[Editor’s note: This post is part of our ongoing series from authors in the forthcoming edition of the Berkeley Business Law Journal.]
Although the U.S. Supreme Court as far back as the 1981 case of Wood v. Georgia[1] identified the inherent conflict of interest that exists when an employer controls its employee’s counsel, until now, no uniform solution has existed to protect the employee’s rights in these situations.
Currently, a single attorney, as in Wood, may often represent both the corporation[2] and the corporation’s employees. The employer can control the employee’s defense because agency law recognizes only that the interests of the principal—the employer—are at stake.[3] Under agency law, the employer controls the defense because it may ultimately be liable for payments to a third party on the employee’s behalf.[4]
But a corporation’s control over its employee’s defense creates conflict of interest problems for the attorney representing both entities. Under Rule 1.7 of the ABA’s Model Rules of Professional Conduct, “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.” [5] This Rule, however, is too often and too easily waived with a corporation and its employee in the perceived interest of economies of scale and ease of representation. And, until now, there has been no good test for exactly when the attorney’s conflict of interest between the corporation and the employee comes to a head.
Most importantly, in criminal cases, the traditional interpretation that the cause of action is solely the corporation’s intrudes onto Sixth Amendment protections for individual employee defendants. The Sixth Amendment to the U.S. Constitution provides that “[i]n all criminal prosecutions, the accused shall enjoy the right to. . . have the Assistance of Counsel for his defence.”[6] The U.S. Supreme Court has interpreted the Sixth Amendment to require effective assistance of counsel,[7] including the “correlative right to representation that is free from conflicts of interest”[8] for the defendant.
Very little academic debate has focused on these compounding problems: joint representation of a corporation and its individual employee is rife with conflicts of interest for the attorney and, most certainly in criminal cases, can threaten the employee defendant’s Sixth Amendment rights
Our forthcoming article in the Berkeley Business Law Journal, “Protecting Employee Rights and Prosecuting Corporate Crime: A Proposal for Criminal Cumis Counsel,”[9] addresses these conflict of interest problems. We propose a solution that was originally developed for civil insurance cases in California, but that has an even more powerful and appropriate application in the context of criminal employee defendants.
What the government, corporations, the bar, nor the academic community[10] have considered is adopting a new form of independent counsel in indemnification cases similar to a form first pioneered in civil suits in California. Cumis counsel, so named after the California Court of Appeal case in which the court ruled that such special counsel were necessary,[11] are paid for by insurance companies, but must represent the individual employee’s interest when the employee’s interest conflicts with the interest of the insurance company—or, in the case of a corporate business prosecution—with the interest of the potentially co-insured corporation that is the holder of the indemnification policy.
In the case of an employee criminal defendant, the problem is not who pays for the attorney’s services,[12] but whether the attorney’s actions will be controlled by the corporation or by the individual employee defendant whose Sixth Amendment rights are at stake. Under agency law, the employee is entitled to a paid legal defense. But, most importantly, under constitutional law, he or she is entitled to a legal defense that actually represents his or her interests.
Adopting criminal Cumis counsel would cure the Sixth Amendment violation of individual employee defendant’s rights. As the U.S. Supreme Court requires of remedies under the Sixth Amendment, the appointment of criminal Cumis counsel presents a nicely tailored solution to the defendant’s problem with his or her counsel’s conflicts of interest without infringing on the competing interests of other parties.[13] The corporation may still retain its own counsel, and it may coordinate with employee’s counsel when such coordination is in the employee’s best interest. Additionally, the employee retains what the courts have recognized as his or her “qualified Sixth Amendment right to use wholly legitimate funds to hire the attorney of his choice”[14] by redeeming the promise of funds made by his employer as part of the agent’s service to his principal.[15]
Instituting criminal Cumis counsel is a simple and comprehensive solution that establishes bright lines for remedying attorney conflicts of interest. It is a solution that empowers a defendant to select his or her own counsel before conflicts of interest cause damage to his or her cause by coming to an acute head. Moreover, as the California experience has shown after passage of the state’s Cumis statute, the Cumis counsel solution would largely keep resolution of these conflict-of-interest issues out of the overburdened public courts.
