Neil J Wertlieb, the author of this article, is a transactional lawyer, educator and ethicist, who provides expert witness services in disputes involving business transactions and corporate governance, and in cases involving attorney malpractice and attorney ethics.  He is a former Chair and current Member of the Professional Responsibility and Ethics Committee (PREC) of the Los Angeles County Bar Association.  He is also former Chair of the Ethics Committees of the California State Bar (COPRAC) and the California Lawyers Association Ethics Committee, a member of the California Civility Task Force, and a former Chair of the Business Law Section of the California State Bar and its Corporations Committee.  Mr. Wertlieb served as a Partner at Milbank LLP for two decades and also served as General Counsel of the firm.  For additional information, please visit www.WertliebLaw.com. A version of this article may be published by the California Lawyers Association and/or the American Bar Association.  The views expressed herein are his own. Ethics articles are provided regularly by LACBA’s longstanding Professional Responsibility and Ethics Committee.

This article addresses the duties owed by attorneys to the affiliates and other constituents of a company client. 

COMPANY AFFILIATES AND OTHER CONSTITUENTS

When an attorney represents a business entity (such as a corporation, a limited liability company, or a partnership) in a legal matter, certain affiliated or related persons or other entities might be involved in the matter.  In which case, the attorney should be aware of potential duties and obligations that might be owed to such affiliates and other constituents.

Examples of Affiliates and Constituents:

These types of situations arise quite often in both transactional and litigation matters.  Here are just a few examples:

• Finance Matters:  When a business entity is a borrower in a finance transaction, its affiliated entities (such as subsidiaries) may be co-borrowers or guarantors on the loan to the business entity.  Also, if the borrower is closely held, it is not unusual for the lender to require that shareholders be guarantors of the loan.
• Mergers & Acquisitions:  When a business is being sold, certain shareholders of the business may be asked to enter into non-compete agreements, and certain employees may be asked to enter into employment agreements, with the buyer.
• Start-Ups:  When the prospective founders of a new business seek to engage counsel to represent the business before the business entity is even formed, the founders are the ones interacting with counsel as the entity does not yet exist.
• Management:  In representing a business entity, attorneys often interact with management, and provide advice relating to management’s actions on behalf of the business entity.  Such constituents may include directors and officers of a corporation, managers or managing members of a limited liability company, or general partners of a limited partnership.
• Lawsuits by Former Employees:  Claims for wrongful termination may be brought against both the company and certain members of management of the company as co-defendants in the litigation.

The term “affiliates” is used herein to refer to affiliated entities of the entity client (e.g., subsidiaries or entities under common ownership and/or control), and the term “constituents” is used herein to refer to individuals who may be involved in the management of the entity client or its interaction with legal counsel (e.g., directors, officers, employees or shareholders of a corporation, or members or managers of a limited liability company, or general partners or limited partners of a limited partnership).

Questions to Consider:

Attorneys working on such matters on behalf of a business entity should consider the following issues:

• Who is the client – or who are the clients?
• If multiple clients, are there conflicts of interest among the clients?
• Even if the business entity is the sole client, what duties might be owed to non-clients?
• Does the presence of such non-clients in the matter impact the duties owed to the entity client? 

Organization as Client:

When representing a business entity, a lawyer should be mindful of Rule 1.13 of the California Rules of Professional Conduct (the “Rules”).  Paragraph (a) of Rule 1.13 provides:

A lawyer employed or retained by an organization shall conform his or her representation to the concept that the client is the organization itself, acting through its duly authorized directors, officers, employees, members, shareholders, or other constituents overseeing the particular engagement.

Representing a business entity does not mean that the attorney is also representing any of its constituents, even though the “organizational client can only act through individuals who are authorized to conduct its affairs.”  See Comment [1] to Rule 1.13.  In other words, the fact that a business entity generally acts through its various constituents, and its attorneys typically take direction from directors and officers (or comparable members of management in non-corporate business entities), does not automatically create an attorney-client relationship with such managers.  See Koo v. Rubio's Restaurants, Inc., 109 CA4th 719 (2003) (“there is a distinction between a corporate counsel's representation of corporate officers and managers in their representative capacities and the representation of those persons in their individual capacities”); see, also, Capra v. Capra, 58 CA5th 1072 (2020); Sprengel v. Zbylut, 40 CA5th 1028 (2019).

Similarly, representing a business entity does not mean that the attorney is also representing any of its affiliated entities.  See Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, LLP, 69 CA4th 223 (1999); Brooklyn Navy Yard Cogeneration Partners, L.P. v. Sup.Ct. (Parsons Corp.), 60 CA4th 248 (1997); see, also, Cal. State Bar Form.Opn. 1989-113 (“Rule 3-600 [predecessor to current Rule 1.13] makes clear that in the representation of corporations, it is the corporate entity actually represented rather than any affiliated corporation, which is the client”).

