ETHICS OPINION 717: PRACTICE OF LAW; CONFIDENCES AND SECRETS; COMPANY PROCEDURES

NEW YORK COUNTY LAWYERS’ ASSOCIATION

Committee on Professional Ethics

QUESTION NO. 717

TOPIC: PRACTICE OF LAW; CONFIDENCES
AND SECRETS; COMPANY
PROCEDURES

DIGEST: WHETHER AN INSURANCE COMPANY
EMPLOYEE IS ACTING AS A LAWYER
WITHIN THE MEANING OF THE CODE
OF PROFESSIONAL RESPONSIBILITY
DEPENDS ON THE FACTS AND
CIRCUMSTANCES OF EACH CASE.
IF THE EMPLOYEE IS ACTING AS A
LAWYER, THEN WHAT THE LAWYER
LEARNS ABOUT THE COMPANY’S
PROCEDURES MAY BE PROTECTED AS
A SECRET OF THE CLIENT
DEPENDING ON (i) WHETHER THE
INFORMATION IS GENERALLY KNOWN
AND (ii) THE AMOUNT OF TIME
THAT HAS PASSED SINCE THE
LAWYER ACQUIRED THE
INFORMATION. AFTER LEAVING
THE COMPANY, THE EMPLOYEE CAN
REPRESENT INTERESTS MATERIALLY
ADVERSE TO THE COMPANY ONLY IF
THE MATTERS ARE NOT THE SAME
OR SUBSTANTIALLY RELATED TO
MATTERS ON WHICH THE EMPLOYEE
WORKED FOR THE COMPANY, OR IF
THE FORMER CLIENT CONSENTS.

CODE: DR 4-101(A); DR 4-101(B)(l)
and (2); DR 5-105(D); DR 5-
108; DR 9-101 (B) (1); EC 4-4;
EC 4–6.

QUESTION:

The inquirer asks whether an attorney who formerly worked as a “claims adjuster” or “claims attorney” for a large insurance company may: (a) be employed by a law firm to work on cases which are pending against the insurance company; (b) work on cases materially adverse to the insurance company; (c) use information about the procedures of the insurance company to assist in the preparation of litigation against the insurance company; or (d) reveal information about the procedures of the insurance company to the public,

OPINION:

In N.Y. County 705 (1995), we discussed the ethical obligations of lawyers who are employed by corporations in jobs where they are not expected to act as lawyers. In that opinion, we noted that lawyers are bound by the Code of Professional Responsibility (the “Code”) even when not performing legal work. See also N.Y. State 584 (1987) (“[A] lawyer is held to the standards of professional conduct set forth in the Code of Professional Responsibility even in non-legal activities.”). Nevertheless, some provisions of the Code by their terms apply only if the lawyer is acting as a lawyer. In particular, the conflict of interest and confidentiality prohibitions fall into the latter category.

DR 4-101 (B) (1) and (2) prohibit a lawyer from knowingly revealing a confidence or secret of a client or using such a confidence or secret to the disadvantage of the client. DR 5-108 prohibits a lawyer who has represented a former client in a matter from thereafter (1) representing a second client in the same or a substantially related matter where the second client’s interests are materially adverse to those of the former client, or (2) using confidences or secrets of the former client except when permitted by DR 4-101 (C) or when the information has become generally known. Thus, both rules are operative only if the relationship of the lawyer to the employer is as lawyer-client.

Determining Whether an Employee Acted as a Lawyer

We stated in N.Y. County 705 that whether a corporate employee who happens to be a lawyer represents the corporation within the meaning of the Code depends on the facts and circumstances involving the particular employee, including whether the lawyer was hired to provide legal services, whether the lawyer actually provides legal services, and whether the client relies on the lawyer for legal advice.

Ultimately, the question of whether a particular lawyer is acting as a lawyer in the course of employment is a question of fact that this Committee cannot decide. We believe, however, that the fact that an insurance company chooses to call certain employees “claims attorneys” rather than “claims adjusters” is some evidence that the insurance company is looking to such employees for legal advice. Also relevant might be whether the job descriptions and pay scales for “claims attorneys” are the same as those for “claims adjusters.”

