United States: Ethical Issues In Employment Law

The topic of ethical issues in employment law practice divides into two subtopics:

1. What ethical rules govern lawyers in the practice of employment law?
2. Since most employment lawyers are also employers or employees, what ethical issues arise in lawyers’ handling of employment matters within the lawyers’ own offices?

Both areas of law are undergoing significant development in Pennsylvania and elsewhere.

II. ETHICAL ISSUES IN EMPLOYMENT PRACTICE

1. Ethical issues in employment practice divide into two subcategories:

1. Ethical issues that arise in a lawyer’s decision to undertake or continue a representation.
2. Ethical issues that arise during employment litigation.

2. The Pennsylvania Rules of Professional Conduct apply to practice within Pennsylvania courts and the federal courts in Pennsylvania (e.g., F.R.Civ.P. E.D. Pa. 83.6(IV)(B)).

3. A lawyer may not represent a client, and must withdraw from the representation of a client, if the representation will result in violation of the Rules of Professional Conduct or other law. Rule 1.16(a); Bayges v. Southeastern Pennsylvania Transportation Authority, 887 F. Supp. 108 (E.D. Pa. 1995).

In DeStefano v. Henry Michell Company, 2000 WL 433993 (E. D. Pa.), the Eastern District of Pennsylvania dismissed a complaint against a law firm for aiding and abetting discrimination on the basis of the law firm’s transmittal of a letter on behalf of the employer that terminated plaintiff’s employment. The Court held that (1) liability under 43 P.S. § 955(e) did not arise solely from the scope of a law firm’s agency relationship; (2) the law firm had not intended to aid the client’s discriminatory behavior; (3) the law firm had not shared a common purpose with the client to retaliate against the plaintiff.

1. Rule 1.7(a) – Direct conflict of interest

a. Rule 1.7(a) provides:

A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:

1. the lawyer reasonably believes that the representation will not adversely affect the relationship with the other client; and
2. each client consents after consultation.

b. Rule 1.7(a) articulates the general rule that loyalty to a client prohibits a lawyer from undertaking a representation directly adverse to that client without that client's consent. It should be self-evident that a lawyer may not represent two opposing parties in the same litigation. But Rule 1.7 also covers many less obvious conflicts. Thus, a lawyer ordinarily may not act as an advocate against an entity represented by the lawyer in another matter, even if the two matters are wholly unrelated. On the other hand, simultaneous representations in unrelated matters for clients whose interests are only generally adverse, such as competing economic enterprises, does not require consent of the respective clients. But see Maritrans GP Inc. v. Pepper, Hamilton & Scheetz, 529 Pa. 241, 602 A.2d 1277 (1992). See generally, Comment to Rule 1.7.

c. A client may consent to representation notwithstanding a conflict. However, under both Rule 1.7(a) and Rule 1.7(b), when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for the client’s agreement to the conflicting representation and cannot provide representation on the basis of the client's consent. (The lawyer considering the conflicting representation only has to analyze the conflict as would a disinterested lawyer; the lawyer need not seek an opinion from a disinterested lawyer.) When more than one client is involved, the lawyer has to resolve conflict issues as to each client. At times, it may be impossible to make the disclosure necessary to obtain consent. See Comment to Rule 1.7(a); in these circumstances, a lawyer must refuse the conflicting representation. As a practical matter, consents under Rule 1.7(a) are difficult to obtain.

d. Although Rule 1.7(a) does not require written consent, it is vitally important to document consent by obtaining the client’s consent in writing after the lawyer makes a full written disclosure of the adverse representation and the basis for the reasonable belief that the adverse representation will not affect the relationship with the other client.

a. Rule 1.7(b) provides:

A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

1. the lawyer reasonably believes that the representation will not be adversely affected; and
2. the client consents after full disclosure and consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

b. Rule 1.7(b) applies where a lawyer is constrained not to consider, recommend, or carry out an appropriate course of action because of the lawyer's other responsibilities or interests. As with Rule 1.7(a), the lawyer has to evaluate conflicting obligations from the viewpoint of a disinterested lawyer. See Comment, Rule 1.7 and the above discussion of Rule 1.7(a).

Rule 1.7’s prohibitions against present conflicts of interest are explicit; possibly because of the explicit nature, few reported employment law cases deal with these rules. Rule 1.7(a) applies when two clients of a lawyer are on opposite sides in the matter in which the attorney advised them. See, e.g., Ragan Henry Broadcast Group, Inc. v. Hughes, 1992 WL 151308 (E.D. Pa.). Rule 1.7(b) applies when one lawyer may represent multiple parties in a litigation (e.g., where an employment lawyer represents an employer and key employees who are sued in an employment claim). In this situation, the lawyer should explain the implications of the common representation, the advantages and the risks involved, and should obtain written consent from each client.

