Corporate Counsel Wrongful Discharge Claims:

I teach an hour-long cle course on this issue on cleonline.com. This page reflects some of the case law and discussion from that seminar. There are some interesting splits that have developed in the courts, principally with Illinois on one side and every one else on the other!. In October 2001, the ABA issued an opinion about wrongful discharge, apparently concluding that the rules do not preclude a cause of action. As of now, however, I have not seen the opinion.

1. The Basic Ethical Duties of In-House Lawyers.

In-house counsel are given specific guidance in the Model Rules and most ethics rules as to how to react upon learning that a constituent of the entity has, or intends to, engage in misconduct that could harm the entity. Suppose, for example, that the lawyer learns that the board intends to market a dangerous toy to the public, one that violates specific federal safety statutes that the lawyer is required to certify have been complied with.

The disciplinary rules provide some general and no doubt familiar guidance. See, e.g., Model Rule. 1.13. In pertinent part, that rule provides:

(b) If a lawyer for an organization knows that an officer, employee or other person associated with the organization is engaged in action, intends to act or refuses to act in a matter related to the representation that is a violation of a legal obligation to the organization, or a violation of law which reasonably might be imputed to the organization, and is likely to result in substantial injury to the organization, the lawyer shall proceed as is reasonably necessary in the best interest of the organization. In determining how to proceed, the lawyer shall give due consideration to the seriousness of the violation and its consequences, the scope and nature of the lawyer's representation, the responsibility in the organization and the apparent motivation of the person involved, the policies of the organization concerning such matters and any other relevant considerations. Any measures taken shall be designed to minimize disruption of the organization and the risk of revealing information relating to the representation to persons outside the organization. Such measures may include among others:

Suppose house counsel faces a client who intends to do wrong – criminal conduct, even -- that threatens lives. The lawyer follows the steps detailed in Model Rule 1.13 to dissuade the client, but to no avail, and so finally withdraws. "Withdrawal" for in-house counsel, of course, means that he resign or refuse to do the act and so be terminated for the refusal. Can he sue for wrongful discharge or bring some other claim against his former employer, since the reason he quit was to avoid becoming party to a criminal act – one that would have cost lives?

The law on this point is developing. Some background on employment law is necessary.

In many jurisdictions, even at-will employees can bring wrongful discharge claims where they were terminated or constructively discharged for refusing to do an illegal act. The policies underlying this exception to the usual rule that an at-will employee can be fired for any reason are plain, and recognized among various jurisdictions. While the details vary, generally speaking an at-will employee who is fired for refusing to do an illegal act, or who is forced to quit in order to avoid doing so, has a cause of action for wrongful discharge.

The problem that in-house counsel have faced is that the disciplinary rules, such as Model Rule 1.13, typically provide that if the lawyer cannot dissuade the client from taking the illegal action, the lawyer's recourse is to withdraw from the representation. Once he has withdrawn, the client will likely fire him. As one judge put it: "When an attorney elects to withdraw and not to follow the client's wishes, he should not be surprised that his client no longer desires his services." Willy v. Coastal States Management Corp., 647 F. Supp. 116, 117 (S. D. Tex. 1986), rev'd on other grounds, 855 F.2d 1160 (5th Cir. 1990). Even though he has been fired, the lawyer must still treat the client's information as confidential, since termination of the attorney-client relationship does not constitute termination of the duty of confidentiality. Therein lies the rub: if the lawyer must keep the information confidential, then house counsel has no obvious cause of action, since in seeking to establish a claim against his former client/employer, the lawyer would obviously have to use and disclose client information.

Whether, and if so when, terminated in-house counsel should have a cause of action for wrongful discharge is an issue that has split the courts into at least three camps: (a) those which deny the lawyer a cause of action; (b) those which permit a claim, but only if confidentiality can be preserved; and (c) those which allow the cause of action without special restrictions. See Willy v. Coastal States Management Co., 939 S.W.2d 193, 198 (Tex. App. – Houston 1996), writ denied, 977 S.W.2d 566 (Tex. 1998). The following sections survey the case law, and suggest that the states which have denied the claims, or which have narrowly permitted them, may have misapprehended the nature of the claim and the obligations of house counsel.

3.The Perceived Tension.

The courts have based reluctance on recognizing wrongful discharge claims on behalf of employed counsel on two foundations: (1) the belief that allowing a cause of action for discharging a lawyer for failing to perform an illegal act would restrict the client's otherwise almost unfettered right to terminate the attorney-client relationship at any time; and (2) the belief that permitting such claims would allow attorneys to disclose client confidences to prove the claims, and that would necessarily make clients less likely to disclose facts to counsel in the first instance. See generally, Nordling v. Northern States Power Co., 478 N.W.2d 498, 502-03 (Minn. 1991).

