The opinion interprets rules 1.0.1, 1.7, 1.8.1, 1.9, 1.10, and 1.13 of the Rules of Professional Conduct of the State Bar of California.

The opinion digest states: It is common for in-house lawyers to move from one company to another, often within the same industry. And, although conflicts rules apply equally to in-house lawyers as to law firm lawyers, the conflicts analysis must take into account the unique characteristics of the in-house role, which is typically both an attorney-client and employer-employee relationship.

A former client conflict of interest under rule 1.9 does not arise simply because an in-house lawyer moves between companies that are economic competitors. A conflict of interest will arise if the lawyer was personally involved in representing their former employer on a matter that is factually and legally identical or similar to a matter the lawyer is to handle for their new employer, and in which the companies are materially adverse. Alternatively, a conflict of interest will arise if the lawyer was not personally involved in the representation, but they obtained confidential information during their prior employment concerning the same or substantially similar, adverse matter. The conflict may be imputed to the entire legal department of the new employer unless screening measures may be implemented under rule 1.10.

In-house lawyers are often offered employee stock options as part of their compensation package. In a typical attorney-client relationship—which is inherently imbalanced in favor of the attorney—taking stock in a client requires compliance with rule 1.8.1: the transaction must be fair and reasonable; the lawyer’s role in the transaction is fully and plainly disclosed to the client in writing; the client is advised in writing to consult with independent counsel about the transaction and the client thereafter provides informed written consent to it. However, in the in-house context, where the new lawyer is offered the same general compensation terms as those offered to other employees and indicia of inequality do not exist, compliance with rule 1.8.1 would not be required. (See rule 1.8.1, Cmt. [6]).

Factors to consider in determining whether rule 1.8.1 applies to an in-house lawyer’s compensation include: (1) whether the lawyer was involved in advising on the organization’s formation; (2) whether the proposed compensation agreement is drafted and proposed by the organization (or its counsel) or the lawyer; (3) whether the organization has independent counsel concerning the compensation agreement; (4) whether the compensation terms offered to the lawyer are substantively similar to those offered to employees at the same level; and (5) whether the compensation is part of the lawyer’s initial employment agreement, or modifications thereto, or related to lawyer’s work on a specific transaction. These factors are not exhaustive but are intended as an analytical tool to determine whether an indicia of inequality exists. If so, compliance with rule 1.8.1 is required.

Even if compliance with rule 1.8.1 is not required, stock ownership may still trigger a material limitation conflict under rule 1.7(b) if there is a significant risk that the in-house lawyer’s representation will be materially limited by their financial interest in connection with their stock ownership. Such a conflict could arise if the lawyer is asked to advise the company concerning a transaction that affects the character or price of the stock, such as a merger or acquisition. If so, the lawyer must obtain informed written consent from an authorized constituent of the company. If the lawyer does not reasonably believe they can competently represent the company due to the conflict, or if the company refuses to consent to the conflict, the lawyer must refer the matter to nonconflicted in-house counsel or outside counsel.

At its December 1, 2023 meeting and in accordance with its procedures, the State Bar Standing Committee on Professional Responsibility and Conduct tentatively approved Proposed Formal Opinion Interim No. 21-0003 for a 90-day public comment distribution.