Claims Risks

Over the past 12 months, in-house counsel have likely read about their contemporaries:

• Charged with obstructing justice by misleading government investigators in their probes of off-label uses for pharmaceuticals;
• Sentenced to federal prison for defrauding the Internal Revenue Service;
• Found liable for damages for the unauthorized disclosure of confidential information;
• Terminated from employment for the unauthorized practice of law;
• Attempting appeals for convictions involving conspiracy, fraud, and making false statements to the Securities and Exchange Commission (SEC);
• Accused of negligently supervising brokers who attempted stock market manipulation;
• Disciplined or sanctioned for spoliation of electronic evidence; and
• Found in violation of the Foreign Corrupt Practices Act (FCPA) by engaging in bribery.

There were other in-house counsel indicted on weapons charges, conspiracy and obstruction of justice; sentenced to prison for obstructing proceedings before the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC); used as scapegoats by senior executives; suspended from employment due to ethical violations; and disbarred and imprisoned for conspiracy and money laundering. Many in-house attorneys continued to endure the fallout from the financial crisis and stock option backdating cases.

As in-house counsel continue to juggle their roles between corporate gatekeepers and confidants, they face a host of emerging risks. The passage of new statutes, creation and rejuvenation of regulatory bodies, and the revitalization of existing laws all pose new potential liabilities around compliance and due diligence. Examples include:

• The Dodd-Frank Wall Street Reform and Consumer Protection Act and its '922 whistleblower bounty provision or '1502 requiring disclosure of the source of conflict minerals, the use of which companies are being asked to track. Examples of such minerals are tin, tantalum, gold and tungsten;
• The FTC's privacy protection framework and its Red Flags Rule;
• Mandates from the Patient Protection and Affordable Care Act;
• Amendments to the False Claims Act;
• Modifications to the U.S. Sentencing Guidelines clarifying standards for determining effective compliance programs;
• The multi-agency initiative to increase criminal prosecutions of individuals for violations of the food and drug laws;
• The FDIC's current agenda as to failed banks;
• The Environmental Protection Agency's crackdown on everything from greenhouse gas emissions to oil spills;
• The IRS' launch of 6,000 compensation probes;
• The application of Rule 34 of the Federal Rules of Civil Procedure as it relates to cloud computing and electronically stored information; and
• The application of the Sarbanes-Oxley Act's '1519 prohibiting the destruction or concealment of documents to influence a department or agency of the U.S.

The Old Story Revisited

Notwithstanding the onslaught of new laws and agendas, in-house attorneys continue to be haunted by the traditional ghosts leading to legal malpractice claims, including issuing formal and informal legal opinions, conflicts of interest, anti-trust, compliance, insider trading, confidentiality, attorney-client privilege, unauthorized practice of law, multijurisdictional practice, intellectual property, Web 2.0 (a/k/a social media), shareholder class actions, whistleblower and employment law, internal investigations, government probes, fraud, ' 307 of the Sarbanes-Oxley Act and international issues.

Although there were more newsworthy cases and investigations involving in-house counsel over the past year, many insurers reported that the volume of claims activity remained flat, while others advised an increase in claim activity for shareholder class actions, fraud, and insider trading. The majority of claims settled for $50,000 or less, yet a growing minority were resolved for more than $250,000.

Approximately 25% of all claims against in-house attorneys were related to securities laws; 20% were employment or whistleblower-related; 20% involved transactional work; 10% pertained to misrepresentation; 10% regarded intellectual property, social media, and privacy; and 15% were a combination of procedural issues and emerging exposures. The majority of claims were against in-house attorneys from publicly traded corporations and large non-profit organizations. Common allegations hailed from the traditional legal malpractice causes of action and included negligence, breach of fiduciary duty, misrepresentation, conflict of interest, failure to disclose, and related assertions.

The following are typical, real-life claims recently made against in-house attorneys.

