LEGAL ETHICS OPINION 1838                   CAN AN IN-HOUSE COUNSEL FOR A CORPORATION PROVIDE LEGAL SERVICES TO A SISTER CORPORATION AND CAN THAT CORPORATION COLLECT REIMBURSEMENT FOR THOSE SERVICES FROM THE SISTER CORPORATION?

 

In the facts you present, Corporation A is one of several privately held corporations in a Group, all of which are directly or indirectly owned exclusively by a single corporate entity.  Corporation B is another member of the Group; Corporation A and Corporation B do not own any part of each other, but are commonly owned by the same parent company.

 

Patent Lawyer is employed by Corporation A to draft and prosecute patent applications in order to patent protect the discoveries/inventions that Corporation A has acquired.  Corporation B has needs for legal advice regarding patent infringement and/or validity regarding patents held by third parties. 

 

Based upon these hypothetical facts you present the following questions for determination by the Committee:

 

1.                  Whether Patent Lawyer employed by Corporation A can provide legal services to Corporation B with Corporation A’s consent?

 

2.                  Whether Patent Lawyer’s time/fees can be recouped by Corporation A from Corporation B for legal services rendered to Corporation B?

 

The principal issues here involve conflicts of interest, client confidences and secrets, division of fees with non-lawyers and lay entities billing for the provision of legal services.  As a general proposition, a lay corporation may not employ a lawyer to provide legal services to third parties such as customers of Corporation A.  Richmond Ass’n of Credit Men v. Bar Assoc., 167 Va. 327, 189 S.E.2d 153 (1937).

 

However, it seems clear that Patent Lawyer can provide legal services to Corporation B as long as Patent Lawyer provides those services to Corporation B directly, independently and free of any conflicts of interest and with the consent of Corporation A.

 

Since the lawyer in question is a regular, active member of the Virginia State Bar he is authorized to practice law generally and may represent clients other than his employer, Corporation A.[1]  See UPL Op. 211 (2006) (Virginia lawyer serving as corporate counsel does not need separate law office to provide legal services to pro bono clients).  In the facts you present, Corporation A has authorized the lawyer to provide legal services to an affiliated entity, Corporation B.  (See Rule 1A:5 Virginia Corporate Counsel & Corporate Counsel Registrants (“Employer” includes: for-profit or a non-profit corporation, association, or other business entity, including its subsidiaries and affiliates….)

 

While there is nothing inherently wrong with lawyers performing legal services for one party at the request of another party, it must always be clear who the lawyer’s client is and to whom counsel owes undivided loyalty and confidentiality.  While the interests of the two corporate clients may be identical, the lawyer owes undivided loyalty and independent professional judgment to both.  Communications between Corporation B and the Patent Lawyer rendering the services must be direct and not shared with Corporation A without Corporation B’s consent.  If confidences of Corporation B are acquired by Patent Lawyer while providing legal services, such confidences must be held inviolate. Rule 1.6.  Discharging this duty of confidentiality to Corporation B may require Patent Lawyer to work off-site, at a physically separate office, rather than on the premises of Corporation A.  The lawyer must preserve the confidences of the subsidiary corporation and may disclose them only with the informed consent of the subsidiary. Rule 1.6.

 

Patent Lawyer must be able to exercise independent professional judgment on behalf of Corporation B free of any interference or direction from Corporation A.[2]  Where a lawyer is employed by multiple organizations, a written agreement may help define the relationship between the lawyer and those organizations so as to prevent misunderstanding in his respective roles and further define the scope of the representation.[3]

If the lawyer has other interests that may limit the representation, the lawyer must obtain the client’s consent after consultation; provided, however, that independent of such consent, the lawyer reasonably believes that he or she will be able to provide competent and diligent representation to each affected client. [4]

 

Patent Lawyer needs to be mindful of his duties of independent professional judgment under Rule 1.8 (f)(2) when determining whether or not he can provide legal services to Corporation A and Corporation B under such an arrangement.  If Patent Lawyer finds that he is compromising client confidences, diligence or independence in representing either client corporation, the lawyer needs to address these issues in order to maintain his representation of both clients.  The most appropriate time to deal with this issue is at the onset of the representation with a letter of representation that outlines who the lawyer would continue to represent, if either, in the event of a conflict.  Corporation A cannot direct Patent Lawyer’s loyalties or representation of B, which may include even the allocation of time spent between Corporation A and B in order for Patent Lawyer to provide diligent and competent representation to both.

 

The second question regarding whether the time/fees involved in sharing Patent Lawyer with Corporation B can be recouped by Corporation A is answered in LEO 480.[5]  LEO 480 states that it is improper for a lawyer’s corporate employer or parent company to charge and collect legal fees for work done by its corporate lawyer unless the fee is simply a reimbursement to the corporate employer for the actual cost of the legal work provided by the lawyer.  The “actual cost” of the legal work can include the costs the corporation incurs to employ the lawyer based upon the services provided; however, there cannot be any direct or indirect profit for legal services provided.  In other words, corporate counsel cannot be used to generate profits for an employer, as that would be considered fee splitting with a non-lawyer and a violation of Rule 5.4(a).[6]

 

Among the problems Rule 5.4 seeks to prevent, the most important is interference by lay persons with a lawyer’s practice.  The involvement of non-lawyers, such as corporate employers, in the legal process is of concern because the lawyer’s independent professional judgment can be impaired by the influence and control of non-lawyers who, by definition, are not subject to the same ethical mandates regarding independence, conflicts of interest, confidentiality, fees and other important provisions of the profession’s code of conduct.  “[F]ee splitting between lawyer and layman … poses the possibility of control by the lay person , interested in his own profit, rather than the client’s fate….” Emmons, Williams, Mires & Leech v. State Bar, 6 Cal. App. 3d 565, 573-74, 86 Cal. Rptr. 367, 372 (1970).  ABA Formal Opinion 95-392 concluded that while a corporation should be free to require its lawyers to reimburse its costs of employing in-house counsel when the lawyers do work for others, a corporation may not reap profits from the work of its in-house lawyers as that is part of the reasons Rule 5.4 was adopted.[7]

 

The Committee concludes that while Patent Lawyer may provide legal counsel to both Corporation A and Corporation B, the lawyer must be mindful of his obligation to protect each client’s confidences and secrets, properly address any conflicts issues between Corporation A and Corporation B, and any funds collected from Corporation B for the lawyer’s services can be no more than reimbursement to Corporation A for the actual costs Corporation A incurs in employing that in-house counsel.

 

This opinion is advisory only and not binding on any tribunal.

 

Committee Opinion

May 10, 2007