Furthermore, adopting criminal Cumis counsel would help deter and prosecute corporate crime. Corporate crime costs the United States a staggering $600 billion a year. [16] By contrast, the total cost of all non-corporate crime in 2001 from robbery, burglary, larceny-theft, and motor vehicle theft combined was $17.2 billion; [17] less than one-third of what fraudulent activities at the single company of Enron cost investors, pensioners, and employees in the same year. [18]
As illustrated by the debate surrounding the U.S. Department of Justice’s (DOJ) Holder Memorandum,[19] the appointment of criminal Cumis counsel would solve law enforcement’s three main concerns about how corporations use directors and officers (D&O) indemnification to hamper government prosecutions. First, the use of criminal Cumis counsel would prevent a corporation from stonewalling investigations. Second, criminal Cumis counsel would prevent a corporation from providing insincere offers of cooperation while simultaneously impeding investigations through its exercise of control over its employees and their counsel through joint defense agreements. Third, the use of criminal Cumis counsel would prevent a corporation from sacrificing its employee’s defense to curtail further government investigation and appropriate prosecution.
Finally, adopting criminal Cumis counsel is in the best interests of corporations, employees, and society.
For corporations, adopting criminal Cumis counsel unwinds the tangle of the corporation’s and its employees’ interests that impedes a corporation’s appearance of cooperation with the government, and that undermines the corporation’s satisfaction with required D&O indemnification. For a corporation, adopting criminal Cumis counsel means (1) easier perception of cooperation with government investigations; (2) easier attraction and retention of talented employees; (3) relief from political pressures during litigation; and (4) less reputational harm from the corporation’s compliance with legal standards. Moreover, the corporation benefits financially from the adoption of Cumis counsel in the form of lower D&O insurance fees.
For employees, adopting criminal Cumis counsel makes them more secure in their right as agents to indemnification. The Sixth Amendment arguments attach once the employee is subject to adversary judicial criminal proceedings.[20] Adopting criminal Cumis counsel offers the employee both enhanced conflict-free representation by counsel and greater protection of the individual employee’s interests against co-defendants within joint defense agreements.
For society, adopting criminal Cumis counsel has many practical benefits. Among these benefits are that Cumis counsel is already a well-tailored tool to protect all parties’ interests in the new environment of pervasive D&O insurance. U.S. corporations are not required to disclose the purchase of D&O insurance, but recent surveys report that as many as 99 percent of public companies carry D&O insurance.[21] In studies of Canadian firms for which data are available, the presence and support of D&O insurance makes employees more truthful, especially for those firms cross-listed in the United States.[22] It has long been established that the presence of D&O insurance contributes to the corporate bottom line when insurance companies have incentives to encourage better decision-making on the part of top corporate employees.[23]
Instituting criminal Cumis counsel would properly incentivize the D&O insurance companies insuring 99 percent of public corporations.[24] Insurance companies are already anticipating the wide-spread adoption of Cumis counsel. In response, insurance companies have started to change their D&O policies to produce economic efficiencies and to benefit employees. Results to date show that the provision of resources to employees to defend themselves from suit as litigation occurs results in less ultimate liability for insurance companies because of the higher quality of counsel available to the insured during the case.[25] Employees benefit in the form of better results from litigation through the availability of higher-quality counsel, as well as a greater likelihood of reimbursement under the insurance policy.
Ultimately, adopting criminal Cumis counsel is good public policy because these changes in insurance practices, and the reduction in litigation from training employees to avoid corporate crime, reduce long-term costs to everyone. The savings that insurance companies receive are passed on to corporations in the form of lower fees, to the government in the form of reduced need for prosecution, to employees in the form of more productive careers, and to society by decreasing the staggering costs of corporate crime.