The concerns of the courts over interfering with the right to terminate the attorney client relationship seem misplaced. Clients cannot hire lawyers to perform illegal acts, and so allowing a lawyer to sue when he has been fired for not doing so does not interfere with the client's choice of counsel. With respect to concern for confidentiality, the discussion below makes two broad points. First, many state ethics rules allow for disclosure of confidences in disputes between lawyer and clients, such as to collect a fee. It is difficult to make a principled distinction between an outside lawyer's adverse use of client confidences to collect a fee owed and a terminated in-house lawyer's use of the same information to obtain recompense for wrongful termination. At bottom, both are seeking money, and both are seeking to use information against a former client. Finally, in both instances, there are numerous mechanisms available to preserve privilege or reduce the scope of disclosure.

Illinois is the leading jurisdiction denying retaliatory discharge claims to in-house counsel. Balla v. Gambro, Inc.,584 N.E.2d 104, 108 (Ill.1991); Herbster v. North Am. Co.,501 N.E.2d 343, 348 (Ill.App.1986), cert. denied, 484 U.S. 850 (1987. The Illinois courts have reasoned that allowing in-house counsel to recover would have negative consequences for the attorney-client relationship, concluding that "the danger exists that if in-house counsel are granted a right to sue their employers in tort for retaliatory discharge, employers might further limit their communication with their in-house counsel." Balla, 584 N.E.2d at 109. Further, Illinois courts concluded that allowing a cause of action would interfere with the client's unfettered right to terminate counsel. See Herbster, 501 N.E.2d at 347.

Incidentally, in Jacobson v. Knepper & Moga, P.C., 706 N.E. 2d 491 (Ill. 1998), the court extended Balla to lawyers working in private practice.

In Wise v. Consolidated Edison Co. of New York,, N.Y.Sup. Ct. App. Div. 1st Dept. No. 3883 (Apr. 19, 2001) (reported at 17 ABA/BNA Lawyers' Manual On Professional Conduct Current Reports 310 (May 23, 2001)), the New York court held that house counsel could not bring a claim in light of counsel's obligations of confidentiality, and also ordered that the record be sealed.

3.Texas (Federal Court).

The Texas federal court in Willy v. Coastal States Management Corp., 647 F.Supp. 116, 118 (S.D.Tex.1986), rev'd on other grounds, 855 F.2d 1160 (5th Cir.1988). Because the Texas appellate court took a different view, Willy is probably no longer good law. Nonetheless, its simplistic approach mirrors that of the Illinois courts, since the Texas federal court reasoned that the duty of confidentiality precluded a cause of action.

The states that have permitted causes of action have, in my opinion, engaged in more substantive analysis than the Illinois decisions or the Texas federal court in Willy.

In General Dynamics, the court held that there was nothing inherent in the role of house counsel that demonstrated that allowing a wrongful discharge claim was bad policy. However, the court held that a claim could be brought only if the duty of confidentiality were maintained and no damage was done to "values" of the profession. 876 P.2d at 490.

In GTE Prods. Corp. v. Stewart, 653 N.E.2d 161 (Mass.1995), the court addressed the claim by in-house counsel that he had been terminated for insisting that his employer comply with federal hazardous waste disposal laws. The court permitted a cause of action, but seemed to place severe limits on it. The scope of the claim is circumscribed. GTE Prods., 653 N.E.2d at 166-67.

In Nordling v. Northern States Power Co., 478 N.W.2d 498 (Minn. 1991), the Minnesota Supreme Court reversed an appellate court's decision that had followed the Illinois lead and which had denied a wrongful discharge claim.

4. Montana.

The Montana Supreme Court in Burkhart v. Semitool, Inc., 2000 MT 201 (Mont. 2000), that the obligations of confidentiality owed by in-house counsel were not a bar to a retaliation claim in a thorough and highly informative opinion.

The Oregon Bar Association reasoned that wrongful discharge claims should be permitted in Oregon Ethics Opinion 1994-136, which is available by clicking here.

The Philadelphia Bar Association has published a thoughtful opinion and made it available on line. It is at: http://www.philadelphiabar.org/public/ethics/displayethics.asp?id=134418282000 or you should be able to just click here

The Texas appellate court deciding Mr. Willy's claim reasoned that Texas Rule 1.05(c)(5), which allows disclosure of client confidences "to the extent necessary to enforce a claim or establish a defense on behalf of the lawyer in a controversy between the lawyer and client," did not allow disclosure of confidences in a wrongful discharge case, since it concluded that that rule "applies in situations in which a lawyer is attempting to collect a fee." Willy, 939 S.W.2d at 200 n. 6. That conclusion is central to understanding why the court limited the cause of action to cases where the lawyer could prove the claim "without any violation of the attorney's obligation to respect client confidences and secrets." 939 S.W.2d at 200.

In the Texas Supreme Court, the employer "retreated from its position that Sabine Pilot should not apply to in-house counsel and instead contend[ed] that the court of appeals struck the appropriate balance. Willy, of course, contend[ed] that he is authorized under the circumstances of this case to reveal confidential or privileged information to the extent necessary to press his claim." The Texas Supreme Court did not hear the case.