If a lawyer cannot predict the outcome of a common representation, the lawyer may recommend that each party aligned on the same side retain separate counsel. In this situation, a Joint Defense Agreement can allow the parties to share defense materials without waiving the privilege attaching to use and disclosure of these materials. A sample Joint Defense Agreement for non-compete litigation is attached as Appendix A. The parties never used this Joint Defense Agreement, since counsel for the corporate defendant agreed to take over the defense of all parties.

a. Where a lawyer represents an individual employee who is named in an employment claim, the lawyer should request indemnification from the corporate defendant. Pennsylvania corporate law generally provides for indemnification of employees named in lawsuits if allowed by the corporate by-laws, if an individual is sued by reason of the fact that the individual was a representative of the corporation. 15 Pa. C.S. § 1741. The indemnification covers both liabilities to opposing parties and legal fees. There is an absolute right to indemnity if the defense of the litigation is successful.

b. The rules governing indemnity are subject to a number of limitations, including the following:

1. To qualify for indemnity, the individual must have acted in good faith and in a manner that the individual reasonably believed to be in, or not opposed to, the best interests of the corporation;
2. Indemnity may not be provided if the individual has violated a law, committed a crime, or acted in a manner opposed to the best interests of the corporation;
3. The corporation may advance the defense expenses on receipt of an undertaking by the individual to repay the corporation if it is determined that the individual is not qualified to be indemnified.

c. It has been the author’s experience that corporate employers are not necessarily willing to commit to indemnify employees in either employment discrimination cases or in cases involving alleged taking of trade secrets or violation of restrictive covenants. An indemnification application places the lawyer representing an individual defendant in some difficulty, because the interests of the individual and corporate defendants become adverse, and the individual client may begin to rely on indemnification as a means of payment for the lawyer, when indemnification is by no means certain.

a. Rule 1.9(a) provides:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after a full disclosure of the circumstances and consultation.

1. An analysis of a potential violation of Rule 1.9(a) focuses on whether the prior and present matters are substantially related, whether the clients have materially adverse interests, and whether the clients consent after consultation. Henry v. Delaware River Joint Toll Bridge Commission, 2001 WL 1003224, *1 (E.D. Pa. 2001); James v. Teleflex, Inc., 1999 WL 98559, *3 (E.D. Pa. 1999). The critical test in reported cases is almost always whether the prior and present matters are "substantially related" – there would be little ground for dispute if the clients consented after consultation or the parties’ interests were not adverse.
2. In determining the presence of a "substantial relationship", a court will consider the following three factors: (1) the nature of the present lawsuit against the former client; (2) the nature and scope of the prior representation at issue; and (3) whether in the course of the prior representation, the client might have disclosed to the attorney confidences which could be relevant or possibly detrimental to the former client in the present action. See Henry v. Delaware River Joint Toll Bridge Commission, supra.

b. Cases: Former client and present client are adverse parties

1. Henry v. Delaware River Joint Toll Bridge Commission, 2001 WL 1003224 (E.D. Pa.) – Law firm was disqualified from representing plaintiff in civil rights litigation over cancellation of retiree health benefits, where the individual lawyer for the plaintiff had previously worked for a firm that was general labor counsel to the defendant. In this previous firm, the individual attorney had represented the agency in employment litigation, including litigation similar to the case before the court; drafting of a revised employee manual, including provisions that affected the result in this case; providing general employment law advice, including advice on civil rights issues; and participating in confidential meetings, which included employment and personnel matters. Further, since the litigation raised issues of political discrimination, the lawyer’s knowledge of the agency board members’ confidential views was relevant. Under all the circumstances, the prior and present representations were "substantially related." Henry v. Delaware River Joint Toll Bridge Commission, supra, at 5.
2. James v. Teleflex, Inc., 1999 WL 98559 (E.D. Pa.) – Law firm was disqualified from representing employee in litigation after law firm acquired another law firm whose clients included corporate defendant; the fact that the law firm terminated the attorney-client relationship with the corporate defendant was immaterial. The Court held that the firm had not properly screened the attorneys representing the different clients, under Rule 1.10(b).

Rule 1.10(b) provides that when a lawyer becomes associated with a firm, the firm may not knowingly represent a person in the same or substantially related manner in which that lawyer, or the lawyer’s previous firm, had represented a client whose interests were materially adverse to the person, and about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(b) unless (a) the disqualified lawyer is screened from any participation or fee, and (b) written notice is given to the client to enable the client to ascertain compliance.

