Friday, December 7, 2012

When Your Employees Might Be Guilty

There are certain cases under various state and federal laws when both the corporate entity of the company and its individual employees face separate liability for their joint conduct. A typical example is a sexual harassment case that involves allegations of physical contact. The company is potentially liable because its employees have allegedly created a hostile work environment; the individual supervisor involved in the alleged conduct is potentially liable because of the assault on the person of the plaintiff. Another example might involve allegations of securities fraud-both the company and individual executives can face criminal liability stemming from securities transactions in which the employees were involved.

As a result, lawyers like me who defend these cases have to tread very carefully at the very beginning of our investigation. While I am representing a company in the case, I'm also representing the individual employees in their management capacity as representatives of the company.  Of necessity, I am frequently representing the employees in their individual capacity, too, because their interests (i.e. their version of events) and the company's coincide. But what happens if, during the course of the investigation, I discover that the individual employee has, in fact, committed securities fraud? Or has committed an assault? At that point, the interests of the employee and the interests of the company diverge-the company might well want to be able to say that the employee acted outside the scope of her employment, and therefore the company has no liability.

Obviously, this puts the lawyer in an untenable situation where he is representing two clients with diametrically opposed interests: the company wants to throw the employee under the bus, and the employee wants to shift as much claim to the company as possible. In that case, the lawyer must withdraw from representing both clients and turn the case over to someone else.

Just about the only way to avoid this situation is with what is called a joint defense agreement. Basically the lawyer advises the employee that she is representing both the company and the employee, but that if their interests diverge, the lawyer is staying with the company, and the employee must get her own counsel. The agreement also specifies that both sides can share whatever information is uncovered up to the point that their interests begin to diverge and that each side waves its right to disqualify the lawyer because of a conflict of interest.

But if the lawyer doesn't get a joint defense agreement, and continues the representation, he's in real trouble. As we see in this case.

I'll follow up when I see the decision here, but the lesson for corporate clients is clear-make sure you understand up front the exposure that you are facing and the exposure that your employee is facing, if any. Where both sides have exposure, make sure your counsel is not in the process of disqualifying himself when he starts the investigation.

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