Our article should spark wide-spread implementation of criminal Cumis counsel to solve the problems inherent in corporate control of employee’s counsel. We argue that strategic, forward-thinking corporations and defense counsel should move on their own to put criminal Cumis counsel in place for employee defendants of business prosecutions DOJ and other law-enforcement agencies should encourage and reward corporate adoption of criminal Cumis counsel. Legislatures should enact criminal Cumis counsel statutes to apply in D&O indemnification cases, and they should seize on criminal Cumis counsel as a way of better protecting employees’ rights as well as the interests of corporations, law-enforcement, and society as a whole.
[1]. Wood v. Georgia, 450 U.S. 261 (1981); see also id. at 269 n.15 (“It is inherently wrong to represent both the employer and the employee if the employee’s interest may, and the public interest will, be advanced by the employee’s disclosure of his employer’s criminal conduct. For the same reasons, it is also inherently wrong for an attorney who represents only the employee to accept a promise to pay from one whose criminal liability may turn on the employee’s testimony.”) (quoting In re Abrams, 266 A. 2d 275, 278 (N.J. 1970)).
[2] The Article refers to “corporations” because that is the standard term that has been used in the debate. See Memorandum from Paul J. McNulty, Deputy Att’y Gen., to Heads of Dep’t Components & U.S. Attorneys, on Principles of Federal Prosecution of Business Organizations (Dec. 12, 2006), available at http://www.justice.gov/dag/speeches/2006/mcnulty_memo.pdf (“While these guidelines refer to corporations, they apply to the consideration of the prosecution of all types of business organizations, including partnerships, sole proprietorships, government entities, and unincorporated associations.”).
[3].Restatement (Third) of Agency § 8.14 cmt. b (2006) (“Agent’s right to indemnification–in general. In general, a principal’s obligation to indemnify an agent arises when the agent makes a payment or incurs an expense or other loss while acting on behalf of the principal.”); id. (specifically including the costs of litigation in the agents’ right to indemnification).
[4].Id. at cmt. d (“Because the principal will be subject to liability for any payment due the third party, the principal has the primary interest in defending against the third party’s claim.”).
[5].Model Rules of Prof’l Conduct R. 1.7 (2010).
[6].U.S. Const. amend VI (original spelling in the U.S. Constitution).
[7].Strickland v. Washington, 466 U.S. 668, 686 (1984) (“Defendants… have the right to effective assistance of counsel.”); Yarborough v. Gentry, 540 U.S. 1, 5 (2003) (“The Sixth Amendment guarantees criminal defendants the effective assistance of counsel.”); accord Wheat v. United States, 486 U.S. 153, 159 (1988) (holding that, in considering attorney conflicts of interest, “the essential aim of the [Sixth] Amendment is to guarantee an effective advocate for each criminal defendant rather than to ensure that a defendant will inexorably be represented by the lawyer whom he prefers.”).
[8].Wood, 450 U.S. at 271; accord Wheat, 486 U.S. at 160 (“[A] court confronted with and alerted to possible conflicts of interest must take adequate steps to ascertain whether the conflicts warrant separate counsel.”).
[9]. J. Sandler Nelson, Protecting Employee Rights and Prosecuting Corporate Crime: A Proposal for Criminal Cumis Counsel, 10 Berk. Bus. L.J. 115 (2012).
