The highly controversial section 307 of the US Sarbanes-Oxley Act, introduced after the collapse of Enron to appease the public’s baying for corporate blood, now has in-house lawyers more concerned about their own derriere than that of their employers.
According to the American Corporate Counsel Association, the act has effectively “deputised” the in-house lawyers of publicly listed companies, forcing them to turn in their employer/client to the US Securities and Exchange Commission.
Under the act, an issuer’s in-house lawyer has a statutory obligation to report “up-the-ladder” any violations of securities laws or breaches of fiduciary duty. Ultimately, if nothing is done, the lawyer must go to the top – the SEC.
Before the Enron collapse, the primary concern of the in-house lawyer was an allegation of misconduct, where they faced being disbarred. Now they face 20 years in jail or a $US10 million ($16 million) fine if they fail to observe the act.
The in-house lawyer in the US has reason to feel under siege. Not only are their loyalties split and their roles undermined, but, under the legislation, they could find themselves personally liable for advice they give on wayward transactions. In other words, they could be sued by their employer. And the cases are starting.
While Australia has been less gung-ho in its response to corporate collapses, the Australian Corporate Counsel Association has warned that the move towards suing an in-house lawyer for alleged negligent advice is “very likely” to follow in Australia, with potentially disastrous consequences for legal professional privilege.
But expert lawyers and academics in Australia say since 1949, when the British House of Lords ruled in the Lister Romford case, the way has been open for employers to sue their in-house lawyer, along with any of their employees.
While the case has been criticised by Australian judges, it still represents the common law in all states except NSW, SA and the NT.
One of Australia’s pre-eminent experts on professional indemnity law, Professor Harold Luntz from the University of Melbourne, says the fact that an employee is a lawyer does not make a difference as to whether or not they can be sued by their employer.
Luntz says it is unlikely Australian companies will start to sue their in-house lawyers – it is more likely that in-house lawyers will start to be targeted by third parties.
Emilios Kyrou, a senior partner of Mallesons Stephen Jaques, agrees with Luntz and says in Australia’s common law jurisdictions, any employee, whether in-house lawyer or not, was open to be sued by their employer.
But he, too, agrees it is unlikely that an in-house lawyer would be sued by their employer who is found vicariously liable for the general counsel’s conduct.
Kyrou says he does not believe Australia will follow the US lead and introduce legislation forcing in-house lawyers to become whistleblowers, but does warn that corporate lawyers are facing greater ethical dilemmas in their role, and the increasing scrutiny by the courts on legal professional privilege.
There is also the ethical problem surrounding the increasing number of businesses which are enmeshing the in-house lawyer into the company.
This potentially undermines the independence of the in-house lawyer, because they are placed in a quasi-legal capacity and business advice can be offered under the umbrella of legal professional privilege.
Kyrou says it is too soon to say whether Australian in-house lawyers may be forced to follow the US lead – with many corporate lawyers there forced to obtain professional indemnity insurance independent of their employer.
He says the insurance standing of in-house lawyers in Australia is unclear, with directors and officers’ insurance potentially covering them when they act in a management capacity, but not in a legal capacity, while the situation is more favourable under professional indemnity insurance.
Notwithstanding the greater scrutiny and pressures on corporate lawyers, the company collapses of the last couple of years have seen a growing demand for in-house lawyers in Australia, with recruiters reporting that demand for corporate lawyers is far outstripping demand for lawyers from private practice