Beware the Landmines: Ethical Considerations in Defending Employment Cases

WDC Journal Edition: Summer 2017
By: Aaron J. Graf and Jonathan E. Sacks, Mallery & Zimmerman, S.C.

I. Introduction
Counsel representing companies in defense of employment litigation claims can face unique challenges during the course of representation that require careful consideration to avoid running afoul of ethical obligations. These considerations include who exactly the client is, whom counsel takes direction from, what communications are privileged, what happens when multiple related defendants are sued, and various other related issues—all of which can act as landmines for the unwary. In addition, if defense is undertaken on behalf of an insurer and insured under an Employment Practices Liability Insurance (EPLI) policy, this can add another layer of complexity to these issues.

This Article will examine five of the more common ethical issues that arise in employment litigation defense contexts and provide useful guidance for counsel who find themselves facing such dilemmas. Keeping the below issues at the forefront of all decisions can help counsel prevent more problematic ethical issues from arising.

II. Determining Who Is the Client

A. The Employer Entity Is the Client.

While it may seem like a self-evident question, in representing an employer, an attorney must still ask the question: Who is the client? At all times, the corporate entity which has retained counsel to represent it is the sole client of defense counsel— not any individual and not any closely related entities. However, as a practical matter, the client consists of the representatives and employees of the company with whom the attorney will discuss the litigation on a daily basis. In fact, it is not uncommon for defense counsel to work with the same representative at a company over the course of many years and even develop a professional friendship with the individual. Nevertheless, the attorney must never lose sight of where his or her ethical duties lie.

Pursuant to the Wisconsin Rules of Professional Conduct for Attorneys, employment lawyers must remember that a lawyer “retained by an organization

represents the organization acting through its duly authorized constituents.”1 An organizational client is a legal entity, but it cannot act except through its officers, directors, employees, shareholders, and other managers of the entity. Therefore, while confidentiality and other aspects of a traditional attorney-client relationship may extend beyond the corporate entity itself, the attorney cannot lose sight of the fact that the entity itself is the client.2 This means that the lawyer must act in the best interests of the company, even if it is not in the best interests of the individual representatives involved in the litigation. Correspondingly, the duties of competence,3 diligence,4 communication,5 and the like are owed to the company itself.

Because the attorney is dealing with the company’s representatives regularly in the representation, counsel needs to be aware that in dealing with these individuals, he or she needs to explain that the organization is the client whenever it becomes apparent that the organization’s interests may become adverse to the representative with whom the lawyer is dealing.6 If this situation should arise, the lawyer should advise the representative to obtain his or her own legal counsel.7 “Care must be taken to assure that the individual understands that, when there is such adversity of interest, the lawyer for the organization cannot provide legal representation for that constituent individual, and that discussions between the lawyer for the organization and the individual may not be privileged.”8

The potential for this divergence of interests is more likely to arise in employment litigation than in some other contexts, because many times the cause of action asserted against the employer involves actions taken by the employer’s representatives, and can even lead to personal liability for a supervisor as well. For example, several employment laws, such as the Fair Labor Standards Act (FLSA) and the Family Medical Leave Act (FMLA), provide for the possibility of both employer and supervisor liability.9 During the course of litigation, it may become apparent that the supervisor may have acted in such a way that would exonerate the employer itself from liability, but at the expense of the supervisor’s own personal liability. This would absolutely necessitate advising the supervisor that they should retain their own counsel, since the employer-organization is the actual client.

It is also important to remember that, during the course of a lengthy, drawn-out employment case, the representatives with whom counsel interacts regularly may change, perhaps more than once. In addition, the representatives from whom counsel takes take day-to-day direction at the beginning of the case may not only change, but the representative could become openly hostile or an adverse witness if their own employment with the entity is terminated. Thus, keeping at the forefront of every decision that the entity is always the client will help counsel to avoid getting caught in ethical traps.

B. Both the EPLI Insurer and the Company Are Clients.

The presence of EPLI insurance adds an additional layer of complexity to the question of who is the client. The majority of states, including Wisconsin, follow the “two-client theory,” which means that both the insured and the insurer are equally clients of counsel.10 A duty of care is owed to both the insured and the insurer.11 Within this tripartite relationship, issues concerning control of the litigation, confidentiality of communications, and other issues can arise, all of which are discussed more fully below.