10. There is a lively and important debate in the academic literature about how to keep the independence of counsel in important situations in which the advice and function of counsel may otherwise be compromised. This Article fits well into the academic debate because we rely on the excellent work on independent counsel that has been done before, but we specifically apply those concepts to the condition of individual employees entitled to indemnification. See generally Norman W. Spaulding, Independence and Experimentalism in the Department of Justice 63 Stan. L. Rev. 409, 415-19 (2011) (examining the independence of counsel inside the Department of Justice); Lawrence Lessig & Cass R. Sunstein, The President And The Administration, 94 Colum. L. Rev. 1, 14-22 (1994) (discussing the history and place of the Independent Counsel Act in the executive branch of government); Harvard Law Review, Developments In The Law–Corporations And Society, 117 Harv. L. Rev. 2181, 2183, 2192 n.59 (2004) (discussing corporate directors and noting their ability to hire independent counsel). In the corporate context, there has been some discussion of conflicts of interest for counsel divided between the corporation that hires counsel and the employee whom counsel has been hired to represent. Professor Karlan nicely distinguished “discrete” attorney-client relationships that courts have historically protected from newly emerging “relational” relationships that dominate corporate and criminal enterprise cases, and that should be subject to greater court review for ethics problems, particularly the work of attorneys in potentially advancing the goals of criminal enterprises. Professor Karlan, however, stopped short of proposing a specific test for when joint counsel between a corporation and its employees should be retained, and she warned of undue prosecutorial influence in removing defense counsel too easily. Pamela S. Karlan, Discrete and Relational Criminal Representation: The Changing Vision of the Right to Counsel, 105 Harv. L. Rev. 670, 720-23 (1992). Another recent law review article questioned whether ethics rules should prevent corporations from controlling employees’ counsel, but the article was framed as an examination of the no-contact rule preventing prosecutors from contacting employee defendants directly while employees are represented by corporate counsel, thereby muzzling the employees’ First Amendment right to speak, but not considering the impact of joint representation on the employees’ Sixth Amendment right to conflict-free counsel. Joan Colson, Rule of Ethics or Substantive Law: Who Controls An Individual’s Right to Choose a Lawyer in Today’s Corporate Environment, 38 J. Marshall L. Rev. 1265, 1275-81 (2005).
In the insurance context, there has been significant recognition that there is a conflict of interest for insurance attorneys in representing both the insurance company and the insured, but no discussion of how adopting criminal Cumis counsel could address the concerns underlying the DOJ’s initiative. See generally John C. Coffee, Jr., Litigation Reform Since The PSLRA: A Ten-Year Retrospective: Panel One: Private Securities Litigation Reform Act: Reforming The Securities Class Action: An Essay On Deterrence And Its Implementation, 106 Colum. L. Rev. 1534, 1546-47 (2006) (discussing misplaced incentives in payments from D&O insurance in derivative suits); Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 262-63 (1995) (noting that “[i]nsurance defense lawyers are integral parts of the engine that drives civil litigation, and the rules that govern their conduct are both extraordinarily vague and often wrong”); Douglas R. Richmond, Walking a Tightrope: The Tripartite Relationship Between Insurer, Insured, and Insurance Defense Counsel, 73 Neb. L. Rev. 265, 279-81 (1994) (discussing conflicts of interest for attorneys from the tripartite relationship among insurance counsel, the insurance company, and the insured, especially in joint representation); Chad G. Marzen, Can (and Should) an Insurance Defense Attorney Be Held Liable for Insurance Bad Faith?, 7 Va. L. & Bus. Rev. 97, 98-103 (2012) (surveying the insurance attorney’s conflicts of interest in representing both the insurance company and the insured, and suggesting that some attorneys’ actions may rise even to the level of bad faith in their representation of the insured).
