Concept
Responding to Wrongdoing
Lawyer representing an entity or other organization
Responding to Wrongdoing
A lawyer for an organization represents the organization itself, acting through its duly authorized constituents.1 That allocation creates a hard case. When an officer, employee, or other associated person acts against the organization, the injury lands on the lawyer's client, yet the people who ordinarily direct the lawyer may include the wrongdoer. A lawyer who takes instructions from the wrongdoer ends up serving the wrongdoer. A lawyer who goes straight to outsiders bypasses the client's own means of correcting the problem.
Rule 1.13(b) resolves the dilemma by turning ordinary diligence into a process: the lawyer carries the matter to someone inside the organization with power to correct it.2 Most of the directives in Rule 1.13(b) through (e) tell the lawyer to do what a lawyer for an organization ought to do anyway, because the lawyer is responsible to the organization as the actual client. Even in the substantial minority of states that have not adopted every provision of Rule 1.13, the lawyer's responsibilities in most respects may not differ materially.3
Three questions follow, in order. When does the duty arise? What must the lawyer do once it has? And how do the federal rules for lawyers who practice before the Securities and Exchange Commission change the answer?
Triggers for Action
Rule 1.13(b) imposes its duty only when a defined set of facts exists. The lawyer must know 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. The conduct must violate a legal obligation to the organization, or violate law in a way that reasonably might be imputed to the organization, and it must be likely to result in substantial injury to the organization. When every condition is met, the lawyer shall proceed as is reasonably necessary in the best interest of the organization.4 The conditions are cumulative, so the failure of any one means that paragraph (b) imposes no duty.
Knowledge comes first, and the Model Rules treat it as a defined term meaning actual knowledge.5 Documents, admissions, or direct observation that leave no real doubt satisfy it. A rumor, an odd-looking figure, or an uneasy feeling does not. Paragraph (b) speaks of a lawyer who knows, so it does not reach a lawyer who merely should have known.6 A fact pattern that says the lawyer suspects, has heard talk, or has noticed unusual figures describes a lawyer who does not yet know, and the duty has not arisen. One in which the company's records and the employee's admission leave nothing to doubt describes knowledge.
The second element identifies who may be the wrongdoer and when the wrong occurs. The rule reaches an officer, employee, or other person associated with the organization, so the wrongdoer's title does not matter. Conduct under way qualifies, conduct the person intends qualifies, and so does a refusal to act. An executive who refuses to file a legally required report falls within the rule as surely as one who falsifies it, and a lawyer who learns of the intention need not wait for the loss.
The third element ties the duty to the lawyer's own engagement. The conduct must arise in a matter related to the representation, so the duty follows the lawyer's work and not everything the lawyer happens to learn about the client.
The test looks to the relationship between the conduct and the engagement. The identical falsification would meet this element if the lawyer's assignment were to review that division's export compliance.
The fourth element asks what kind of wrong the conduct is, and the rule offers two alternatives. The first is a violation of a legal obligation to the organization, as when an officer engages in self-dealing.7 Here the organization is the victim, betrayed by its own agent. The second is a violation of law that reasonably might be imputed to the organization, meaning that the agent's act will produce legal liability the organization must answer for.8 Here the organization is the likely defendant, and the wrongdoer may even have meant to help it.
The two alternatives cover the two ways an agent can harm the entity, by taking from it and by exposing it to liability. The imputation wording asks only that attribution to the organization reasonably might occur, so the lawyer need not be certain that a court would hold the entity liable.
The fifth element requires that the conduct be likely to result in substantial injury to the organization, and both qualifiers carry weight. Likely excludes harm that is merely conceivable, and substantial excludes lapses too small to matter to the entity as a whole. The injury must also fall on the organization, since the organization is the client.9 A wrong that injures only outsiders and carries no realistic prospect of harm to the entity falls outside this trigger, however troubling the lawyer finds it.
When the elements are met, the duty is mandatory, because the rule says the lawyer shall proceed as is reasonably necessary in the organization's best interest. The words reasonably necessary leave the lawyer judgment over the means, so the response can match the seriousness of the threat and the prospects of correction. Nothing in the trigger permits disclosure outside the organization, a step the chapter treats later. A lawyer who ignores a known threat of this kind also risks discipline and civil liability, because the professional duty to protect the entity against its constituents' wrongful acts exists even apart from Rule 1.13.10
Reporting Up the Ladder
Once the trigger is met, the second sentence of Rule 1.13(b) tells the lawyer what to do. Unless the lawyer reasonably believes that referral is not necessary in the best interest of the organization, the lawyer shall refer the matter to higher authority in the organization, including, if warranted by the circumstances, the highest authority that can act on behalf of the organization as determined by applicable law.12 Lawyers call this course of action up-the-ladder reporting.13 Referral is the default, and skipping it requires a reasonable belief that it is unnecessary.