Consequences of Not Acting as a Lawyer

If the facts and circumstances indicate that the lawyer/employee was not acting as a lawyer, then the provisions of the Code governing preservation of confidences and secrets and undertaking subsequent adverse representations do not apply. Whether other considerations (e.g., requirements of employment contracts or laws governing the protection of trade secrets) apply is a question of law which is outside the jurisdiction of this Committee.

Consequences of Acting as a Lawyer

Use of Confidences and Secrets

If the facts and circumstances indicate that the lawyer/employee was acting as a lawyer, the Code provisions apply. DR 4-101 (B) prohibits a lawyer from knowingly (1) revealing a confidence or secret of a client, (2) using a client confidence or secret to the disadvantage of the client, or (3) using a client confidence or secret for the advantage of the lawyer or a third person, unless the client consents after full disclosure. This duty of confidentiality survives the termination of the representation. EC 4-6.

The Committee notes that, with regard to confidentiality, there is an apparent inconsistency between EC 4- 4 and DR 5-108(A)(2). According to EC 4-4, a secret exists without regard to the nature or source of the information or the fact that others share it. DR 5-108(A)(2), in contrast, allows a lawyer to use a confidence or secret of a former client when the confidence or secret has become “generally known.” In the opinion of the Committee, the disciplinary rule must supersede the ethical consideration, which existed at the time DR 5-108 was adopted. Additionally, this interpretation is consistent with DR 4-101(A), which defines a “secret” as information the disclosure of which is likely to be detrimental or embarrassing to the client. When information that would otherwise be a secret becomes generally known, its disclosure is not likely to be detrimental or embarrassing to the former client.

The crucial question raised by this inquiry is whether information about the procedures of the insurance company — a former client — constitute confidences or secrets. Confidence refers to information protected by the attorney-client privilege. DR 4-101 (A). A secret refers to other information gained in the professional relationship that (a) the client has requested be held inviolate, or (b) the disclosure of which would be embarrassing or would likely be detrimental to the client. Id. Most clients do not specify whether particular information they provide to lawyers should be held inviolate. If the client, however, has specifically instructed the lawyer not to disclose certain information, that information would qualify as a secret. The second part of the definition of “secrets” includes information the disclosure of which would be embarrassing or detrimental to the client. As noted above, this test should not be read to include information from a former client that is already generally known. Consequently, it is important to define information that is generally known.

It is well accepted that “secrets” do not include information that is available from books and what a lawyer learns about the law and legal institutions. See ALI Restatement of the Law Governing Lawyers (Proposed Final Draft No. 1) § 111, at 271 cmt. [e] (“Confidential client information does not include what a lawyer learns in the course of representing clients about the law, legal institutions such as courts and administrative agencies, and similar public matters in the course of representing clients.”). Thus, what the lawyer learned about insurance law while employed by the insurance company would not be protected as a secret.

In contrast, what the lawyer learned about the company’s personnel, policies, procedures and negotiating strategies could qualify as a secret depending upon: (1) whether the information was generally known and (2) the amount of time that has passed since the lawyer was exposed to the information. For example, if information about the insurance company’s settlement policies is well known to lawyers who litigate against it, then the same information possessed by a former lawyer for the insurance company would not constitute a secret. Alternatively, if the information was not widely known, but a substantial amount of time had passed so that it was unlikely that use of the information could be detrimental to the former client, the information would no longer be considered a secret. Compare Duncan v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 646 F.2d 1020, 1031-32 (5th Cir.) (law firm that previously represented Merrill Lynch in ten different matters could sue Merrill despite law firm’s knowledge of its practices and procedures because such knowledge was not substantially related to the case), cert. denied, 454 U.S. 895 (1981); Westinghouse Elec. Corp. v. Rio Algom, Ltd., 448 F. Supp. 1284, 1306-10 (N.D. I11.) (general knowledge of corporate organization, officers, marketing methods and business philosophy acquired for a specialized representation ten years earlier does not warrant disqualification in a present, unrelated litigation), aff’d sub nom. Westinahouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1322 (7th Cir.), cert, denied, 439 U.S. 955 (1978); Howard Hughes Med. Inst, v. Lummis, 596 S.W.2d 171 (Tex, Civ. App. 1980) (former law firm of medical institute could represent plaintiff in suit against institute despite familiarity with former client’s policies and operations); Ind. Ethics Op, 1991-3 (1991) (former in-house labor lawyer could sue former employer on behalf of current employee because, among other things, the lawyer’s familiarity with the personalities and negotiating styles of the corporate officers fall within the “generally known” exception of Rule 1.9, the analogue to DR 5-108) with Stitz v. Bethlehem Steel Corp., 650 F. Supp. 914, 917 (D. Md. 1987) (former in-house labor attorney is disqualified from representing plaintiff in a labor dispute against the corporation because of, among other things, familiarity with the company’s personnel policies and procedures); Emle Indus., Inc. v. Patentex, Inc,, 478 F.2d 562, 571-75 (2d Cir. 1973) (facts lawyer learned about former client’s corporate relationship with subsidiary requires that lawyer be barred from further participation as attorney for plaintiff in proceeding against former client involving substantially related claim); Motor Mart, Inc. v. Saab Motors, Inc., 359 F. Supp. 156, 157-58 (S.D.N.Y. 1973) (lawyer who was exposed to client’s policies, trade practices and business procedures could not sue former client in essentially the same type of action, despite lapse of twelve years since prior representation); Reardon v. Marlayne, 83 N.J. 460, 416 A.2d 852 (1980) (affirming disqualification because former lawyer of automobile manufacturer acquired knowledge of defendant’s general tactical thinking and defense strategy). See generally 51 Laws. Man. Prof. Conduct (ABA/BNA), at 215-18 (discussing the kinds of information that are held to be confidential).