III. Litigation Control and Direction

A. The Decision-Maker at the Company

Entities come in all shapes and sizes—corporations, LLCs, partnerships, and sole proprietorships—and each has its own management structure. While it may be a simple task to coordinate with the members or partners of a small organization, with regards to large corporations, it may be impossible to run to the board of directors or a similar control group any time a decision needs to be made about litigation. Therefore, some form of delegation or agency is necessary for the company to make dayto- day decisions in the defense of a case. Generally speaking, the control group directs the corporation’s affairs and business path, while day-to-day operations are left to corporate officers such as the president, CEO, or COO. Thus, it is important for the attorney to obtain clarification from the client at the outset of representation as to who internally will make litigation decisions, both minor and major.

Normally, a designated corporate officer will have the authority to make decisions, but what should defense counsel do if that individual is unavailable and decisions in the litigation have to be made? While defense counsel must abide by the client’s decisions concerning the objectives of the representation, he or she “may take such action on behalf of the client as is impliedly authorized to carry out the representation.”12 This means that—with the exception of a major decision, such as whether to settle the case—the lawyer can make minor decisions about the litigation without having to consult with a representative of the client, so long as that decision does not contradict or undermine the overall objectives or direction of the client. It is likely ideal to have multiple contacts with the decision-making authority to avoid such a situation, but, in the end, the lawyer should be able to ethically rely on his or her knowledge of the client’s objectives and direction to make minor decisions, where necessary, without first consulting the client.

B. EPLI Control and Direction

Another important issue is who controls the defense: the EPLI insurer or the insured employer? Typically, in tripartite insurance relationships, “the insurer has a duty to retain and pay for an attorney to represent the policyholder/insured when the insured is sued by a third party. As such, the insurer maintains the right to control the defense, the settlement of a claim, and the payment of a claim within policy limits.”13 While the specific policy at issue may alter the general rule, typically the insurer retains the right to control the defense, and counsel should default to this position unless the policy provides otherwise.

One issue that can arise and create ethical concerns for counsel is the existence of litigation management guidelines. EPLI insurers’ retention agreements with counsel usually allow the insurer to control costs through the use of these guidelines, which are rules and procedures for defense counsel to follow in managing the litigation.14 The guidelines will usually cover a wide array of tasks that an attorney may perform in providing a defense.15 EPLI carriers also routinely use internal or external auditors to review legal bills to ensure compliance with the litigation management guidelines, and this oversight can affect the attorney’s judgment as to how the litigation should be conducted.16 This can potentially be problematic if an attorney is dissuaded from pursuing a particular course of action, even if it is in his or her client’s best interests, because he or she knows the insurer will not pay for it.17 This is especially true if many routine tasks require insurer pre-approval.18

In Wisconsin, litigation management guidelines can run afoul of ethical considerations. The Wisconsin Ethics Counsel has opined that, if litigation management guidelines restrict defense counsel’s budget in a way that is detrimental to the defense, then the attorney may be forced to withdraw from the representation.19 Wisconsin has specifically addressed this issue in Ethics Opinion E-99-1, which states that, while insurers may manage the defense of claims, not every limitation or restriction imposed by an insurer on the defense will be consistent with a lawyer’s duties under the Rules of Professional Conduct.20 Lawyers cannot accept restrictions or limitations on the defense of a claim that are so fundamentally or otherwise onerous that they would prevent lawyers from satisfying their ethical obligations21 to their clients or would interfere with their independent professional judgment on behalf of the insured client.22 A lawyer may not enter into or continue in a contract with the insurer that would be so restrictive.23 Each lawyer, however, must make an independent professional judgment about whether restrictions or limitations imposed by litigation management guidelines raise ethical concerns.24

Wisconsin’s position is consistent with ABA guidelines and the Restatement (Third) of the Law Governing Lawyers, and confirms the general consensus that a lawyer may abide by litigation management guidelines as long as those restrictions are reasonable and do not prevent the lawyer from providing competent and diligent representation to the insured.25 If the lawyer does not reasonably believe that he or she can competently represent the insured, the lawyer must inform the insured and insurer and seek to have the restrictions altered or removed, or otherwise withdraw.26