The report exists to give someone in charge the opportunity to take corrective action.14 That purpose explains why the lawyer reports inward. The organization is the client, and its own governing structure is the part able to protect it. A report that stops at the wrongdoer gives no one in charge that opportunity, so the lawyer has not complied. The same logic limits the remedy. The lawyer reserves extraordinary measures, such as disclosure of confidential information to outsiders, for the anomalous case in which the organization's governing body proves utterly inadequate to the task.15
How high the lawyer must climb depends on the circumstances. Higher authority may be the general counsel or the CEO, and if necessary the board of directors.16 If the circumstances warrant, the lawyer goes to the highest authority that can act for the organization, as applicable law determines, which for a corporation is the board.17 When the wrongdoer is a lower-level employee, a report to a supervising officer or the general counsel may put corrective power behind the matter. When senior officers are implicated, or a lower official does nothing after being told, the circumstances point to the board.
Bar examiners like to follow this scenario with a confidentiality question, and the instinct that any telling is a disclosure produces the wrong answer. A lawyer who reports evidence of wrongdoing to the board has not violated the duty of confidentiality under Rule 1.6. The duty is owed to the client, the client is the organization, and the board is the highest authority that can act for that client, so the lawyer has never disclosed information outside the organization.18 The CFO's objection fares no better, because the CFO is a constituent and not the client.
The duty to refer has one qualification: a lawyer who reasonably believes that referral is not necessary in the organization's best interest may skip it.19 Referral exists to put the matter before someone able to correct it, so a lawyer with reasonable grounds to think the right people already have it in hand adds nothing by repeating the step. The belief must be reasonable, not merely hopeful.
The same words would carry no weight if they came from the purchasing manager or from the supervisor who approved the contracts. An assurance from someone who benefits from the scheme or answers for it says nothing about whether anyone with authority and no stake is acting, so it cannot support a reasonable belief that referral is unnecessary.
Compliance with the Model Rules does not always settle a lawyer's position. In Crandon v. State, the court said that whether the plaintiff violated the Model Rules was not the determinative factor, and that a finding of no violation could be of no comfort to her.20 The court looked instead to the balancing test of Connick v. Myers and Pickering v. Board of Education, which weighs an employee's First Amendment rights against the State's interest as an employer in promoting the efficiency of the public services it performs through its employees.21 In that government-employment setting, the conduct rules were only part of the analysis, and the chapter returns to government clients below.
The Sarbanes-Oxley Overlay
Rule 1.13 is not the only up-the-ladder duty a securities lawyer carries. Section 307 of the Sarbanes-Oxley Act authorized the SEC to issue rules setting minimum standards of professional conduct for attorneys who appear and practice before the Commission in representing a securities issuer. It also required those rules to direct such attorneys to report evidence of a material violation of any federal or state law, or a breach of fiduciary duty, by the company or any agent up the ladder within the issuer.23 The federal rules sit on top of the state rules and do not replace them, so a securities lawyer must still know the rules of professional conduct of each jurisdiction where the lawyer is admitted.24
The two regimes differ most in their triggers. Rule 1.13(b) turns on actual knowledge.25 The SEC rules turn on evidence of a material violation, which they define as credible evidence from which a prudent and competent attorney could not reasonably avoid concluding that a material violation is reasonably likely to have occurred, to be ongoing, or to be about to occur.26 The double negative in that definition shows that a lawyer faces discipline under the rules only if the lawyer's assessment of the facts was unreasonable.27 The standard is objective and does not wait for certainty. A lawyer who holds credible documents but has not confirmed what they show may lack actual knowledge under paragraph (b) and still owe a duty under the SEC rules.
The lawyer's role decides which trigger governs, so the same doubtful facts can produce different duties.
Because Rule 1.13 is a model, the rule that binds a lawyer is the version the lawyer's own state adopted. A substantial minority of states have not adopted every provision, though a lawyer's responsibilities in most respects may not differ materially from those the Model Rule expresses.28 For a lawyer in securities practice the analysis therefore has two layers, the state rule and the SEC rules, and compliance with one does not excuse a failure under the other.
On an exam, the lawyer's practice decides which trigger applies. A fact pattern that places the lawyer before the SEC for a public company and describes credible but unconfirmed evidence of a material violation invites the federal standard and reporting up the ladder within the issuer. One that speaks only of the Model Rule, or of a client with no SEC dealings, calls for actual knowledge, and suspicion alone does not trigger the duty.