possible consequences of
choices available.[6] The duty of confidentiality enhances the
likelihood that clients will make the full and frank disclosures that are
necessary for the lawyer to counsel the client. Model Rule 1.6 speaks to the lawyer's duty of confidentiality and
the ability of the lawyer to reveal such confidences in limited
circumstances.
III. Discussion of Recent
Changes in the Law of Ethics
The Duty of Confidentiality
The 1983 version of Model Rule 1.6 prohibited
lawyers from disclosing client information except to the extent the lawyer reasonably believes necessary to (1) “prevent the
client from committing a criminal act that the lawyer believes is likely to
result in imminent death or substantial bodily harm,” and (2) “to establish a
claim or defense on behalf of the lawyer in a controversy between the lawyer
and the client, to establish a defense to a criminal charge or civil claim
against the lawyer based upon conduct in which the client was involved, or to
respond to allegations in any proceeding concerning the lawyer's representation
of the client." The Ethics
2000 Commission proposed six exceptions to the broad prohibition (the two
exceptions set forth in the 1983 version with some changes and four additional
exceptions). Like the 1983 rule, all
the exceptions are permissive, requiring disclosure of client information in no
case. In February 2002, the ABA House
of Delegates adopted four of the six proposed exceptions, permitting disclosure
when necessary to prevent “reasonably certain death or substantial bodily
harm,” to “secure legal advice” about compliance with the Model Rules, and to
comply with "other law or a court order." The rule also retained the exception authorizing lawyers to
disclose client information “to establish a claim or defense on behalf of the
lawyer.” Under the cumulative revisions
from the August 2003 House of Delegates action, Model Rule 1.6 now also permits
lawyers to disclose client information when the lawyer reasonably believes
necessary “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 or is
using the lawyer's services” and “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 services.” These
two additional exceptions were originally proposed by the Ethics 2000
Commission and proposed again by the ABA Task Force on Corporate
Responsibility.[7]
The Duty to Advise the Client
Model Rules 1.2 and 1.4 note the axiomatic role of the lawyer in
serving the client by providing advice regarding the law and the possible
consequences of choices available.[8] The corporate setting presents complicating
factors relating to what person has the authority to set the objectives of the
client and what person or persons the lawyer should contact to fulfill the role
of urging compliance. Model Rule 1.13
addresses the lawyer's duty to advise in the context of representing
organizations, including corporations. Model
Rule 1.2 states that "lawyers shall abide by a client's decisions
concerning the objectives of representation and, as required by Rule 1.4, shall
consult with the client as to the means by which they are to be pursued."[9] When a lawyer disagrees with the client
about the way to proceed in a matter, the rules impose a duty on the lawyer to
consult with the client and seek a resolution of the disagreement. “The lawyer
should also consult with the client and seek a mutually acceptable resolution
of the disagreement. If such efforts
are unavailing and the lawyer has a fundamental disagreement with the client,
the lawyer may withdraw from the representation.”[10] In the corporate setting, setting and evaluating
goals in light of the law should be an integrated process. It creates an up-the-ladder reporting system
for advising constituents within the organization. Model Rule 1.13(a) makes clear that the lawyer representing an
organizational client acts for the entity rather than for its
constituents. Model Rule 1.13(b) guides
the lawyer who learns that someone within the organization intends to violate a
legal obligation. The rule presents two
situations: the first involves self-dealing by a constituent of the company and
the second involves a violation of the law.
“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 is likely to result in substantial
injury to the organization, the lawyer shall proceed as is reasonably necessary
in the best interest of the organization.”
The 2003
revision to Rule 1.13 made several changes to the text and comments of the rule. For example, in subsection (b), the rule set
the default of reporting up the ladder rather than remaining silent by
substituting the following language for its original description of
alternatives:
“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 revised rule did not, however, change the threshold test set
forth in 1.13(b), indicating when the lawyer must consider taking action
because of an organizational constituent is in violation of either law or a
duty to the corporate client. The
“trigger” for action remains the same as the prior rule:
“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 that 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.”