DUTIES OWED TO CO-CLIENTS

Notwithstanding the foregoing limitation, an attorney representing a business entity “may also represent any of its constituents.”  See Rule 1.13, paragraph (g).  However, the attorney must act in accordance with the Rules pertaining to, among other things, conflicts of interest and confidentiality.

Conflicts of Interest: Current Clients:

When representing multiple clients, including where a lawyer is representing a business entity as well as one or more affiliates or constituents, the lawyer must comply with Rule 1.7, which precludes representation of multiple clients, absent informed written consent from each such client, if the representation of one client “is directly adverse to another client in the same or a separate matter” [paragraph (a)] or “if there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with another client” [paragraph (b)].  And, even absent such “significant risk,” the lawyer may still be required to provide the client or clients with “written disclosure of the relationship” [paragraph (c)].  In addition, the lawyer is permitted to engage in such joint or concurrent representations only if, among other things, “the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client” [paragraph (d)(1)].

If the attorney will be representing a business entity as well as one or more of its individual constituents, where the informed written consent of the entity client is required, the attorney should be mindful of Rule 1.13, paragraph (g), which precludes any such individual from providing such consent on behalf of the business entity:

If the organization’s consent to the dual representation is required by any of these rules, the consent shall be given by an appropriate official, constituent, or body of the organization other than the individual who is to be represented, or by the shareholders.

Use of Current Client’s Information:

When representing multiple clients, the lawyer must also comply with Rule 1.8.2, which provides:

A lawyer shall not use a client’s information protected by Business and Professions Code section 6068, subdivision (e)(1) [client secrets] to the disadvantage of the client unless the client gives informed consent, except as permitted by these rules or the State Bar Act.

In essence, this means that where a lawyer is representing a business entity as well as one or more of its affiliates or constituents, the lawyer must maintain confidentiality as between or among the joint or concurrent clients.

Compensation from One Other than Client:

Because it is common for entity clients to be responsible for payment of the legal fees incurred by the entity as well as its constituents in joint representations, the lawyer representing both a business entity and one or more of its constituents should also be mindful of potential conflicts of interest created by such payment terms.  Rule 1.8.6 provides:

A lawyer shall not enter into an agreement for, charge, or accept compensation for representing a client from one other than the client unless: [among other things] (a) there is no interference with the lawyer’s independent professional judgment or with the lawyer-client relationship; … and (c) the lawyer obtains the client’s informed written consent at or before the time the lawyer has entered into the agreement for, charged, or accepted the compensation, or as soon thereafter as reasonably practicable ….

Although the business entity which is paying the fees is also a client, because such payment arrangement may create a conflict of interest for the lawyer, the lawyer should be comfortable that such arrangement does not interfere with the lawyer’s independent professional judgment on behalf of, or the attorney-client relationship with, the individual client.

INADVERTENT OR UNINTENDED ATTORNEY-CLIENT RELATIONSHIPS

An attorney-client relationship is typically formed by agreement, which may be express or implied.  When formed by express agreement, attorneys should keep in mind the requirements of California Business and Professions Code Sections 6147 and 6148.  Section 6147 requires a written contract when an attorney represents a client on a contingency fee basis.  Section 6148 requires a written contract when “it is reasonably foreseeable that the total expense to a client, including attorney fees, will exceed one thousand dollars” – subject to certain exceptions set forth in paragraph (d), including when the client is a corporation.

Whether or not an attorney-client relationship is formed by implication (i.e., absent an express agreement) depends on the facts and circumstances of the situation, the apparent intention of the parties, and whether a reasonable person in the position of the purported client would have reasonably believed that such person was a client of the attorney.  See Responsible Citizens v. Sup.Ct. (Askins), 16 CA4th 1717 (1993) (“one of the most important facts involved in finding an attorney-client relationship is the expectation of the client based on how the situation appears to a reasonable person in the client’s position” [internal quotes and citation omitted]); see, also, Sky Valley Ltd. Partnership v. ATX Sky Valley, Ltd., 150 F.R.D. 648 (ND CA 1993) (“the courts have focused on whether it would have been reasonable, taking into account all the relevant circumstances, for the person who attempted to invoke the joint client exception [to the attorney-client privilege] to have inferred that she was in fact a ‘client’ of the lawyer.”).  The same analysis applies when the purported client is an affiliate or constituent of an entity client, thereby potentially creating a joint representation and/or co-clients. 