Antitrust

An action was commenced against senior executives and the general counsel of an advertising conglomerate. The plaintiffs, a consulting firm and its principals, alleged that pursuant to an executed non-disclosure agreement between the parties, they shared confidential and proprietary information relative to an advertising campaign in anticipation of the defendants retaining their services. Subsequently, the defendants, purportedly in an effort to eliminate the plaintiffs as competition, utilized the proprietary information with no compensation to the plaintiffs.

The allegations included violations of the Sherman Antitrust Act, conspiracy, conversion, misappropriation of trade secrets, unfair competition, breach of fiduciary duty, and tortious interference with economic advantage. The plaintiffs specifically alleged legal malpractice and misrepresentation against the general counsel claiming that he misrepresented the intentions of his employer and refused to return the plaintiffs' confidential information.

Following the exchange of documentary discovery and settlement negotiations, this matter settled for $750,000 with contributions from the D&O insurer and the employed lawyers insurer.

Securities Class Action

The general counsel of a financial institution prepared and filed documents with the SEC regarding the financial condition of the company. She also issued a press release to shareholders and the investing public relative to the documents that were filed. Thereafter, it was learned that the information provided to the SEC and investors was false. A restatement of earnings was issued, and an addendum explaining litigation against the company was also distributed.

Shareholder plaintiffs commenced an action against the financial institution, its directors and officers, and the general counsel. The plaintiffs alleged breach of fiduciary duties, violations of Rule 10(b)(5) of the Securities Exchange Act of 1934, fraud, insider trading, misrepresentation, and negligence. The SEC commenced a separate action against the general counsel relative to the false filings and press release.

The securities class action was settled for $60 million. The general counsel resolved the matter with the SEC for a $250,000 fine and suspension from practice before the SEC for three years.

The D&O insurer paid its remaining limits of liability and the employed lawyers insurer tendered its policy limits of $10 million on behalf of the general counsel. Note that the majority of employed lawyers policies provide excess coverage to a D&O policy for claims against in-house attorneys alleging violations of the securities laws.

Whistleblower

An associate general counsel of a publicly traded technology company commenced an action, naming the chief legal officer, other senior officers, and board directors as defendants. The plaintiff alleged that he was terminated in retaliation for highlighting to the chief legal officer and senior management that potential FCPA violations were occurring in South America. The plaintiff claimed that this retaliatory termination was in violation of ' 806 of the Sarbanes-Oxley Act whistleblower protection.

The defendants counterclaimed alleging that the plaintiff breached confidentiality and attorney-client privilege by whistleblowing to external media sources. To avoid any further negative publicity, the company settled with the plaintiff for an undisclosed amount, but with contributions from an employment practices liability policy and an employed lawyers policy, which provided defense costs for the counterclaims against the in-house attorney.

Moonlighting

An in-house attorney who performed transactional work for a talent management agency was asked by a client for advice regarding a real estate matter for which the client was already represented by counsel. The in-house attorney provided advice that was later found to be erroneous. The client brought a lawsuit against the in-house attorney for legal malpractice. The matter settled quickly for $125,000 inclusive of defense costs. The employed lawyers policy paid the claim.

Failure to Disclose

An in-house attorney of a privately held company was delegated the task of securing a loan for his employer. Based upon documents submitted by the in-house attorney, including a legal opinion as to the financial status of the company, and conversations that he had with the commercial loan officer, the loan was approved. One week later, the company announced that it was closing its business.

The lender commenced an action against the defunct company and a separate action against the in-house attorney for failure to disclose, misrepresentation, negligence, breach of fiduciary duty, conflict of interest, and legal malpractice. The in-house attorney claimed that he provided the information given to him by management and the company accountants. The separate action against the in-house attorney was later dismissed. An employed lawyers policy paid $200,000 in defense costs on behalf of the in-house attorney.

