Real Ethics Cases for In-House Counsel

August 5, 2014

By: John M. Tanner

Now and again when I speak about ethical issues for in-house counsel, I get pushback from attendees who maintain either that:   (a) I am just making up a bogey-man, and that in-house counsel are not really affected by grievances or malpractice actions; or (b) even if the ethical rules do apply to in-house counsel, they somehow do not apply as usual.  So, my guess is readers of this column may have the same thoughts.

So, for this article I reviewed some relatively recent cases involving in-house lawyers who ran into ethical, malpractice, or evidentiary issues.  (Note that in many states disciplinary actions are confidential, so the fact that only a few of these are grievance cases against in-house counsel is of little comfort):

I.         Kaye v. Rosefield1

Kaye v. Rosefield is one of the more horrifying cases I have read recently.  There, the in-house lawyer (Mr. Rosefield) was also an officer who was given considerable latitude by the owner of the company.  He was also the lawyer for the owner and for a trust for the benefit of the owner’s children.  He used his power to, among other things, create new companies in which he had an ownership interest.   When his shenanigans came to light, he was fired and then subsequently sued for malpractice.

His defenses were similar to those I hear from attendees at lectures.  He claimed that sometimes he was acting as a businessman, so the ethical rules regarding conflicts of interest did not always apply.  The Court of Appeals quoted favorably an expert from the trial:

Poplar saw nothing in the record that would have satisfied the disclosure requirements under RPC 1.7(b), permitting a possible waiver by the clients of the attorney’s conflict of interest. Poplar also rejected as “fallacious” any attempt by Rosefield to exempt himself from his ethical obligations as an attorney by suggesting that, at the time he prepared Lattuga’s separation agreement from Kaye,he was acting within his dual role as COO. Id. at 1188 (Emphasis added.)

Mr. Rosefield also claimed that the ethical rules were not intended “to apply the conflict interest prohibitions in RPC 1.8 [business transaction with a client] to lawyers who serve as a business entity’s in-house counsel.” This defense was also squarely rejected:

Independent of the particular facts of this case, we also discern no rational  basis  to  exempt  attorneys  who  have  been  hired  by corporate clients to serve as in-house counsel from the ethical requirements  of  RPC  1.8.  .  .  .    We  find  nothing  in  the  plain language used by the Court to suggest or even imply that lawyers who  are  retained  by  corporate  clients  as  in-house  or  general counsel are exempt from the proscriptions of RPC 1.8(a).   Id. at 1204 (Emphasis added.)

As part of the remedies against him in this civil case, Mr. Rosefield was ordered to give up his equity interests in the companies that he had obtained in violation of the New Jersey equivalent of Texas Disciplinary Rules of Professional Conduct 1.06 and 1.08.

II.       In re Zimmerman2

In re Zimmerman is nearly as distressing.  Mr. Zimmerman was in-house counsel to a real estate development company.  He not only failed to safeguard escrow funds, but he lied to the escrower as to the whereabouts of the funds and then lied to the grievance committee about the whole deal.

Mr. Zimmerman personally acted as the escrow agent for a failed real estate deal, but was no doubt selected because he was an attorney and the buyers felt he could be trusted.  When the contract was terminated, however, he did not return the money to the prospective buyers, but rather turned it over to his client, the prospective seller.   When the buyers made repeated demands for it, he did not inform them that he no longer had the money.  Instead, he continued to allow the buyers to believe their funds were secure in his escrow account.  He was sanctioned for those actions and also sanctioned for failing to safeguard funds “entrusted to him as a fiduciary incident to his practice of law.”

At his grievance hearing, he testified as a mitigating factor that he was “used” and “led down the wrong path” by his employer.  This was rejected by the referee, who stated that:

“[Mr. Zimmerman] knew that his conduct was improper and violated basic rules governing escrowed funds.   He nevertheless took no action to blow the whistle or step down from his position as in-house counsel with the company.   Rather, he knowingly allowed his services to be used by another to perpetrate a fraud.” Id. at 315-16.