This rule sets forth
four elements or prongs that must be met before the lawyer has a duty to act by
reporting up the ladder:
(1) knowledge
[of constituent’s wrongful act] [ “violation of legal obligation to the
organization, or a violation of law]
(2) in
a matter related to the representation,
(3) reasonably
might be imputed to the organization, and
(4) likely
to result in substantial injury to the organization.
Comment 4 to Model Rule 1.13 make
clear that the lawyer has discretion to report information up the ladder within
the client without meeting each of these tests. It provides in part:
“Even
in circumstances where a lawyer is not obligated by Rule 1.13 to proceed, a
lawyer may bring to the attention of an organizational client, including its
highest authority, matters that the lawyer reasonably believes to be of
sufficient importance to warrant doing so in the best interest of the
organization.”
IV. Selected Quotations
Section 307 (15 U.S.C. 7245) provides:
Not
later than 180 days after the date of enactment of this Act, the Commission
shall issue rules, in the public interest and for the protection of investors,
setting forth minimum standards of professional conduct for attorneys appearing
and practicing before the Commission in any way in the representation of issuers,
including a rule ---
(1)
requiring an attorney to report evidence of a material violation of securities
law or breach of fiduciary duty or similar violation by the company or any
agent thereof, to the chief legal counsel or the chief executive officer of the
company (or the equivalent thereof); and
(2) if the counsel
or officer does not appropriately respond to the evidence (adopting, as
necessary, appropriate remedial measures or sanctions with respect to the
violation), requiring the attorney to report the evidence to the audit
committee of the board of directors of the issuer or to another committee of
the board of directors comprised solely of directors not employed directly or
indirectly by the issuer, or to the board of directors.
Pertinent ABA Model Rules of
Professional Conduct
(as approved by the ABA House of Delegates
August, 2003)
* * * *
(a) A lawyer employed or retained
by an organization represents the organization acting through its duly
authorized constituents.
(b) 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 that
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.
(c) Except as provided in paragraph (d), if:
(1) 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
(2) 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.
(d) Paragraph (c) shall not apply with respect to information relating to
a lawyer’s representation of an organization to investigate an alleged
violation of law, or to defend the organization or an officer, employee or
other constituent associated with the organization against a claim arising out
of an alleged violation of law.
(e) A lawyer who reasonably believes that he or she has been discharged
because of the lawyer’s actions taken pursuant to paragraphs (b) or (c), or who
withdraws under circumstances that require or permit the lawyer to take action
under either of those paragraphs, shall proceed as the lawyer reasonably
believes necessary to assure that the organization’s highest authority is
informed of the lawyer’s discharge or withdrawal.
(f) In dealing with an organization's directors, officers, employees,
members, shareholders or other constituents, a lawyer shall explain the
identity of the client when the lawyer knows or reasonably should know that the
organization's interests are adverse to those of the constituents with whom the
lawyer is dealing.
(g) 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.
* * * *
NY
Code of Professional Responsibility, DR 4-101
A. "Confidence"
refers to information protected by the attorney-client privilege under
applicable law, and "secret" refers to other information gained in
the professional relationship that the client has requested be held inviolate
or the disclosure of which would be embarrassing or would be likely to be
detrimental to the client.
B. Except
when permitted under DR 4-101 [1200.19] (C), a lawyer shall not knowingly:
1. Reveal a
confidence or secret of a client.
2. Use a
confidence or secret of a client to the disadvantage of the client.
3. Use a
confidence or secret of a client for the advantage of the lawyer or of a third
person, unless the client consents after full disclosure.
C. A
lawyer may reveal:
1. Confidences or
secrets with the consent of the client or clients affected, but only after a
full disclosure to them.
2. Confidences or
secrets when permitted under Disciplinary Rules or required by law or court
order.
3. The intention
of a client to commit a crime and the information necessary to prevent the
crime.
4. Confidences or
secrets necessary to establish or collect the lawyer's fee or to defend the
lawyer or his or her employees or associates against an accusation of wrongful
conduct.
5. Confidences or
secrets to the extent implicit in withdrawing a written or oral opinion or
representation previously given by the lawyer and believed by the lawyer still
to be relied upon by a third person where the lawyer has discovered that the
opinion or representation was based on materially inaccurate information or is
being used to further a crime or fraud.