Medicaid Fraud

A state Office of the Attorney General joined in a qui tam (“whistleblower”) lawsuit brought by two administrative assistants against a hospital network. The action, brought pursuant to the federal False Claims Act and whistleblower acts, named the entity and chief officers including an associate general counsel as defendants. It was alleged that the defendants knowingly presented fraudulent claims to the U.S. government in order to obtain reimbursement provided under Medicaid for services that were never performed.

The claims against the associate general counsel specified that he knowingly ratified the falsification of records and made misleading statements. An investigation revealed that the associate general counsel sent e-mails advising hospital personnel to “submit the billing as is.” The associate general counsel argued that he was doing what he was told, although he had suspicions of potential misconduct, which he reported to the chief legal officer.

Citing conflicts of interest, the hospital refused to indemnify and defend the in-house attorney. Prior to the completion of the legal action, the in-house attorney was dismissed from the case. The defense costs for this associate general counsel were paid by the employed lawyers policy.

Social Media

An associate general counsel of a media enterprise learned that her employer was going to be responsible for the advertising of a new skin care product recently approved by the FDA. On her Facebook page, the in-house attorney praised the soon-to-be-released product making claims that she had tried the product and was thoroughly satisfied with its results.

The media company's client took issue when it learned that news of the product's release was posted on the Internet. It claimed breach of confidentiality, violation of trade secrets, negligent supervision, and related assertions. Although the client did not commence a legal action, it sought an apology from the in-house attorney and monetary damages to manage the premature release of information.

A professional liability insurance policy and an employed lawyers policy contributed toward the monetary damages. The in-house attorney apologized for her actions and was terminated from employment.

Conflict of Interest

The chief financial officer of a publicly traded technology company was represented by the company's general counsel in an investigation and subsequent legal action by the SEC involving the company's stock option granting practices, conspiracy and fraud. The company was also investigated, but all charges against it were dismissed. The chief financial officer, however, was found liable. He was fined by the SEC and terminated from employment. Thereafter, he commenced a legal malpractice action against the general counsel for conflict of interest, misrepresentation, legal incompetence, and ineffective assistance of counsel. The malpractice action settled for $325,000 and was paid by the employed lawyers policy.

Statute of Limitations

A publicly traded publishing company was involved in a copyright dispute with another publisher. The general counsel of the company retained outside counsel to litigate the matter. The company sought to assert counterclaims against its adversary, but learned that the statute of limitations had run.

The legal action between the publishers was settled, but the company then commenced an action for legal malpractice against its outside counsel, who commenced a third-party action against the general counsel alleging that he committed legal malpractice by not advising outside counsel accurately as to dates of filing and service. The case was mediated and settled in excess of $5 million as to outside counsel. The third-party action cost $100,000 to defend and $100,000 to settle, both of which were paid by the employed lawyers policy.

Unauthorized Practice of Law

An associate general counsel of a consumer products company was transferred from the company's New York office to another state. The in-house counsel was admitted to practice law in New York only. He was assigned to negotiate a joint promotion with another company, which included drafting a number of contracts. The contracts were executed, but issues arose. An action was commenced against the company and the associate general counsel for breach of contract, negligence, and misrepresentation. The plaintiffs alleged legal malpractice against the in-house attorney claiming that he engaged in the unauthorized practice of law. He was also reported to state bar disciplinary committees.

It was learned that the in-house attorney never registered to practice law outside of New York. The underlying action was settled for an undisclosed amount. The in-house attorney was terminated and disciplined for engaging in multi-jurisdictional practice without the proper registration. The employed lawyers policy provided his defense to both the underlying action and the disciplinary proceedings.

Conclusion

In-house counsel are advised to review new regulations and legislation, candidly and unambiguously advise their clients of what is legally permissible, act accordingly when they become aware of misconduct, and assist their clients in promoting good corporate governance via effective compliance programs.

Susan F. Friedman is a senior vice president, claims advocate, and the national leader of the Employed Lawyers Product Practice at Marsh.