IV. Privileged Communications

A. Communications with Employees and Former Employees

Under Wisconsin law, a corporation, association, or other organization or entity that is rendered professional legal services by a lawyer is entitled to the protections of the attorney-client privilege.27 Wisconsin follows the “entity rule,” and accordingly, the attorney-client privilege belongs to the corporate entity.28 A corporate client, however, can only act through its officers, directors, employees, shareholders, and other constituents.29 Thus, confidential communications made by corporate employees for the purpose of facilitating the rendition of professional legal services to the corporation are privileged.30 In Upjohn v. United States, the United States Supreme Court specifically held that, when a corporation’s managers require its employees to give information to its attorneys in the course of providing legal advice, those communications are privileged.31 The court justified this protection on the grounds that lawyers need to be able to communicate freely with corporate employees in order to carry out the obligations of their representation.32 The privilege generally extends to any employee regardless of position as long as the communication is made to the attorney at the direction of corporate superiors, the information concerns matters within the scope of the employee’s corporate duties, and the employee is aware that the communication serves the purpose of enabling the attorney to provide the corporation with legal advice.33

Communications with former employees may also be protected, though only if the communications relate to the employee’s conduct and knowledge obtained during employment and are limited to facts of current litigation.34 At the same time, the consensus view is that the attorney-client privilege continues to protect privileged communications which occur during the period of employment even after the employment relationship ends.35

Defense counsel should also keep in mind the ethical rules governing opposing counsel’s contact with represented parties. Specifically, SCR 20:4.2 prohibits a lawyer representing a client adverse to the organization from contacting employees who direct, supervise, or regularly consult with the entity’s lawyer concerning the litigation, who have the authority to obligate the organization with respect the litigation, or whose act or omission in connection with the litigation may be imputed to the organization.36 However, all other employees (generally low level employees without any management role) can be contacted by opposing counsel without the consent of the organization or its attorney.37 More importantly, consent is not required for opposing counsel to contact former employees of the organization, regardless of their former position with the company.38

Finally, as a practical consideration, many companies incorrectly believe that labelling emails, letters, and other documents as “Attorney-Client Communication” or “Subject to Attorney Work Product” protects such documents from disclosure. Labels, however, have no legal meaning and documents must still satisfy all of the elements necessary to establish privilege.39 Likewise, simply copying an attorney on emails, letters, or other documents does not automatically make those communications privileged.40 Generally speaking, unless the attorney is either receiving information in order to provide legal advice or is actually providing legal advice, the communication may not be considered privileged. It is important for the attorney to remind those individuals directing the litigation about the scope and limits of the attorney-client privilege to avoid situations where individuals write things they would not otherwise write mistakenly believing that they are privileged communications.

B. Communications with the EPLI Insurer

Whether a tripartite communication is protected from disclosure to a third party generally turns on whether the insurer had the right and is exercising control over the defense of the underlying litigation.41 In Wisconsin, given the above-stated general rule that the insurer controls the litigation, the insurer and the insured are both considered clients of the lawyer, and tripartite communications are generally protected by the attorney-client privilege.42 Of course, just like in other circumstances, counsel must still be careful to ensure that such communications remain privileged and that neither client acts to waive such privilege. This can potentially be difficult in the employment context as it is not unusual for a corporate entity to want to share information internally amongst numerous individuals. Thus, for example, if the president of the company attends a meeting with the insurer and counsel, those communications are undoubtedly privileged. However, when the president discloses the content of that communication to the director of human resources, who then in turn discloses the communication to a third-party vendor who oversees the company’s payroll, there is a risk of losing the privilege attached to the communication. Accordingly, regular reminders to client contacts at both the insurer and the organization about privilege and its boundaries are important.

Additionally, issues can arise regarding the confidentiality of information exchanged between the insurer and the insured. In the tripartite relationship, communication between the attorney, the insured, and the insurer should generally be free flowing as counsel is obligated ethically, and likely contractually, to keep both clients informed as to all material developments.43 However, an attorney in this situation may face a dilemma if he or she learns information from either the insured or the insurer which may be of material benefit to the other.44 For example, if the attorney becomes aware through contacts with the organization that its employees engaged in intentional discrimination, an “intentional acts” exclusion under the EPLI policy could be implicated.45 In such a situation, the attorney may be limited, if not outright prevented, from revealing this confidential information to the insurer,46 even though the attorney also has an ethical obligation to keep the insurer reasonably informed47 about the status of the case.48 The ABA has warned attorneys facing this dilemma that they may be forced to withdraw from one or both of the representations.49

V. Multiple Defendants

Another issue that often rears its head in the employment context is that of multiple defendants. It is not uncommon for more than one entity or individual to be named as a defendant, either because of potential liability on the part of both the company and a supervisor or because of a parent-subsidiary relationship, a temporary employee-joint employer scenario, or the like. Such situations can cause additional ethical concerns for defense counsel.

