Corporate Lawyers After the Big Quake: The Conceptual Fault Line in the Professional Duty of Confidentiality

Georgetown Journal of Legal Ethics, The, Fall 2006 by Bost, Thomas G

INTRODUCTION

As most observers of the American legal scene are aware, the past four years or so have witnessed a convulsion and consequent seismic shift in the roles, duties, expectations, and liabilities of corporate lawyers. This upheaval in the standards of mandated lawyer responsibility is the result of the commonly-held perception that lawyers have failed to adequately guard investors from the devastation that accompanied the great corporate scandals of the recent past. Lawyer reform came first from the securities and Exchange Commission ("sec"), in response to the mandates of the Sarbanes-Oxley Act of 2002, and then from the American Bar Association ("ABA"), in response to the urgings of the ABA's Task Force on Corporate Responsibility. Although the details of these reforms differ, their general thrust and effect are similar and in general alignment.

The primary focus of reform has been on the lawyer's duty of confidentiality, and the primary effect of the sec and ABA initiatives has been to create or confirm significant exceptions to that duty. The lawyer's duty of confidentiality has always been regarded as basic:

A fundamental principle in the client-lawyer relationship is that, in the absence of the client's informed consent, the lawyer must not reveal information relating to the representation .... This contributes to the trust that is the hallmark of the client-lawyer relationship. The client is thereby encouraged to seek legal assistance and to communicate fully and frankly with the lawyer even as to embarrassing or legally damaging subject matter. The lawyer needs this information to represent the client effectively and, if necessary, to advise the client to refrain from wrongful conduct. Almost without exception, clients come to lawyers in order to determine their rights and what is, in the complex of laws and regulations, deemed to be legal and correct. Based upon experience, lawyers know that almost all clients follow the advice given, and the law is upheld.1

However, vigorous challenges to crucial aspects of the SEC and ABA initiatives have been mounted by critics from around the nation, with the most vocal and sustained organized opposition coming from lawyers from the state of California, which has the distinction of having the strictest confidentiality rules in the nation.2 These disparate views each reflect a different vision of corporate lawyering: what does it mean to be a counselor, advisor, and advocate for a business enterprise? The conceptual fault line between the competing visions is fundamental and lies at the core of the legal profession and its role in society.

The discussion in this article begins with the corporate scandal resulting in the sudden demise of Enron Corporation, with particular attention paid to Enron's lawyers. In significant respects, the sec and ABA reforms were reactions to the perceived inadequacies in the performance of these lawyers. Critics asserted that these lawyers suffered from a dual failure of vision-losing sight of who their client was-the corporation itself, as opposed to any particular corporate agent with whom they were dealing-and seeing their role in unacceptably narrow terms-as mere implementers or transaction engineers, rather than as broadlygauged corporate counselors or advisors.3

There followed closely the enactment of the epochal Sarbanes-Oxley Act of 2002 with its section 307 directing the SEC to adopt rules setting forth "minimum standards of professional conduct for attorneys appearing and practicing" before the SEC, including a rule requiring lawyers with evidence of a "material violation" of law to report that evidence up the ladder, beginning, in the typical case, with the company's chief legal officer and ending with the board of directors if those below did not "appropriately respond."4 In January 2003, the SEC duly adopted comprehensive rules setting forth a mandatory elaborate up the ladder reporting regime while also permitting lawyer disclosure of confidential information to the SEC if the lawyer reasonably believes that disclosure is necessary to prevent the company from committing a material violation likely to cause substantial financial injury to the company or to investors, or to rectify such injury in the case of past violations.5 The SEC rules purport to preempt conflicting state rules.6

The ABA followed, in August 2003, with comprehensive amendments to Rules 1.6 and 1.13 of the Model Rules of Professional Conduct. As amended, Model Rule 1.6 permits the lawyer to disclose confidential information to prevent the client from committing a crime or fraud reasonably certain to result in financial loss to a third party, or to prevent, mitigate, or rectify financial loss to a third party that is reasonably certain to result from, or has resulted from, the client's past commission of a crime or fraud, if, in all instances, the lawyer's services were used by the client in furtherance of the crime or fraud.7 Amended Model Rule 1.13 adopts a presumptive up the ladder reporting duty for the corporate lawyer in the case of a corporate agent's violation of law that is likely to result in substantial injury to the corporation and permits the lawyer to disclose confidential information to third parties if the lawyer's up the ladder reporting efforts have been in vain.8