Over the past 12 months, in-house counsel have likely read about their contemporaries:

• Charged with obstructing justice by misleading government investigators in their probes of off-label uses for pharmaceuticals;
• Sentenced to federal prison for defrauding the Internal Revenue Service;
• Found liable for damages for the unauthorized disclosure of confidential information;
• Terminated from employment for the unauthorized practice of law;
• Attempting appeals for convictions involving conspiracy, fraud, and making false statements to the Securities and Exchange Commission (SEC);
• Accused of negligently supervising brokers who attempted stock market manipulation;
• Disciplined or sanctioned for spoliation of electronic evidence; and
• Found in violation of the Foreign Corrupt Practices Act (FCPA) by engaging in bribery.

There were other in-house counsel indicted on weapons charges, conspiracy and obstruction of justice; sentenced to prison for obstructing proceedings before the Food and Drug Administration (FDA) and the Federal Trade Commission (FTC); used as scapegoats by senior executives; suspended from employment due to ethical violations; and disbarred and imprisoned for conspiracy and money laundering. Many in-house attorneys continued to endure the fallout from the financial crisis and stock option backdating cases.

As in-house counsel continue to juggle their roles between corporate gatekeepers and confidants, they face a host of emerging risks. The passage of new statutes, creation and rejuvenation of regulatory bodies, and the revitalization of existing laws all pose new potential liabilities around compliance and due diligence. Examples include:

• The Dodd-Frank Wall Street Reform and Consumer Protection Act and its '922 whistleblower bounty provision or '1502 requiring disclosure of the source of conflict minerals, the use of which companies are being asked to track. Examples of such minerals are tin, tantalum, gold and tungsten;
• The FTC's privacy protection framework and its Red Flags Rule;
• Mandates from the Patient Protection and Affordable Care Act;
• Amendments to the False Claims Act;
• Modifications to the U.S. Sentencing Guidelines clarifying standards for determining effective compliance programs;
• The multi-agency initiative to increase criminal prosecutions of individuals for violations of the food and drug laws;
• The FDIC's current agenda as to failed banks;
• The Environmental Protection Agency's crackdown on everything from greenhouse gas emissions to oil spills;
• The IRS' launch of 6,000 compensation probes;
• The application of Rule 34 of the Federal Rules of Civil Procedure as it relates to cloud computing and electronically stored information; and
• The application of the Sarbanes-Oxley Act's '1519 prohibiting the destruction or concealment of documents to influence a department or agency of the U.S.

The Old Story Revisited

Notwithstanding the onslaught of new laws and agendas, in-house attorneys continue to be haunted by the traditional ghosts leading to legal malpractice claims, including issuing formal and informal legal opinions, conflicts of interest, anti-trust, compliance, insider trading, confidentiality, attorney-client privilege, unauthorized practice of law, multijurisdictional practice, intellectual property, Web 2.0 (a/k/a social media), shareholder class actions, whistleblower and employment law, internal investigations, government probes, fraud, ' 307 of the Sarbanes-Oxley Act and international issues.

Although there were more newsworthy cases and investigations involving in-house counsel over the past year, many insurers reported that the volume of claims activity remained flat, while others advised an increase in claim activity for shareholder class actions, fraud, and insider trading. The majority of claims settled for $50,000 or less, yet a growing minority were resolved for more than $250,000.

Approximately 25% of all claims against in-house attorneys were related to securities laws; 20% were employment or whistleblower-related; 20% involved transactional work; 10% pertained to misrepresentation; 10% regarded intellectual property, social media, and privacy; and 15% were a combination of procedural issues and emerging exposures. The majority of claims were against in-house attorneys from publicly traded corporations and large non-profit organizations. Common allegations hailed from the traditional legal malpractice causes of action and included negligence, breach of fiduciary duty, misrepresentation, conflict of interest, failure to disclose, and related assertions.

The following are typical, real-life claims recently made against in-house attorneys.

