Inside Lawyers: Friends or Gatekeepers?

Sung Hui Kim is Professor of Law and Faculty Director of the Program on In-House Counsel at the UCLA School of Law. This post is based on a recent article by Professor Kim.

What should the role of inside (in-house) lawyers be within the corporation? What, if any, obligations to the corporate entity should inside lawyers have to disrupt the material misconduct of their client representatives (to wit: senior managers, including the CEO)? Should inside lawyers conduct themselves as if they are “close friends” of senior managers or is there another, more appropriate model that would facilitate good corporate governance? To what extent should an inside lawyer think of herself as a “gatekeeper”—defined as a “private intermediary who can prevent harm to the securities markets by disrupting the misconduct of his/her client representatives? Would the imposition of some gatekeeping obligations ultimately backfire by foreclosing access to critical information about corporate misconduct? These controversial questions are, at least partially, addressed in my article, Inside Lawyers: Friends or Gatekeepers? 84 Fordham L. Rev. 1867 (2016), the fifth article of mine on the subject of gatekeeping.

Using the GM ignition switch scandal as my point of departure, I answer the most vocal criticisms of my work and address prior mischaracterizations. Although the focal point of the paper is the particular reform that I proposed back in 2005, the primary goal of this article is not so much to defend my proposal (indeed, I believe that I prepared an adequate defense in the 2005 paper) but (i) to discuss fundamental empirical disagreements between those who support affirmative legal/professional obligations on lawyers to stop material corporate misconduct and those who oppose them and (ii) to critique the common, if not prevailing, assumption that our legal system is best served if the corporate in-house lawyer conducts his/her relationships with senior corporate managers according to the “lawyer as friend” model.

With respect to fundamental empirical disagreements, it is my view that skeptics of legal-gatekeeping tend to focus myopically on a single—and narrow—category of information sources. Let me explain. Everyone can agree that what is relevant is a particular reform’s net impact—whether the desirable effects of a reform outweigh the potentially undesirable ones of decreased information. In other words, if we assume that the predicted costs (loss of some information containing the red flags of misconduct) will be incurred, would those costs likely offset all other benefits to be gained from my reform? To even begin to answer that question, it is necessary to situate those costs in the context of all other information sources. As I observed in Gatekeepers Inside Out, 21 Geo. J. Leg. Ethics 411 (2008), information can flow through both informal and formal communication channels. In addition, inside counsel can learn of information from the perpetrators themselves or from other sources, e.g., other inside lawyers, outside vendors, or other employees. By intersecting these insights, we see that critical information can be gained (1) directly from perpetrators through informal communications; (2) from nonperpetrators through informal communications; (3) directly from perpetrators through formal communications; and (4) from nonperpetrators through formal communications. The following two-by-two matrix classifies the relevant information categories according to the sources of information (perpetrator vs. nonperpetrator) and their relevant modes of transmission (informal vs. formal). These information categories are identified by their respective quadrants.

  Perpetrators* Nonperpetrators**
Informal Communications Quadrant I Quadrant II
Formal Communications Quadrant III Quadrant IV

* Perpetrators are those principally engaged in the wrongdoing. Hamermesh’s central prediction assumes the perpetrators are senior managers.

** Nonperpetrators include inside counsel, outside counsel, and other company employees who are not principally engaged in the wrongdoing.

In the paper, I discuss each of the quadrants of information sources and observe that those who oppose legal-gatekeeping are mainly concerned about one category of information sources, namely, informal communications between the perpetrators and in-house counsel (Quadrant I information). However, in order to assess a reform’s net impact, one must analyze the impact on all four quadrants. Indeed, Quadrant I is only one category of information sources and may not even be the primary source of critical information for the general counsel. In the paper, I provide a more thorough treatment of all four quadrants of information sources.

With respect to pleas that inside counsel should conduct themselves according to the “lawyer as friend” model, I argue that there are numerous problems with the model, not the least of which is the invariably (and perhaps intentionally) vague way in which the model is invoked. Those who invoke the “lawyer as friend” model repeatedly assert that the senior corporate manager needs to be able to repose “trust and confidence” in the in-house lawyer. Unfortunately, they never explain: trust and confidence in what? As a matter of professional responsibility and fiduciary obligation, the lawyer cannot reassure the manager that his communication will remain confidential or that the manager will be shielded from adverse consequences. If the corporate senior manager is engaged in material wrongdoing that may harm the corporate entity, that manager will usually not be entitled to those assurances. As William Simon has explained, the authority to invoke or waive the organization’s confidentiality rights usually belongs to the organizational agents different from those who made the confidential communications. Because the lawyer may be required to testify against the manager in a court of law, it would be entirely inappropriate for the lawyer to reassure her colleague of her continuing loyalty or confidentiality. The lawyer’s duty of confidentiality will not block disclosure within the organization, and it will not prevent the organization from divulging information outside of the corporation, no matter how harmful internal or external disclosure is to the manager. Indeed, the only thing that the lawyer can properly promise the manager is that she will listen carefully and not rush to judgment, which is the behavior that anyone would reasonably expect of a competent professional (irrespective of any preexisting friendship). In short, the “lawyer as friend” analogy should be abandoned.

To be sure, in the best possible world, the senior corporate manager backs down from his illicit plan. This good result may be reached through some form of moral dialogue that legal scholars are right to recommend. What many folks ignore, however, is the sobering reality that persuasion does not always work. Not all lawyers will be skillful in the art of moral suasion, and—frankly—most law schools do not train students in moral suasion. Also, sophisticated senior managers, who find themselves in desperate enough situations to be considering wrongdoing in the first place, may not be receptive to the lawyer’s attempts at moral suasion. This isn’t to say that lawyers shouldn’t try: they should attempt to engage in polite moral dialogue. But let’s not confuse “friend” with “friendliness.” And let’s not add a “lawyer as friend” gloss to the in-house role, a gloss that is both misleading and inappropriate and thus should be abandoned.

The full paper is available for download here.

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