As discussed above, several laws, including the FLSA and FMLA, provide for the potential of personal liability for a supervisor. In the event both the entity and an individual supervisor are sued, defense counsel should be careful to fully analyze the issues, consider the current and future potential for conflicts between the interests of the entity and the supervisor, determine whether the company must—or is willing to—indemnify the supervisor, and evaluate whether the attorney can ethically represent both in the litigation. The primary rule governing such a situation is SCR 20:1.7, which provides that a lawyer shall not represent a client if it would involve a concurrent conflict of interest such as being “directly adverse to another client,” or “there is a significant risk that the representation of one or more clients will be materially limited by” the representation of another client.

If necessary, separate counsel should be retained by the supervisor individually, even if the employer takes the laboring oar of the defense. Of course, if defense counsel cannot also represent the supervisor, problems can arise regarding privileged communications and the defense of the case. Defense counsel should always be mindful of the fact that the supervisor is a separate party to the litigation, is not the client, and any potential communications are likely not privileged. In the event of multiple defendant litigation, whether in the company-supervisor context or the parent-subsidiary context, counsel may wish to consider entering into a joint defense agreement with the other defendant. This can be useful in aiding the exchange of information without necessarily compromising privilege or running afoul of other ethical issues.

When there is a complex web of closely related defendants, it can sometimes be easy for counsel to become too comfortable and complacent and not carefully analyze which communications are privileged or who is, and who is not, the client. In these multiple defendant situations, it is more important than ever to constantly be thinking about who the client is, what types of communications are privileged, and other similar issues, in order to avoid the landmines inherent in such situations.

VI. Settlement Considerations

Employment claims are unique in that it seems there is a higher percentage of frivolous claims, as there is often little disincentive for employees to file administrative claims after termination to try and “make a quick buck.” In Wisconsin, at least presently, there are no cost-shifting provisions or other measures to act as disincentives to plaintiffs.50 Further complicating matters is that, once a questionable claim has been filed, it can often take dozens, if not hundreds, of hours for the employer and counsel to obtain dismissal of the claim through the dual state and federal administrative systems that have been set up. Thus, whether or when to settle can become an important consideration that also implicates various ethical issues.

Under counsel’s duty of communication and candor with the client—the corporate entity—it is important to lay out from the beginning of the case the potential course of the case, the likely time until a decision, the estimated defense costs, and the exposure and liability for the client if unsuccessful in the defense. Only after undertaking such a conversation and ensuring that the client is fully informed of the issues can the client, or its designee, make a reasoned, informed decision about what course of action is best for the company itself.

Counsel should be cognizant of the fact that sometimes the interests of the company representatives that they deal with regularly and the interests of the company itself do not align in this regard. For example, simply because the individual whom counsel regularly deals with wants to settle to get rid of the annoyance of the lawsuit does not mean the settlement best serves the company’s overall interests. Thus, while not necessarily mandated by the ethical rules, it is a best practice to ensure that any settlement offer received from the opposition ends up before the actual control group of the entity. Whether, when, and for how much to settle are issues that are simply too important in most cases to handle any other way. For obvious reasons, counsel never wants the control group to be finding out for the first time at the end of a case that cost $250,000 to defend and resulted in damages and attorneys’ fees of $750,000 that it could have been settled for $25,000 before litigation began. It is therefore best to keep the control group informed early and often regarding settlement developments in order to avoid any unpleasant surprises.