Conflicts When Working as a Sole Practitioner

If the facts and circumstances indicate that a lawyer/employee was acting as a lawyer, then the employee could thereafter handle cases adverse to the insurance company only if those matters were not the same or substantially related to cases on which the employee worked for the insurance company, or if the insurance company consented to the representation after full disclosure of the potential conflict.

In determining when a matter for a current client is “substantially related” to a matter handled for a former client, most courts examine whether the facts or subject matter of the former representation is similar to material factual matters in the latter representation. See Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 722 n.10 (7th Cir. 1982) (defining the “substantial relationship” test); Westinghouse Elec. Corp. v. Guild Oil Corp., 588 F.2d 221, 224-25 (7th Cir. 1978) (same). If so, the lawyer would be disqualified from undertaking the subsequent representation, DR 5-108(A). If the lawyer had worked on the same matter for the insurance company, he would clearly be disqualified. In our opinion, the mere fact that two matters involved the same type of insurance coverage would not, by itself, make the matters substantially related.

Conflicts When Working for Another Firm

If the lawyer/employee was acting as a lawyer for the insurance company, then the employee could thereafter be employed by a law firm to work on cases which are pending against the insurance company only if: (1) those matters were not the same or substantially related to cases on which the employee worked for the insurance company, or (2) the insurance company consents after full disclosure of the conflict. DR 5-108. If the employee was disqualified from such a representation, the law firm also would be disqualified from continued representation of its clients. DR 5-105(D). Some commentators have suggested that the Code should permit screening in cases where a lawyer who would be personally disqualified from a representation changes association, as long as the personally disqualified lawyer is screened from participation in the case. In New York, the Code authorizes such screening measures only in the case of a former government lawyer. See DR 9-101 (B) (1) (prohibiting representation of a private client in connection with a matter in which a lawyer participated as a public officer unless, among other things, disqualified lawyer is effectively screened). Although the insurance company could authorize screening as a condition of any consent to the continued involvement of the law firm, the firm could not avoid the conflict under the Code, or the need for client consent, by instituting screening of its own volition.

CONCLUSION:

Whether a corporate employee who happens to be a lawyer represents the corporation within the meaning of the Code depends on the facts and circumstances Involving the particular employment, including whether the lawyer was hired to provide legal services, whether the lawyer actually provides legal services, and whether the client relies on the lawyer for legal advice. If the facts and circumstances indicate that the lawyer/employee was acting as a lawyer, then what the lawyer learned about the company’s procedures would be protected from disclosure as a secret of the client if disclosure would be detrimental to the company, unless such information has become generally known. If the facts and circumstances indicate that a lawyer/employee was acting as a lawyer, then the employee could thereafter handle cases adverse to the insurance company, or be employed by a law firm handling such cases, only if those matters are not the same or substantially related to cases on which the employee worked for the insurance company, and if they do not require the use of the former client’s secrets.

July 9, 1996