III.      Yanez v. Plummer3

Yanez v. Plummer involved an in-house counsel who defended a company employee at the employee’s deposition.  The employee was not a party, but just a bystander witness.  Before the deposition,  the  employee  expressed  concerns  about  job  security  to  the  lawyer,  because  he thought his testimony would be unfavorable to the company.  The lawyer told him not to worry. After the deposition, the company performed an investigation and ultimately fired the employee for dishonest conduct prior to the deposition.

The employee sued the in-house counsel for malpractice, claiming that the in-house counsel was also his lawyer.  The suit alleged that this was a conflict of interest for the lawyer to represent both him and that company, and that the conflict was never disclosed much less waived.  The trial court granted summary judgment for the in-house lawyer, but the appellate court reversed and reinstated the employee’s suit against the in-house lawyer for malpractice.

IV.      Dinger v. Allfirst Fin., Inc.4

In Dinger v. Allfirst Fin., Inc., former officers of a bank brought a claim against the bank, alleging that its in-house counsel had given them bad legal advice regarding the exercise of stock options. The company won on summary judgment on the merits of the case, with the District Court determining that the lawyer’s advice had been reasonable.  The issue of the lawyer giving advice to someone other than his client was not discussed. In affirming, the Third Circuit noted that “The District Court recognized that defendants owed plaintiffs a fiduciary duty based on the confidential relationship that existed between [the lawyer] and plaintiffs, but found no breach of that duty.” Id. at 265.

V.        Fox Searchlight Pictures v. Paladino5

Fox Searchlight Pictures v. Paladino involved litigation between a former client and its former in-house counsel.   The former in-house counsel’s personal attorney sent a demand letter (including a draft complaint for retaliatory discharge) to the company.  In response, the company brought an anticipatory suit against the former in-house counsel for violation of the California Ethical Rules by disclosing its confidential information to her lawyer in connection with the demand letter.   The company then sought to disqualify those lawyers from the suit on the grounds that they possessed the company’s confidential information.

The trial court denied the motion to disqualify, but also denied the motion to dismiss the matter as  a SLAPP  suit.  The court  of appeals  affirmed  on  the former but  reversed  on  the latter, dismissing the complaint as a SLAPP suit.  The court held that a lawyer could disclose client information to her own counsel for assistance in a dispute with the client, even though the California Ethical Rules did not contain such an exception at that time.  [Note, the 2002 changes to ABA Model Rule 1.6 expressly allow such disclosures.]

VI.      In re Teleglobe Commc’ns. Corp.6

In re Teleglobe Commc’ns. Corp. involved a dispute among related companies.  The in-house lawyer for one company had often performed legal work for the related companies.   In the dispute, it was determined that the lawyer’s notes were not privileged as to any of the companies in the dispute, as he was each company’s lawyer.   It was also held that the common-interest doctrine did not apply to protect the notes, because that doctrine requires the involvement of multiple lawyers.

VII.     GSI Commerce Solutions, Inc. V. BabyCenter, L.L.C.7

GSI Commerce Solutions, Inc. v. BabyCenter, L.L.C. similarly involved the question of attorney- client relationship where a lawyer did legal work for multiple closely-related companies.  When a dispute arose between a subsidiary and a third party, the subsidiary was able to disqualify the third-party’s lawyer who had previously done work for the parent company.  The court held that the connection between the wholly owned subsidiary and its parent corporation was sufficiently close that the two were essentially a single client for attorney-disqualification purposes.   The court noted, among other things, that the subsidiary and the parent relied on the same in-house legal  department,  and  that  the  parent’s  legal  department  had  been  involved  in  the  dispute between the plaintiff and subsidiary since it first arose.

The fact that there was an executed conflict waiver did not resolve the issue, because the waiver was limited to a patent infringement issue that did not regard the contract action that was the subject of the motion to disqualify.

VIII.   J&G Indus., Inc. v. Abood8

J&G Indus., Inc. v. Abood was a malpractice case where a corporation brought suit against its former in-house counsel and chief operating officer.  It claimed the former in-house counsel had been negligent in reviewing contracts.   This case was rare when it was filed because the malpractice claim was not in response to a claim for wages or wrongful termination—it was just a stand-alone suit against former in-house counsel for malpractice. These cases are not so rare any more.