In addition, EPLI coverage can further complicate matters. Typically, an EPLI policy will provide that the insurer controls the decision as to whether and when to settle a claim. On occasion, however, the insured retains the right to essentially veto a settlement decision under a “consent to settle” provision. However, these types of provisions are the exception, not the norm. In any event, defense counsel may be caught in the middle of a tension-filled debate. Sometimes, the insured desires to settle quickly to avoid the annoyance of the litigation or embarrassing allegations, while the insurer desires to litigate the case because there are defenses available. On the other hand, sometimes the insurer desires to settle quickly and efficiently to avoid defense costs and exposure on a claim, while the insured desires to fight the claim to avoid setting a precedent for other employees, or because they are emotionally invested in the situation. It is not uncommon for one side or the other to try and recruit defense counsel to their side to try and convince all individuals involved that a particular course of action is the “right” one.

Given the tripartite relationship and the fact that both the insurer and the insured are the client, an irreconcilable conflict between the insurer and insured regarding settlement could force counsel to withdraw from representation. As a matter of practice, if counsel provides the insurer and insured with all of the information needed to fairly and accurately evaluate the case and the risks and benefits of settlement, almost always an agreement can be reached.

VII. Conclusion

Defense counsel in employment cases often face rather difficult ethical issues due to a variety of circumstances. Whether it is the complexity of the company counsel is defending, the competing interests of the company’s representatives and the company itself, or the existence of an EPLI carrier, it is important for counsel to constantly be critically analyzing the situation with the above considerations in mind in order to avoid the numerous landmines which might be encountered. Doing so will aid counsel in complying with ethical obligations and will stop counsel from triggering events which could lead to even more substantial ethical crises.


Aaron Graf is a litigator in the Milwaukee, Wisconsin office of Mallery & Zimmerman, S.C. He focuses his practice on labor and employment law and municipal law. He routinely defends employers and municipalities in litigation throughout Wisconsin and also proactively advises them on ways to avoid liability. Aaron was selected for inclusion as a Wisconsin Rising Star in 2014-2016 by Super Lawyers. He received his J.D. from Marquette University Law School in 2008 and his B.S. from Concordia University Wisconsin in 2004.

Jonathan Sacks is an attorney in the Milwaukee office of Mallery & Zimmerman, S.C., where he focuses his practice on civil litigation related to commercial disputes, municipal law, employment and labor matters, and school law issues. Jonathan helps advise his clients by drawing from his diverse experiences, including time practicing in the greater Philadelphia area and clerking for a civil trial judge in New Jersey. His current practice involves representing businesses, municipalities, and school districts in all litigation matters and counseling them on ways to avoid litigation. Jonathan received his J.D. from Rutgers School of Law-Camden in 2013 and his B.A. from Lawrence University in 2010.

