Posted on 11 April 2013.
An Everyday Scenario: Ethics in Business Representation
“Lawyers concerned about the ethics of business enterprise representations often think that, despite their best planning, there is some ethical or malpractice monster waiting in the future to trap them without warning. Although occasionally true, the more common situation is one where the lawyer (figuratively) steps on a legal land mine the lawyer placed years before.”
In the above synopsis our Advanced Business Law ethics panel, Geoffrey Grodner, Arend Abel, Charles Kidd, and Patrick Olmstead, Jr., set the stage for delving into ethics and professional responsibility situations that a business lawyer may face in everyday practice. Here on Law Tips they present you with a scenario and the possible issues. Make your own evaluation. What are the relevant professional responsibility considerations? And how would you avoid potential pitfalls?
You represented Walter, an entrepreneur, about six months ago when he leased office space for a new business. At the time, he told you he was planning to develop a computer “role playing game.” He shared with you that his plan was to come up with the concepts for the look, feel and user experience for the game, including characters, skills and abilities, levels, hazards and adversaries, and then to hire a programmer to write the code needed to implement those concepts. You listened politely, even encouragingly, but all you were hired to do at that time was negotiate a lease, and your engagement letter expressly stated as much.
Walter has now settled into his space and hired Jennifer to do computer programming. They have agreed that Walter will not pay her a salary, but that she will own a portion of the company, which they both believe will be highly profitable. Walter will retain voting control. Walter asks you to form the company and set up the ownership as near to 50-50 as you can.
What ethical issues should you consider in this situation?
Examining this scenario, our panel presents the following issues to consider:
The key step that the attorney should take is to clarify who, specifically, the attorney does and does not represent. Absent some clarification, the attorney may be held to represent the entity under Ind. R. Prof. Con d. 1.13. See Jesse by Reinecke v. Danforth, 485 N.W.2d 63, 169 Wis.2d 229 (1992). In Jesse, the Wisconsin Supreme Court adopted a rule that a lawyer would be deemed to represent the entity “where (1) a person retains a lawyer for the purpose of organizing an entity and (2) the lawyer’s involvement with that person is directly related to that incorporation and (3) such entity is eventually incorporated, the entity rule applies retroactively such that the lawyer’s pre-incorporation involvement with the person is deemed to be representation of the entity, not the person.” While Jesse did not address whether its “guideline” could be varied by the terms of the lawyer’s engagement, there is no apparent reason that it could not be. An attorney-client relationship is a consensual one, Douglas v. Monroe, 743 N.E.2d 1181, 1186 (Ind. Ct. App. 2001).
Due to the inevitable conflict among prospective constituents of an entity, when two or more persons come to a lawyer wanting to form a company, it may be advisable for the lawyer to individually represent one of them, and specifically advise the others that they may wish to seek independent counsel.
In fact, Comment 10 to Rule 1.13 provides that, where the lawyer does represent the entity, and conflicts among constituents arise “the lawyer should advise any constituent, whose interest the lawyer finds adverse to that of the organization of the conflict or potential conflict of interest, that the lawyer cannot represent such constituent, and that such person may wish to obtain independent representation.” Again, given the inherent legal conflict between co-owners, at the very least a clarification should be made and the co-owners should be given the opportunity to seek separate counsel.
Counsel should clarify who counsel represents at the earliest possible point, ideally before meeting with the two of them. Otherwise, the rule governing duties to prospective clients could become problematic. Rule 1.18(b) provides that a lawyer “shall not use or reveal information learned in the consultation” with a prospective client. In addition, Rule 1.18(b) provides that a lawyer who has learned information in a consultation with a prospective client “shall not represent a client with interests materially adverse to those of a prospective client in the same or a substantially related matter” absent an informed consent. A person can become a prospective client simply by “discuss[ing] with a lawyer the possibility of forming a client- lawyer relationship with respect to a matter.”
Thus, the lawyer should clarify who he represents before “learning” information from both constituents, at least if the lawyer wants to avoid the default rule of representing the entity.
Are there other ethical concerns in this scenario? How have you effectively handled these issues? Do you have questions? Feel free to leave comments at the bottom of this post.
You might want to take advantage of the thorough discussion of Ethical Concerns in Business Representation with attorneys from around the state through ICLEF’s On-Demand CLE programming. The recent Advanced Business Law seminar, covering several topics in this arena, is available at your convenience. You schedule the time and place, Click Here.
Join us next week for an additional scenario that develops for Walter and Jennifer that could pose ethical dilemmas for their attorney.
Thank you to our Law Tips Faculty Contributors:
- Charles M. Kidd, Deputy Executive Secretary, Indiana Supreme Court Disciplinary Commission, Indianapolis
- Geoffrey M. Grodner, Mallor Grodner LLP, Bloomington
- Arend J. Abel, Cohen & Malad, LLP, Indianapolis
- Patrick J. Olmstead, Jr., Center Grove Law Office, Greenwood
About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We plan to utilize her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook page, Twittering and other places her legal experience lends itself.
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