D. A
lawyer shall exercise reasonable care to prevent his or her employees,
associates, and others whose services are utilized by the lawyer from
disclosing or using confidences or secrets of a client, except that a lawyer
may reveal the information allowed by DR 4-101 [1200.19] (C) through an
employee.
* * * *
NY
Code of Professional Responsibility, DR 5-109
A. When
a lawyer employed or retained by an organization is dealing with the
organization's directors, officers, employees, members, shareholders or other
constituents, and it appears that the organization's interests may differ from
those of the constituents with whom the lawyer is dealing, the lawyer shall
explain that the lawyer is the lawyer for the organization and not for any of
the constituents.
B. 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 that reasonably
might be imputed to the organization, and is likely to result in substantial
injury to the organization, the lawyer shall proceed as is reasonably necessary
in the best interest of the organization. In determining how to proceed, the
lawyer shall give due consideration to the seriousness of the violation and its
consequences, the scope and nature of the lawyer's representation, the
responsibility in the organization and the apparent motivation of the person
involved, the policies of the organization concerning such matters and any
other relevant considerations. 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, Such measures may
include, among others:
1. Asking
reconsideration of the matter;
2. Advising that a
separate legal opinion on the matter be sought for presentation to appropriate
authority in the organization; and
3. 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 in
behalf of the organization as determined by applicable law.
C. If,
despite the lawyer's efforts in accordance with DR 5-109 [1200.28] (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 a substantial injury to the organization, the lawyer may resign in
accordance with DR 2-110 [1200.15].
* * * *
(1) Lawyer knows that Client
accidentally discharged toxic waste into a town's water supply. After talking with Client’s scientists and
plant managers, Lawyer believes there is a present and
substantial risk that a person who drinks the water will contract a
life-threatening or debilitating disease.
Lawyer has advised Client that he should report the accidental
release.
(See Comment 6 to
Model Rule 1.6; Comment 16 to Tennessee Rules of Professional Conduct 1.6) (Consider
permissive or mandatory nature depending on the state rule.)
(2) Lawyer represents Client
in a purchase-sale contract between Client as seller and another party. Lawyer has prepared all the documents
necessary for the sale and at Client’s direction has attached a fraudulent
environmental inspection reports that show no contamination when in fact
significant contamination exists on property that is the subject of the purchase-sale
contract between Client as seller and another party. The remediation of the property is estimated to be over $1
million.
(See Comment 7 to
Model Rule 1.6.) (Consider permissive nature of the disclosure and the
involvement of the lawyer in the transaction.)
(3) Lawyer
advises the constituent he reports to (Assistant Legal Officer of Corporation)
that Corporation is in serious violation of its water permit for hazardous
substances. His contact advises lawyer
that enforcement is not going to find the violation.
(See Model Rule
1.13(b). Consider standards for
reporting up the ladder.)
[1] Copyright Irma S. Russell.
[2] See Hale v. Henkel, 201 U.S. 43 (1906).
[3] See, e.g., D. I. Chadbourne, Inc. v. Superior Court of City and County of San Francisco, 60 Cal.2d 723, 388 P.2d 700, 736 (1964) (holding that “no greater liberality should be applied to the facts which determine privilege in the case of a corporation than would be applied in the case of a natural person (or association of persons), except as may be necessary to allow the corporation to speak”).
[4] See Principle of Corporate Governance § 201 (American Law Institute 2003).
[5] See Model
Rule 1.2, cmt. 2 ( noting that clients “normally defer to the special knowledge
and skill of their lawyer with respect to the means to be used to accomplish
their objectives,” and “lawyers usually defer to the client regarding such
questions as the expense to be incurred and concern for third persons who might
be adversely affected”).
[6] See Model Rules, Preamble, para. 9; Model Rule 2.1, cmt. 2 (noting lawyer’s advice may include social, moral, and political components).
[7] The
report of the Task Force on Corporate Responsibility is available at: http://www.abanet.org/leadership/2003/summary/119a.pdf (visited 2/11/2004).
[8] See Model Rules, Preamble, para. 9; Model Rule 2.1, cmt. 2 (noting lawyer’s advice may include social, moral, and political components).
[9] 2002 Model Rule 1.2(a).
[10] 2002 Model Rule 1.2, cmt.2.