Antitrust

An action was commenced against senior executives and the general counsel of an advertising conglomerate. The plaintiffs, a consulting firm and its principals, alleged that pursuant to an executed non-disclosure agreement between the parties, they shared confidential and proprietary information relative to an advertising campaign in anticipation of the defendants retaining their services. Subsequently, the defendants, purportedly in an effort to eliminate the plaintiffs as competition, utilized the proprietary information with no compensation to the plaintiffs.

The allegations included violations of the Sherman Antitrust Act, conspiracy, conversion, misappropriation of trade secrets, unfair competition, breach of fiduciary duty, and tortious interference with economic advantage. The plaintiffs specifically alleged legal malpractice and misrepresentation against the general counsel claiming that he misrepresented the intentions of his employer and refused to return the plaintiffs' confidential information.

Following the exchange of documentary discovery and settlement negotiations, this matter settled for $750,000 with contributions from the D&O insurer and the employed lawyers insurer.

Securities Class Action

The general counsel of a financial institution prepared and filed documents with the SEC regarding the financial condition of the company. She also issued a press release to shareholders and the investing public relative to the documents that were filed. Thereafter, it was learned that the information provided to the SEC and investors was false. A restatement of earnings was issued, and an addendum explaining litigation against the company was also distributed.

Shareholder plaintiffs commenced an action against the financial institution, its directors and officers, and the general counsel. The plaintiffs alleged breach of fiduciary duties, violations of Rule 10(b)(5) of the Securities Exchange Act of 1934, fraud, insider trading, misrepresentation, and negligence. The SEC commenced a separate action against the general counsel relative to the false filings and press release.

The securities class action was settled for $60 million. The general counsel resolved the matter with the SEC for a $250,000 fine and suspension from practice before the SEC for three years.

The D&O insurer paid its remaining limits of liability and the employed lawyers insurer tendered its policy limits of $10 million on behalf of the general counsel. Note that the majority of employed lawyers policies provide excess coverage to a D&O policy for claims against in-house attorneys alleging violations of the securities laws.

Whistleblower

An associate general counsel of a publicly traded technology company commenced an action, naming the chief legal officer, other senior officers, and board directors as defendants. The plaintiff alleged that he was terminated in retaliation for highlighting to the chief legal officer and senior management that potential FCPA violations were occurring in South America. The plaintiff claimed that this retaliatory termination was in violation of ' 806 of the Sarbanes-Oxley Act whistleblower protection.

The defendants counterclaimed alleging that the plaintiff breached confidentiality and attorney-client privilege by whistleblowing to external media sources. To avoid any further negative publicity, the company settled with the plaintiff for an undisclosed amount, but with contributions from an employment practices liability policy and an employed lawyers policy, which provided defense costs for the counterclaims against the in-house attorney.

Moonlighting

An in-house attorney who performed transactional work for a talent management agency was asked by a client for advice regarding a real estate matter for which the client was already represented by counsel. The in-house attorney provided advice that was later found to be erroneous. The client brought a lawsuit against the in-house attorney for legal malpractice. The matter settled quickly for $125,000 inclusive of defense costs. The employed lawyers policy paid the claim.

Failure to Disclose

An in-house attorney of a privately held company was delegated the task of securing a loan for his employer. Based upon documents submitted by the in-house attorney, including a legal opinion as to the financial status of the company, and conversations that he had with the commercial loan officer, the loan was approved. One week later, the company announced that it was closing its business.

The lender commenced an action against the defunct company and a separate action against the in-house attorney for failure to disclose, misrepresentation, negligence, breach of fiduciary duty, conflict of interest, and legal malpractice. The in-house attorney claimed that he provided the information given to him by management and the company accountants. The separate action against the in-house attorney was later dismissed. An employed lawyers policy paid $200,000 in defense costs on behalf of the in-house attorney.