The only article in the insurance area on conflicts of interest that touches squarely on criminal law issues focuses on so-called “house counsel,” attorneys such as Bruce Cutler, the Gambino family lawyer who famously helped multiple generations of that crime family to avoid legal punishment, and “captive” law firms in which the “key feature is almost total dependence on a limited number of clients.” See Aviva Abramovsky, The Enterprise Model of Managing Conflicts of Interest in the Tripartite Insurance Defense Relationship, 27 Cardozo L. Rev. 193, 193 (2005) (quoting John Gotti and Texas Supreme Court Justice Raul A. Gonzales); id. at 194-96 (elaborating on the concept of “house counsel”); id. at 219-23 (elaborating on the concept of “captive” law firms). The Authors completely agree with Professor Abramovsky’s observation that “house counsel” loyalty is “relational to fee payment,” and that the enterprise assumes that its “interests will be placed ahead of those of any given nominal defendant… [because] the lawyer’s pecuniary interest is to retain repeat business from the enterprise.” Id at 195. Professor Abramovsky’s proposed solution to counsel’s conflict of interest is case-by-case court intervention and a database of who pays insurance defense counsel’s fees to reveal evidence of financial bias based on their revenue histories. See also id. at 227-28, 231. This Article is a new contribution to the literature because Professor Abramovsky failed to import her solution into the D&O insurance context, or to recognize the significance of the corporation’s control of employees’ counsel as a threat to the employee defendants’ Sixth Amendment rights. In addition, her article failed to recognize the significance of the Cumis case’s solution for employees entitled to corporate indemnification or to the growth of D&O insurance coverage, which is dramatically changing the landscape of D&O indemnification. The adoption of criminal Cumis counsel would solve more of these problems in a more comprehensive manner.
[11].San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc., 162 Cal. App. 3d 358, 375 (1984).
[12].Public defenders, for example, are typically paid by the government, but they owe a duty of loyalty to their clients, not to the entity that issues their salaries.
[13]The U.S. Supreme Court has written that “[c]ases involving Sixth Amendment deprivations are subject to the general rule that remedies should be tailored to the injury suffered from the constitutional violation and should not unnecessarily infringe on competing interests.” United States v. Morrison, 449 U.S. 361, 364 (1981).
[14] United States v. Farmer, 274 F.3d 800, 804 (4th Cir. 2001).
[15] Accord U.S. v. Stein, 541 F.3d 130, 155 (2d Cir. 2008) (citing U.S. v. Farmer in the context of an employer’s advancement of fees to employees); see also id. at 156 (“In a nutshell, the Sixth Amendment protects against unjustified governmental interference with the right to defend oneself using whatever assets one has or might reasonably and lawfully obtain.”).
[16].Corporate Crime and Abuse: Tracking the Problem, Ctr. for Corp. Policy, http://www.corporatepolicy.org/issues/crimedata.htm (last visited June 15, 2012) (“The association’s estimate works out to 6 percent of employers’ revenue, or $4,500 per employee. [Note, however, that] [t]hese crimes are considered crimes against the corporation by employees, not corporate crimes against outside interests or employees.”) (internal parenthesis omitted). In a speech delivered in 2000, a senior DOJ official estimated that abuse and fraud in the healthcare industry alone accounted for the loss of $100 billion a year. James K. Robinson, Ass’t Att’y Gen., Crim. Div. of the U.S. Dep’t of Justice, Address to the Sponsoring Partner Forum Ethics Officer Association (Apr. 6, 2000), at www.justice.gov/criminal/fraud/pr/speech/2000/04-06-200-speechjkrobinson.pdf; see also Press Release, U.S. Dep’t of Justice, GlaxoSmithKline to Plead Guilty and Pay $3 Billion to Resolve Fraud Allegations and Failure to Report Safety Data: Largest Health Care Fraud Settlement in U.S. History (July 2, 2012), available at http://www.justice.gov/opa/pr/2012/July/ 12-civ-842.html (describing the single $3 billion settlement of a three-count criminal information and additional civil liabilities to the federal and state governments).
[17].Corporate Crime and Abuse, supra note 12.
[18].Id.