If such affiliate or constituent might be considered to be a co-client of the attorney, even as a result of an implied attorney-client relationship, the attorney should consider the duties owed to co-clients, as described above.  On the other hand, if such an attorney-client relationship was not intended, it may be advisable for the attorney to expressly disclaim any attorney-client relationship with such affiliate or constituent so as to negate any reasonable inference that such a relationship exists.  In fact, certain situations may require such disclaimers, as described below.

DUTIES OWED TO NON-CLIENTS

Attorneys also owe certain duties to non-clients, and should consider the following potential obligations to affiliates and constituents of an entity client even if such affiliate or constituent is not a client of the attorney.

Disclaimer of an Attorney-Client Relationship:

Although Rule 1.13(g) does not preclude joint representation of entity clients and one or more of its constituents (as noted above), paragraph (f) of Rule 1.13 mandates the disclaimer of an attorney-client relationship with any such constituent in certain circumstances where the entity’s interests are adverse to a constituent with whom the attorney is interacting:

In dealing with an organization’s constituents, a lawyer representing the organization shall explain the identity of the lawyer’s client whenever the lawyer knows or reasonably should know that the organization’s interests are adverse to those of the constituent(s) with whom the lawyer is dealing.

Such disclaimers are sometimes referred to as an Upjohn or “corporate Miranda” warning.  See Upjohn Co. v. United States, 449 U.S. 383 (1981); United States v. Ruehle, 583 F.3d 600 (9th Cir. 2009) (“Such warnings make clear that the corporate lawyers do not represent the individual employee; that anything said by the employee to the lawyers will be protected by the company’s attorney-client privilege subject to waiver of the privilege in the sole discretion of the company; and that the individual may wish to consult with his own attorney if he has any concerns about his own potential legal exposure”).

Truthfulness in Statements to Others:

In accordance with Rule 4.1, attorneys for a business entity have an obligation to be truthful in their dealings with the entity’s affiliates and constituents:

In the course of representing a client a lawyer shall not knowingly: (a) make a false statement of material fact or law to a third person; or (b) fail to disclose a material fact to a third person when disclosure is necessary to avoid assisting a criminal or fraudulent act by a client, unless disclosure is prohibited by Business and Professions Code section 6068, subdivision (e)(1) [client secrets] or rule 1.6 [confidential information of a client].

Communication with a Represented Person:

In accordance with Rule 4.2 (referred to as the No-Contact Rule), if an attorney for a business entity knows that an affiliate or constituent of the entity is represented by separate legal counsel, the attorney is prohibited from communicating with such person about the subject matter of the representation, unless such legal counsel has consented to the communication.  Paragraph (a) of Rule 4.2 provides:

In representing a client, a lawyer shall not communicate directly or indirectly about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer.

Comment [2] to Rule 4.2 makes clear that the No-Contact Rule is not limited to litigation matters, but also applies to communications with any affiliate or constituent on non-litigation matters where such person “is represented by counsel concerning the matter to which the communication relates.” 

Communicating with an Unrepresented Person:

In accordance with Rule 4.3, when an attorney for a business entity is communicating with an affiliate or constituent who is not represented by separate legal counsel, the attorney is prohibited from stating or implying that the attorney is disinterested, and may be prohibited from offering legal advice to that person.  Paragraph (a) of Rule 4.3 provides:

In communicating on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested.  When the lawyer knows or reasonably should know that the unrepresented person incorrectly believes the lawyer is disinterested in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.  If the lawyer knows or reasonably should know that the interests of the unrepresented person are in conflict with the interests of the client, the lawyer shall not give legal advice to that person, except that the lawyer may, but is not required to, advise the person to secure counsel.

Comment [2] to Rule 4.3 makes clear that the attorney is not giving legal advice “merely by stating a legal position on behalf of the lawyer’s client,” and that the Rule “does not prohibit a lawyer from negotiating the terms of a transaction or settling a dispute with an unrepresented person.”

CONCLUSION

When representing a business entity, it is important to clarify whether and to what extent the attorney is – or is not – also representing any of the entity’s affiliates or constituents.  The representation of a business entity is subject to Rule 1.13 (Organization as Client), but certain duties may be owed to the business entity’s affiliates and constituents whether or not they are also clients of the attorney.  If any affiliates or constituents of the business entity are also clients, Rules 1.7 (Conflicts of Interest: Current Clients), 1.8.2 (Use of Current Client’s Information), and 1.8.6 (Compensation from One Other than Client) may also be implicated.  With respect to affiliates and constituents who are not co-clients of the attorney, Rules 4.1 (Truthfulness in Statements to Others), 4.2 (Communication with a Represented Person), and 4.3 (Communicating with an Unrepresented Person) may also be implicated.  Further, it may be advisable or required to disclaim an attorney-client relationship with any such affiliate or constituent, including in accordance with paragraph (g) of Rule 1.13.