3. Ragan Henry Broadcast Group, Inc. v. Hughes, 1992 WL 151308 (E.D. Pa.) – Where law firm had given advice to corporate CEO in business and personal decision-making, law firm could not represent corporation in litigation seeking declaratory judgment that termination was for cause.
4. Guzewicz v. Eberle, 953 F. Supp. 108 (E.D. Pa. 1997) – The Court refused to disqualify a former corporate counsel from representing dissident stockholders. The Court held that, in order to disqualify the stockholder’s attorney, the corporate defendant had to show that the attorney knew information that was (a) confidential; (b) substantial; (c) unavailable to the client; (d) usable by the client to the defendant’s disadvantage. The corporate defendant also had to show that the action was (a) substantially related to matters concerning the matters in which the former counsel represented the corporation; and (b) against or adverse to the corporate defendants. A derivative action is not technically adverse to corporate defendants. Compare Imbesi v. Imbesi, 2001 WL 1346316 (E.D. Pa.), in which the Court disqualified defense counsel in litigation over corporate wrongdoing because defense counsel had previously advised plaintiff family members; and Universal Athletic Sales Co. v. American Gym, Recreational & Athletic Equipment Corporation, Inc., 357 F. Supp. 905 (W.D. Pa. 1973), in which the Court denied the discharged corporate president’s motion to disqualify the corporation’s defense counsel, although ex-president and corporation were at odds; there was no apparent breach of confidence or trust, and no crossclaims existed between corporation and ex-president.
5. Wilson v. Civitell, 1996 WL 479663 (E.D. Pa.) – Solo practitioner who served as counsel for the plaintiff in divorce proceeding ending in 1992 could not defend against employment action brought by the individual in 1995; divorce proceeding dealt with support, visitation, custody and other issues; and the plaintiff claimed that some confidential information had been disclosed.
6. Willig, Williams & Davidson v. Walters, 1993 WL 224723 (E.D. Pa.) – Law firm would not be disqualified from representing another law firm as plaintiff in an action against an ex-partner for interference with contractual relations and breach of contract, involving ex-partner’s solicitation of firm clients for a new practice. The ex-partner claimed that the litigation was "substantially related" to earlier litigation against a departing partner, which involved valuation of the departing partner’s interest in the firm and in referral fees from asbestos cases. In refusing to disqualify counsel, the Court held that the two matters were not substantially related, even though both matters dealt with valuation issues; that the earlier representation had been of the law firm, not the individual lawyer; and that the parties understood that no communications to the lawyer from individual partners could be deemed confidential. The ex-partner also claimed that a conflict arose because of the lawyer’s review of the firm’s partnership agreement for the partners jointly. The Court held that this prior representation was limited to questions of legal form, and had no relationship to the present dispute.
7. Unisys Corporation v. Amperif Corporation, 1992 WL 210243 (E.D. Pa.) – Law firm would not be disqualified from pursuing patent infringement action against former client, when there was no similarity between the patent infringement and the law firm’s former representation of the client on labor law matters; the attorney responsible for the former client had left the law firm.
8. Alexander v. City of Philadelphia, 1990 WL 35681 (E.D. Pa.) – Court refused to disqualify an attorney from representing two plaintiffs who challenged psychiatric examinations for police candidates on constitutional grounds, two years after the attorney had represented the Philadelphia Personnel Department on several personnel matters. The District Court analyzed the nature of these matters and concluded that, although the earlier matters dealt with employment discrimination, the earlier matters did not deal with psychiatric examinations. The Court therefore concluded that the second action, although of a similar type, was not "substantially related" to the attorney’s prior representation of the Philadelphia Personnel Department. 1990 WL 35681,*3.

c. Cases: Former client and present client are competitors

1. In Maritrans GP Inc, v. Pepper, Hamilton & Scheetz, 529 Pa. 241, 602 A.2d 1277 (1992), the Pennsylvania Supreme Court established guidelines for legal representation of economic competitors:

"Whether a fiduciary can later represent competitors or whether a law firm can later represent competitors of its former client is a matter that must be decided from case to case and depends on a number of factors. One factor is the extent to which the fiduciary was involved in its former client's affairs. The greater the involvement, the greater the danger that confidences (where such exist) will be revealed." [1286]

2. In Maritrans, the Pennsylvania Supreme Court enjoined a law firm from representing a former client's competitors because of the law firm's extensive involvement in the former client's affairs as both labor and corporate counsel and the firm's extensive knowledge of sensitive client information. The Supreme Court analyzed the law firm's fiduciary duty to the client and held that a law firm's conduct could be actionable even without violating a Rule of Professional Conduct.

d. Confidential information

Rickards v. CertainTeed Corp., 1995 WL 120231 (E.D. Pa.) – Plaintiff’s attorney was not disqualified as a result of having deposed a former client (and current employee of defendant) on behalf of an ex-employee, although former client had communicated confidential information about substantially related matters to attorney in seeking advice from attorney. Attorney would be prohibited from cross-examining his former client at trial, however.

