Corporate Funding of Employee Legal Fees: Special Considerations

By: Christopher D. Carusone

When companies come under investigation, employees who were involved or otherwise knowledgeable of the conduct at issue often need to have their own counsel. This is because the interests of a company and the personal interests of an employee are not always aligned, particularly during a criminal investigation in which an employee’s liberty is at stake. In these situations, it is commonplace for a company to pay for the employee’s attorney, either out of legal obligation or personal loyalty. There are many advantages to this arrangement from the company’s perspective, not the least of which is the possibility for the company’s and employee’s attorneys to share information under a joint defense agreement when appropriate.

Despite this widespread practice, a company paying for separate counsel for one of its employees is inherently unnatural. Corporate counsel paying for outside counsel’s services are used to being in charge of the objectives of the representation and the tactics designed to achieve them, and the attorneys they hire are conditioned to comply. Loyalty to the company’s interests are paramount. This is the natural order of things when the company is the client.

Unfortunately, this is not the case when hiring an attorney to represent an individual employee. Under Pa.R.P.C. 1.8(f), a lawyer “shall not accept compensation for representing a client from one other than the client unless: the client gives informed consent; there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship; and information related to the representation of a client is protected as required by Rule 1.6.” The second rule is underscored by Rule 5.4(c), which states that a lawyer “shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.”

These requirements appear simple enough and are typically memorialized in a funding agreement between the company and the employee’s attorney, and a separate engagement letter between the employee and his attorney, to cover the attorney’s backside. However, as Albert Einstein once said (or Yogi Berra, depending on what version of history you believe), “In theory, theory and practice are the same. In practice, they are not.”

The first area of tension comes during the ramp-up period. Corporate counsel unfamiliar with the dynamics of a corporate criminal investigation may be inclined to clip the wings of the attorney they have hired to represent an employee early on by resisting the attorney’s requests for information, particularly in the absence of any outward signs of investigative activity. This decision may be prompted out of a desire to limit legal costs. However, this corporate interest often runs counter to criminal counsel’s duties of independent investigation under Standard 4-4.1 of the ABA’s “Criminal Justice Standards for the Defense Function” (Fourth ed. 2017).

The second thorny situation arises after corporate counsel receives the first invoice. Corporate counsel, not accustomed to seeing redactions, will naturally wonder what information is being withheld and how it will affect the company. However, both Rule 1.6 and 1.8(f)(3) prohibit the employee’s attorney from sharing information related to the representation with the company without the employee’s informed consent. While the employee may be willing to provide informed consent to the employer who is paying his legal bills and authorize the disclosure of otherwise privileged information under the confines of a joint defense agreement, this is not the case if the legal interests of the company and its employee diverge from one another.

The third area of tension is the most difficult. The ability of the employee’s attorney to exercise independent professional judgment is critical, and writing checks to an attorney who may not be acting in the company’s interests can be a bitter pill for any corporate counsel to swallow. This is particularly true when an employee’s counsel believes that it is in the client’s best interests to cooperate with the government against the company. The ability to exercise the company’s right to terminate funding to the employee’s counsel may prove tempting in such a situation.

Despite these ethical restrictions, there are certainly things that corporate counsel can do to harmonize the roles of the various attorneys during a government investigation and to control costs.

• Hire counsel experienced in white collar or other government investigations to represent the interests of the company at the earliest signs of an investigation.
• Provide the attorney hired by the company with all relevant documents, and work with that attorney to organize and analyze that information early in the investigation.
• Determine whether there is a need to conduct an internal investigation.
• Determine whether there is going to be a need for separate counsel for certain employees. If so, work with the company’s outside counsel to pre-select a roster of attorneys with the right temperament who are open to cooperative approaches when feasible.
• Establish written joint defense agreements between counsel when possible to allow for the confidential sharing of information among the various attorneys.
• Present documents and other information to the employee’s counsel in a timely and organized fashion to avoid duplication of efforts and facilitate a cooperative approach.

Reprinted with permission from the April 19, 2022 edition of “The Legal Intelligencer” © 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.