Today, the House Financial Services Committee heard testimony regarding its draft legislation rejecting the SEC and CFTC’s proposals to bypass internal compliance and reporting systems when rewarding prospective whistleblowers. 

ACC filed a letter with the Committee, approving of the draft legislation (read the letter here).  In-house counsel who supervise internal compliance and reporting systems need whistleblower tips to make those systems work.  As we note in our letter, the SEC and CFTC deny such tips to internal systems, even when those systems are robust and effective.  The obvious result will be an overwhelmed enforcement staff at the agencies and underinformed compliance staff at the companies.  Not a good outcome for any stakeholder.

The wonderful Marcia Narine (formerly in charge of compliance issues at Ryder, but not testifying on its behalf) decried the lack of information that will be available to compliance officials, because whistleblowers will likely go directly to the SEC and CFTC with their useful tips.  Compliance officials, in charge of effective and robust compliance systems, won’t be able to address underlying misconduct while it festers.  As Marcia asked, “Is that in the best interest of the shareholder?  I’m not sure.” Marcia, we’re not either.

Marcia then distinguished between companies with functioning compliance systems, as envisioned by the Federal Sentencing Guidelines, and those with no compliance systems or otherwise completely infected with corruption from top to bottom.  The former situation should be encouraged, the latter punished harshly. Companies with good systems should be permitted to have a first crack at investigating the allegations.  Employees at companies with nonexistent systems should be free to go straight to the SEC.  However, both types of companies should not be treated the same.  Incredibly, the SEC and CFTC are proposing to do just that.  

We expect the SEC to finalize its whistleblower regulations by the end of the month.  If the SEC does not modify its proposed approach to internal compliance and reporting systems, Congress looks interested in corrective legislation.  Watch this space for further developments.

   
Prior Pennsylvania court decisions had suggested that only confidential communications from the client to the attorney were protected.  Therefore, an opposing litigant could discover an attorney’s legal advice delivered to the client, so long as no confidential information the client provided to the attorney was revealed.  This distinction, which offends common sense as well as the majority rule in the states that both types of communications should be safeguarded, is hard to apply in practice.  As our brief noted:

“The [lower court's] constricted view of the attorney-client privilege requires lawyers, clients, and courts to make surgical separations of communications based on client confidences from communications based on other sources. In practice, drawing such distinctions would be imprecise at best. Determining what documents are privileged will have the practical effect of unnecessarily complicating the court’s in camera review of claimed privilege documents and result in affidavits and depositions of attorneys to determine where they obtained the information used as a basis for their legal advice.”

Gillard v. AIG Insurance Co., et al, No. J-58-2010, slip op. at 11 (Pa. S.Ct. Feb. 23, 2011) (citations and internal quotation marks omitted).   And, as our brief in Nationwide Insurance Co. v. Fleming, which was the last time the Court addressed this issue, made clear:

“The [lower court's] holding reduce[s] Pennsylvania’s attorneys to guessing when their own legal advice may be privileged, leaves clients uncertain as to when their lawyers’ communications are confidential, and, consequently, will significantly disrupt the free and candid exchange of information between attorneys and clients.”

Id. at 9 n.5.

Exactly.  The Court refused to introduce those complications to the discovery process and to the ordinary practice of law.  In-house counsel representing their clients in the Keystone State will now have a more certain privilege on which to rely when they provide candid legal advice. And, a more certain privilege will redound to the company’s benefit by facilitating more informed decision making by the non-lawyers about the constraints and opportunities imposed by legal rules and regulations.  For that, the in-house bar and the client companies those lawyers represent, are quite grateful.

On April 29, Advocate General Juliane Kokott of the Court of Justice of the European Union issued her opinion in the case of Akzo Nobel Chemicals Ltd v. EU (Case-550/07) suggesting that legal professional privilege does not apply to communications with in-house lawyers.  [The AG’s opinion proposes that the Court should dismiss the appeal, but is not binding on the Court of Justice. It is the role of the Advocates General to propose to the Court, in complete independence, a legal solution to the cases for which they are responsible; most commentators agree that the Court relies heavily on the AG’s opinions and directions, but the Court will now begin their own deliberations on the matter and deliver their decision at a later date.] 

The AG’s opinion is based on her belief that internal communications with in-house lawyers, even if they are enrolled as members of a Bar or Law Society, do not enjoy the fundamental protection afforded in the EU to communications between an independent lawyer and his client.  The opinion thus holds that in-house lawyers are not capable of independent judgment under EU professional standards.

According to the AG’s opinion, “A salaried in-house lawyer, notwithstanding any membership of a Bar of Law Society, does not enjoy the same degree of independence from his employer as a lawyer working in an external law firm does in relation to his client. Consequently, equal treatment of both professional groups in regard to legal professional privilege is not required as a matter of law. There is a structural risk that an enrolled in-house lawyer will encounter a conflict of interests between his professional obligations and the aims and wishes of his company, on which he is more economically dependent and with which, as a rule, he identifies more strongly than an external lawyer.”  (See the AG’s press release No 40/10.)

ACC and its European chapter, as intervenors in the Akzo case over the long life of this matter and debate, find this holding to be extremely disappointing, reflecting a fundamental misunderstanding of both the role and responsibilities of in-house counsel, and the impact of financial remuneration on any lawyer retained by a client to represent the client’s legal interests.

Indeed, most in-house lawyers in Europe were fully recognized/respected practitioners in outside practice before beginning their in-house careers: the AG’s ruling infers that on the day that an experienced and ethical lawyer enters a corporate headquarters to work on-premise, they somehow check their credentials and honor at the front door – and that outside counsel, whose livelihoods also hinges on client retention and remuneration, are somehow immune from the professional independence and ethical concerns that dominate the AG’s view of in-house lawyers, simply because outside counsel receives their share of client monies in the form of a retention check, rather than a paycheck. 