References
1 SCR 20:1.13(a).
2 See American Bar Association, Model Rules of Prof’l Conduct, R. 1.13 cmt. [2] (“When one of the constituents of an organizational client communicates with the organization’s lawyer in that person’s organizational capacity, the communication is protected by Rule 1.6.”); Jesse by Reinecke v. Danforth, 169 Wis. 2d 229, 240, 485 N.W.2d 63 (1992) (holding that a lawyer does not automatically represent the constituents of the organization when he or she represents the corporate entity).
3 SCR 20:1.1.
4 SCR 20:1.3.
5 SCR 20:1.4.
6 See SCR 20:1.13(f).
7 Model Rules of Prof’l Conduct, R. 1.13 cmt. [10].
8 Id.; see also Model Rules of Prof’l Conduct, R. 1.13 cmt. [11] (“Whether such a warning should be given by the lawyer for the organization to any constituent individual may turn on the facts of each case.”).
9 See Riordan v. Kempers, 831 F.2d 690, 694 (7th Cir. 1987); 29 C.F.R. § 825.104(d).
10 See Amber Czarnecki, Ethical Considerations Within the Tripartite Relationship of Insurance Law—Who Is the Real Client?, 74 Def. Couns. J. 172, 174 (2007) (“The Two-Client Theory is currently the majority view of the tripartite relationship among American courts.”); Roeske v. Deifenbach, 67 Wis. 2d 313, 226 N.W.2d 666 (1975) (recognizing that the attorney represented both the insured and the insurer).
11 Czarnecki, Ethical Considerations, supra note 10, at 174.
12 SCR 20:1.2(a).
13 Bosco v. Labor & Indus. Review Comm’n, 2004 WI 77, ¶14 n.8, 272 Wis. 2d 586, 681 N.W.2d 157.
14 Kimberly W. Geisler and Josh S. Thompson, Employment Litigation in the Age of EPLI: The Defense Perspective (American Bar Association 2009), available at http://apps.americanbar.org/labor/errcomm/mw/Papers/2009/data/papers/017.pdf.
15 Czarnecki, Ethical Considerations, supra note 10, at 182.
16 Amy S. Moats, A Bermuda Triangle in the Tripartite Relationship: Ethical Dilemmas Raised by Insurers’ Billing and Litigation Management Guidelines, 105 W. Va. L. Rev. 525, 533 (2003).
17 Id.
18 See, e.g., Czarnecki, Ethical Considerations, supra note 10, at 182 (“Among those tasks requiring the insurer’s pre-approval are: (1) hiring an expert; (2) hiring an investigator; (3) taking depositions; (4) videotaping depositions; (5) filing motions; (6) undertaking discovery; (7) expenditures for travel; (8) computerized legal research; and (9) determining how many attorneys may attend depositions, hearings, and trials.”).
19 Timothy J. Peirce, Wisconsin Defense Counsel Seminar Outline, Some Questions About the Ethics of Insurance Defense in Wisconsin, available at http://wdc-online.org/application/files/5714/8... 1.pdf (last visited May 20, 2017).
20 Id. (citing Wisconsin Ethics Opinion E-99-1).
21 See SCR 20:1.1; SCR 20:1.3; SCR 20:1.4; SCR 20:1.7.
22 See SCR 20:2.1.
23 See SCR 20:1.8(f)(2); SCR 20:5.4; SCR 20:1.16(a)(1).
24 Pierce, Some Questions, supra note 19.
25 Id.
26 Id.
27 Wis. Stat. § 905.03(1)(a).
28 Lane v. Sharp Packaging Sys., Inc., 2002 WI 28, ¶ 33, 251 Wis. 2d 68, 640 N.W.2d 788.
29 Id.
30 See Herget v. Nw. Mut. Life Ins. Co., 169 Wis. 2d 466, 487 N.W.2d 660 (Ct. App. 1992); Upjohn Co. v. U.S., 449 U.S. 383, 394, 397 (1981).
31 Patrick J. Fiedler and Tyler K. Wilkinson, Protecting the Attorney-Client Privilege for Corporate Clients, Wis. Civil Trial J., Vol.11, No. 2, at 6 (Wisconsin Defense Counsel Summer 2013), available at http://www.wdconline.org/index.php/wdc-journal/wdc... (citing Upjohn Co., 449 U.S. at 396).
32 Id.
33 Jackie K. Unger, Maintaining the Privilege: A Refresher on Important Aspects of the Attorney-Client Privilege (American Bar Association 2013), available at http://www.americanbar.org/publications/blt/2013/10/01_unger.html.
34 Id.
35 Id.
36 Wisconsin Ethics Opinion E-07-01: Contact with Current and Former Constituents of a Represented Organization, available at http://www.wisbar.org/newspublications/wisconsinlawyer/pages/article.aspx?Volume=8-0&Issue=6&ArticleID=1238.
37 Id.
38 Id.
39 John T. Bergin and Kelley J. Halliburton, Demystifying the Attorney-Client Privilege (Law 360 March 23, 2016), available at https://www.law360.com/medicalmalpractice/articles/775320/demystifying-the-attorneyclient-privilege.
40 Id.
41 See Richard C. Giller, Confidentiality and Privilege in the Insurer-Policyholder-Defense Counsel Relationship (American Bar Association 2012), available at http://apps.americanbar.org/litigation/committees/insurance/art-icles/marapr2012-confidentiality-privilege.html.
42 Id.
43 Geisler & Thompson, Employment Litigation, supra note 14; SCR 20:1.4.
44 Id.
45 Id.
46 SCR 20:1.6.
47 SCR 20:1.4(a)(3).
48 Geisler & Thompson, Employment Litigation, supra note 14.
49 Id. (citing ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 08-450, at 5) (“In the event the lawyer is prohibited from revealing the information, and withholding the information from the other client would cause the lawyer to violate Rule 1.4(b), the lawyer must withdraw from representing the other client under Rule 1.16(a)(1).”).
50 However, in the 2017 proposed state budget, Governor Scott Walker has included legislation which would adopt some of the cost-shifting provisions applicable in state civil cases in the employment law context. It is unclear at this time whether such legislation will survive the budget process.