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

 

SEC Rule 205

 

In 2002, Congress passed the Sarbanes-Oxley Act (“the Act”), reflecting the public concern for the disastrous corporate failures of recent months.  The Act mandated new regulations affecting publicly traded companies as a way of seeking to prevent corporate fraud and protect shareholders and the public from the self-dealing of corporate constituents.  In addition to setting new requirements on CEOs and CFOs of corporations subject to Securities and Exchange Commission (“SEC”) regulation and offering protection to employees of issuers who provide information about violations of securities laws to the SEC, the Act requires new regulations relating to accountants and lawyers. 

 

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

 

Sarbanes-Oxley

 

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)

 

RULE 1.6:  CONFIDENTIALITY OF INFORMATION

 

(a)     A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).

 

(b)      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 or is using 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 services;
(4) to secure legal advice about the lawyer's compliance with these Rules;
(5) 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; or
(6) to comply with other law or a court order.

 

* * * *

 

 
 
RULE 1.13: ORGANIZATION AS CLIENT

 

 (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].

 

* * * *

 

V.  Hypothetical Cases

 

(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.