1. Rule 3.7

a. Rule 3.7 provides as follows:

b. Cases:

a. Rule 4.2 provides as follows:

b. Cases

An attorney’s obligation to preserve confidences allowed a state employee to avoid liability for disclosing certain confidential information to his attorney in Department of Military and Veteran Affairs v. Civil Service Commission (Korenyi-Both), 719 A.2d 1134 (Pa. Cmwlth. 1998).

1. Continuing to assert a time-barred Title VII claim warrants Rule 11 sanctions; where a monetary sanction and written reprimand would not be sufficient to deter similar misconduct, the court may refer the attorney to the Disciplinary Board of the Pennsylvania Supreme Court. Matthews v. Freedman, 128 FRD 194 (E. D. Pa. 1989), aff’d, 919 F.2d 135 (3d Cir. 1990).
2. Where an employee persists in litigating a claim that has no merit, the attorney’s obligation is to withdraw, rather than face Rule 11 sanctions. Bayges v. Southeastern Pennsylvania Transportation Authority, 887 F. Supp. 108 (E. D. Pa. 1995).

b. 28 U.S.C. § 1927

Disqualification and imposition of attorney’s fees and costs under § 1927 is reserved for behavior of an egregious nature stamped by faith, and is violative of recognized standards in the conduct of litigation. See Comuso v. National Railroad Passenger Corp., 2000 WL 502707 (E.D. Pa.), appeal dismissed, mandamus denied, 267 F.3d 331 (3d Cir. 2001). (Court has inherent power to sanction attorney who engaged in profane outbursts, verbal assaults and threats to kill opposing counsel. The Court also referred counsel’s conduct to the Disciplinary Board and awarded the fees for preparation of the motion for sanctions against plaintiff’s counsel (2000 WL 1793400)). See also, e.g., Loftus v. Southeastern Pennsylvania Transportation Authority, 8 F. Supp.2d 458 (E.D. Pa. 1998), aff’d, 187 F.3d 626 (3d Cir. 1999), cert. denied, 120 S. Ct. 581 (2000) (court may assess counsel fees against the attorney under 28 U.S.C. § 1927 for continuing to assert meritless claims).

III. ETHICAL ISSUES IN LAW FIRM EMPLOYMENT

Lawyers have an ethical responsibility to ensure that all lawyers in the firm conform to the Rules of Professional Conduct. Rule 5.1(a). Supervisory lawyers are responsible both for the conduct and work product of subordinate lawyers and non-lawyer assistants. (See Rule 5.1(b) and Rule 5.3). Lawyers also have specific responsibilities when moving from firm to firm; when discharging personnel; and when litigating their own separation. These course materials will strive to cover these issues, in a necessarily brief and summary fashion.

1. Rule 5.6 prohibits post-employment restrictions on a lawyer’s right to practice, except in the case of an agreement concerning benefits on the lawyer’s retirement. Among the divergent decisions on Rule 5.6 in recent years are the following:

2. Rule 1.9

In The Hyman Companies, Inc. v. Brozost, 964 F. Supp. 168 (E.D. Pa. 1997), the District Court enjoined a lawyer from using confidential information acquired while serving a former employer, in the absence of a restrictive covenant. The Court preliminarily enjoined the lawyer from handling any lease negotiations on which the lawyer worked for his previous employer; from handling any negotiation for any retail space that the past and present employers were competing for; and from disclosing any information regarding his former employer’s retail leases. 964 F. Supp. at 175. In granting a permanent injunction, the Court expanded the relief to prohibit the lawyer from handling lease negotiations for retail space within a mall or other area where the former employer occupied space and wanted to continue occupying the space. The Hyman Companies, Inc. v. Brozost, 119 F. Supp.2d 499 (E.D. Pa. 2000).

Rule 1.6 did not compel dismissal of civil rights action filed by former corporate counsel against corporate employer. Kachmar v. SunGuard Data Systems, Inc., 109 F.3d 173 (3d Cir. 1997).

In two cases, federal courts in Pennsylvania have held that a subordinate employee of a law firm has a right to assert a claim for wrongful discharge if the attorney/employer retaliates against the employee for raising ethical concerns, as follows:

1. Paralegal stated a claim for wrongful discharge in violation of public policy in action for discharge and retaliation for notifying her employer’s lawyer in attorney disciplinary matter that the employer had submitted a backdated letter. Paralegal v. Lawyer, 783 F. Supp. 230 (E.D. Pa. 1992).
2. Paralegal/secretary could state a claim for wrongful discharge for refusing to participate in fraudulent billing scheme; she could not state a claim for wrongful discharge for gratuitously revealing to clients and authorities that the attorney billed paralegal time as attorney time, without notice. Brown v. Hammond, 810 F. Supp. 644 (E.D. Pa. 1993).