IX.      Anwar v. Fairfield Greenwich Ltd.9

Anwar v. Fairfield Greenwich Ltd. reiterated the now well-established rule that there is no attorney-client privilege for communications between a “client” and an unlicensed, in-house attorney.  That is, if the in-house attorney is not licensed, then s/he is not an “attorney,” and thus communication cannot be covered by the attorney-client privilege.   Anwar relies heavily on Malletier v. Dooney & Bourke, Inc., No. 04-Civ-5316, 2006 WL 3476735, at *17 (S.D.N.Y. Nov. 30, 2006) (no attorney-client privilege for communications with unlicensed attorney).

X.        Crews v. Buckman Labs. Int’l 10

Crews v. Buckman Labs. Int’l laid open other problems arising from the unlicensed practice of law.  There, an in-house counsel discovered that the general counsel was not licensed to practice law in Tennessee, where General Counsel was officing. She reported this to the company’s Board of Directors.  After considerable time, the general counsel was still not admitted, so the in- house obtained her own legal advice concerning her ethical obligations.   After obtaining the advice, the in-house counsel felt compelled to report the unlicensed practice of law to the Board of Law Examiners.

The in-house counsel was later fired, and brought suit for common-law retaliatory discharge. The suit made the then-novel, but now commonplace, determination that in-house counsel is protected by laws prohibiting retaliatory discharge.

XI.      Harkabi v. SanDisk Corp.11

Harkabi v. SanDisk Corp. the defendant was sanctioned because its in-house counsel failed to preserve evidence while litigation was pending.   Although in-house counsel was involved in several steps to protect information, he did not supervise or even approve the copying and wiping of laptop hard-drives and was not involved in the transfer of email archives from servers.  Thus, when that information was no longer available, the defendant was determined to have a culpable state of mind regarding the failure to preserve.

XII.     Ross v. Am. Red Cross12

Ross v. Am. Red Cross involved an attempt by the plaintiff to designate the former in-house counsel for the defendant as an expert witness.  The in-house counsel apparently cooperated with the plaintiff and prepared an expert report.  The court, however, noted that the former in-house counsel had been involved on behalf of the defendant during the negotiation of the consent decree whose alleged violation triggered the suit.   Thus, the trial court would not allow the testimony without the consent of the defendant, which was not given.

This case is amazing when you think about it—a former in-house counsel serving as an expert for the other side on a matter that related to the work done for the client while in-house.  The plaintiff incorrectly tried to argue that the defendant had to show the former in-house counsel “would necessarily use or reveal confidential information.”  This of course is not the test when the matter is substantially related to prior work—as the Sixth Circuit noted, the test is whether the lawyer obtained the information during his representation of the defendant.

As Dave Barry might write, I am not making this up.


1         Kaye v. Rosefielde, 75 A.3d 1168 (N.J. Super. Ct. App. Div. 2013)

2         In re Zimmerman, 962 N.Y.S.2d 312 (N.Y. 2013)

3         Yanez v. Plummer, 164 Cal. Rptr. 3d 309 (Cal Ct. App. 2013)

4         Dinger v. Allfirst Fin., Inc., 82 Fed. Appx. 261 (3d Cir. 2003)

5         Fox Searchlight Pictures v. Paladino, 106 Cal. Rptr. 2d 906 (Cal. Ct. App. 2001)

6         In re Teleglobe Commc’ns. Corp., 493 F.3d 345 (3rd Cir. 2007)

7         GSI Commerce Solutions, Inc. v. BabyCenter, L.L.C., 618 F.3d 204 (2d Cir. 2010)

8         J&G Indus., Inc. v. Abood, No. L-02-1062, 2002 WL 31420110, *1 (Oh. Ct. App. Oct. 25, 2002)

9         Anwar v. Fairfield Greenwich Ltd., 982 F. Supp. 2d 260 (S.D.N.Y. 2013)

10       Crews v. Buckman Labs. Int’l, 78 S.W.3d 852 (Tenn. 2002)

11       Harkabi v. SanDisk Corp., 275 F.R.D. 414 (S.D.N.Y. 2010)

12       Ross v. Am. Red Cross, No. 12-4312, 2014 WL 289430 (6th Cir. Jan. 27, 2014)

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2014 Fairfield and Woods, P.C., ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:
John M. Tanner