[19] Memorandum from Eric H. Holder, Deputy Att’y Gen., to Heads of Dep’t Components & U.S. Attorneys, on Bringing Criminal Charges Against Corporations (June 16, 1999), available at http://www.justice.gov/criminal/fraud/documents/reports/1999/charging-corps.PDF. See also subsequent documents: Memorandum from Larry D. Thompson, Deputy Att’y Gen., to Heads of Dep’t Components & U.S. Attorneys, on Principles of Federal Prosecution of Business Organizations (Jan. 20, 2003), available at http://www.justice.gov/dag/cftf/corporate_guidelines.htm; Memorandum from Robert D. McCallum, Jr., Acting Deputy Att’y Gen., to Heads of Dep’t Components & U.S. Attorneys, on Waiver of Corporate Attorney-Client and Work Product Production (Oct. 21, 2005), available at http://www.federalevidence.com/pdf/ Corp_Prosec/McCallum_Memo _10_21_05.pdf; Memorandum from Paul J. McNulty, Deputy Att’y Gen., to Heads of Dep’t Components & U.S. Attorneys, on Principles of Federal Prosecution of Business Organizations (Dec. 12, 2006), available at http://www.justice.gov/dag/speeches/2006/mcnulty_memo.pdf; Memorandum from Mark Filip, Deputy Att’y Gen., to Heads of Dep’t Components & U.S. Attorneys, on Principles of Federal Prosecution of Business Organizations (Aug. 28, 2008), available at http://www.justice.gov/dag/readingroom/dag-memo-08282008.pdf; U.S. Dep’t of Justice, U.S. Attorneys’ Manual, §§ 9-28.00, 9-28.740 (downloaded May 24, 2012), available at http://www.justice.gov/usao/eousa/foia_reading _room/usam/title9/28mcrm.htm.
[20] See Kirby v. Illinois, 406 U.S. 682, 689 (1972) (holding that the Sixth Amendment right to counsel attaches at “the initiation of adversary judicial criminal proceedings—whether by way of formal charge, preliminary hearings, indictment, information, or arraignment”).
[21] See Sean J. Griffith, Uncovering a Gatekeeper: Why the SEC Should Mandate Disclosure of Details Concerning Directors’ and Officers’ Liability Insurance Policies, 154 U. PA. L. REV. 1147, 1168 (2006) (reporting 2004 survey results that over ninety percent of public companies carry D&O insurance and citing Tillinghast, Towers Perrin, 2004 Directors and Officers Liability Survey, at 21 fig. 12, in which 99 percent of U.S. respondents reporting purchasing coverage in 2004); accord John A. Edie, Directors and Officers: Liability Insurance and Indemnification, COUNCIL ON FOUNDATIONS 17 (2007), available at www.cof.org/files/Documents/Legal/DandO.pdf (reporting that, in a 2001 survey of non-corporate foundations with over $10 million in assets, “86 percent of respondents now carry D&O insurance, a substantial increase from 62 percent in the 1990 survey”).
[22] See Jinyoung Park, The Effect of Directors’ and Officers’ Liability Insurance and Indemnification on Voluntary Disclosure: Evidence From Canadian Firms, U. Mich. – Flint Sch. of Mgmt. 2 (2005-06), available at http://som.umflint.edu/research/docs/20052006/200506_JP_I.pdf (discussing evidence regarding firms cross-listed in the United States); see also id. (providing “new empirical evidence that the timing decision to announce actual earnings is a function of legal liability coverage and the presence of voluntary disclosures in the form of management forecasts.”).
[23] See Sanjai Bhagat, James A. Brickley, & Jeffrey L. Coles, Managerial Indemnification and Liability Insurance: The Effect on Shareholder Wealth, 54 J. Risk Ins. 721, 733 (1987), available at http://www.jstor.org/stable/253119 (arguing that, because “D&O insurance may align the interests of managers and shareholder,” the ground-breaking report found that “the empirical evidence suggests that the effect of D&O insurance on shareholder wealth is positive”).
[24] See Griffith, supra n. 20 at 1168; Edie, supra n. 20 at 17.
[25] See Lindsay Fisher, D&O Insurance: The Tension Between Cooperating with the Insurance Company and Protecting Privileged Information from Third Party Plaintiffs, 32 Seattle Univ. L.R. 201, 209 (2008) (citing John F. Olson, et al., Director & Officer Liability: Indemnification And Insurance § 12:25).