ACC holds that lawyers are not ethical or unethical because of their employment setting; that is a matter of their personal integrity – the idea that in-house layers are not capable of such integrity is not only misguided, but insulting.

The decision may have been expected by many, but still creates outrage at the in-house bar.  The AG’s recommendation puts the EU in the backward position of discouraging, rather than encouraging, the crucial provision of preventive legal services to the client by those lawyers best placed and suited to prevent failures from happening:  and all at a time when the society, in the EU and around the world, is more concerned than ever about assuring top-notch corporate compliance and an ethical culture.

For those not familiar with the issues of professional status of in-house counsel in EU jurisdictions, the 27 member states of the EU are split as to whether to accord legal professional privilege in-house counsel.  In the Akzo case, an in-house lawyer admitted in an EU member state that does recognize LPP for in-house communications wished to assert his client’s privilege rights in a matter involving EU law in an EU court – lawyer-client communications in that case were seized in a dawn raid by the EU’s Competition Law Commission; the court denied application of the privilege under the doctrines originally established on these issues in the AM&S decisions in the 1980s (Case 155/79 AM & S v Commission [1982] ECR 1575); the Akzo case and its ramifications on cross-border practice and the roles and responsibilities of in-house lawyers has generated international debate on this question ever since.

ACC’s “takeaways” on the case for lawyers engaged in corporate representation in the EU are as follows:

• In-house counsel provides independent legal advice to their clients, just like outside counsel. In fact, in-house lawyers, protected by employment laws and bound by ethical rules, are often more independent than outside counsel.

• The failure to recognize LPP for in-house lawyers limits their ability to advise their clients on the proper application of the EU competition rules and jeopardizes compliance with those rules. With the ever-increasing fines imposed on companies for competition law violations, it is critical that in-house lawyers are in a position to play a leading role in handling compliance issues, which is more difficult to do if they do not benefit from LPP.

• LPP is part of a company’s fundamental right to consult freely with an attorney of its choosing and not a limitation of the Commission’s investigatory powers. AG’s opinion suggests that LPP does not apply to client communications with any lawyer who is not recognized by the EU, thus excluding outside counsel and in-house counsel licensed outside of the EU – something that not many lawyers working in multinational practices have noted.

For more, see ACC resources on Akzo at: www.acc.com/advocacy/professional-privilege-in-the-eu

Some points from our briefing of potential interest to the in-house legal community:

1. Our best foreign policy tool is the example we set at home. For example, our civil rights initiatives and “capacity for self-correction” are powerful tools for foreign policy.
2. The Domestic Policy Counsel seeks to implement the President’s priorities.
3. Equal pay for women has become a priority civil rights issue because the pay gap for women in the US is much larger than other countries.
4. They are seeking to increase funding for civil rights agencies so they have necessary resources for enforcement and dialog.
5. Because of his background, issues involving law and justice are of particular importance to the President.
6. The White House is focusing on judicial nominations because one of the most important legacies for any President is the people he leaves on the bench.
7. The Administration wishes to restore the Department of Justice to its “traditional” role in anti-trust, environment, civil rights and white-collar crime enforcement. The Civil Rights Division “is back in business” but they noted that the role of enforcement has changed and they will address voting rights, census and LGBT issues.
8. DOJ seeks to remove politics from hiring.
9. First Lady Michelle Obama also has great interest in these issues because of her background as a lawyer.
10. The Administration considers diversity to be especially important in judicial nominations. It also views diversity in a wider and deeper context than previous Administrations with both demographic and experiential diversity being important. The Administration seeks nominees with real world experience beyond government and academia, including specific references to in-house practice.

The briefing was an excellent opportunity for ACC and the other associations to hear from the administration. The officials indicated a strong desire to reach out to and receive feedback from the association legal community.

The brief was reviewed by others when being put into its final form, a necessity for these blogs which does not always occur; nonetheless, it had a few misspellings and if red or green does not show-up we are gradually being programmed to accept that there are no errors. In fact, those red and green lines are becoming much better in what they do.

When I sent copies of the briefs out, most responses commented on the substance. One, however, was rather amazing since it made no comment on the ideas expressed, but proceeded to critique the brief on grammar and spelling, and concluded by saying that the response was a reaction to this person’s service as a law clerk.

It reminded me of an experience in college. When I began my college career, I was very ill-equipped to compete with my classmates, many from private schools and very well respected public schools in large metropolitan areas. The consequence was that when we got into discussions and I appeared to be gaining the edge, they would use words I did not understand and concepts that I had never heard before. Intimidated, I would concede positions rather than admit that I did not understand what they had said. One day that was occurring in a debate, and to my surprise I blurted out: “I do not understand what you are saying can you please explain it to me simply.” My debate opponent turned bright red and walked out. He had been caught. He could not explain.

So I file a brief and  some people are not appalled at the concept that courts properly spell the requirement that I prove my waste is “environmentally benign”, a concept that has no scientific reality and can never be proved, but point out that somewhere in the brief  “that” was misspelled as “than”.

Why distract oneself from a clear idea and engage in a form of academic elitism? It is a defense mechanism whose foundation is intimation. If someone confronts you with a position that is clear, powerful, and painful, respond by criticizing their grammar. It makes you feel superior; you do not have to respond or acknowledge a position that makes you feel uncomfortable—and if you are really lucky you can intimidate its author and make it go way. Perhaps, needless to say at this point the brief was not a flattering critique of the courts—and if you had held your tenure as a law clerk in high esteem, it would not have been a pleasant read.