Medicaid Fraud

A state Office of the Attorney General joined in a qui tam (“whistleblower”) lawsuit brought by two administrative assistants against a hospital network. The action, brought pursuant to the federal False Claims Act and whistleblower acts, named the entity and chief officers including an associate general counsel as defendants. It was alleged that the defendants knowingly presented fraudulent claims to the U.S. government in order to obtain reimbursement provided under Medicaid for services that were never performed.

The claims against the associate general counsel specified that he knowingly ratified the falsification of records and made misleading statements. An investigation revealed that the associate general counsel sent e-mails advising hospital personnel to “submit the billing as is.” The associate general counsel argued that he was doing what he was told, although he had suspicions of potential misconduct, which he reported to the chief legal officer.

Citing conflicts of interest, the hospital refused to indemnify and defend the in-house attorney. Prior to the completion of the legal action, the in-house attorney was dismissed from the case. The defense costs for this associate general counsel were paid by the employed lawyers policy.

Social Media

An associate general counsel of a media enterprise learned that her employer was going to be responsible for the advertising of a new skin care product recently approved by the FDA. On her Facebook page, the in-house attorney praised the soon-to-be-released product making claims that she had tried the product and was thoroughly satisfied with its results.

The media company's client took issue when it learned that news of the product's release was posted on the Internet. It claimed breach of confidentiality, violation of trade secrets, negligent supervision, and related assertions. Although the client did not commence a legal action, it sought an apology from the in-house attorney and monetary damages to manage the premature release of information.

A professional liability insurance policy and an employed lawyers policy contributed toward the monetary damages. The in-house attorney apologized for her actions and was terminated from employment.

Conflict of Interest

The chief financial officer of a publicly traded technology company was represented by the company's general counsel in an investigation and subsequent legal action by the SEC involving the company's stock option granting practices, conspiracy and fraud. The company was also investigated, but all charges against it were dismissed. The chief financial officer, however, was found liable. He was fined by the SEC and terminated from employment. Thereafter, he commenced a legal malpractice action against the general counsel for conflict of interest, misrepresentation, legal incompetence, and ineffective assistance of counsel. The malpractice action settled for $325,000 and was paid by the employed lawyers policy.

Statute of Limitations

A publicly traded publishing company was involved in a copyright dispute with another publisher. The general counsel of the company retained outside counsel to litigate the matter. The company sought to assert counterclaims against its adversary, but learned that the statute of limitations had run.

The legal action between the publishers was settled, but the company then commenced an action for legal malpractice against its outside counsel, who commenced a third-party action against the general counsel alleging that he committed legal malpractice by not advising outside counsel accurately as to dates of filing and service. The case was mediated and settled in excess of $5 million as to outside counsel. The third-party action cost $100,000 to defend and $100,000 to settle, both of which were paid by the employed lawyers policy.

Unauthorized Practice of Law

An associate general counsel of a consumer products company was transferred from the company's New York office to another state. The in-house counsel was admitted to practice law in New York only. He was assigned to negotiate a joint promotion with another company, which included drafting a number of contracts. The contracts were executed, but issues arose. An action was commenced against the company and the associate general counsel for breach of contract, negligence, and misrepresentation. The plaintiffs alleged legal malpractice against the in-house attorney claiming that he engaged in the unauthorized practice of law. He was also reported to state bar disciplinary committees.

It was learned that the in-house attorney never registered to practice law outside of New York. The underlying action was settled for an undisclosed amount. The in-house attorney was terminated and disciplined for engaging in multi-jurisdictional practice without the proper registration. The employed lawyers policy provided his defense to both the underlying action and the disciplinary proceedings.

Conclusion

In-house counsel are advised to review new regulations and legislation, candidly and unambiguously advise their clients of what is legally permissible, act accordingly when they become aware of misconduct, and assist their clients in promoting good corporate governance via effective compliance programs.

Susan F. Friedman is a senior vice president, claims advocate, and the national leader of the Employed Lawyers Product Practice at Marsh.