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In re State Grand Jury Investigation

November 23, 2009

IN THE MATTER OF THE STATE GRAND JURY INVESTIGATION


On appeal from the Superior Court, Appellate Division.

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

In this case involving a grand jury investigation of a company, the Court considers whether the trial court properly denied a motion to disqualify attorneys that the company retained and paid to represent employees who were potential witnesses against it.

The State commenced a grand jury investigation into whether a corporate contractor (company) had submitted fraudulent invoices for services purportedly rendered to a county government. The inquiry focused primarily on the company and three employees. The company arranged for counsel for the employees, entering into four separate retainer agreements with four lawyers, three of whom were assigned to represent the three employees, respectively, and a fourth to represent all non-target current and former employees. The retainer agreements provided, in part, that the company would be responsible for the attorney fees, the attorneys' professional obligation was to the individual employees only, the attorneys were not required to make any disclosures to the company, and payment of the legal fees was not conditioned on the attorneys' cooperation with the company or any other party. In addition, the company wrote letters to the employees advising that although it had retained counsel for them, they were not required to use that counsel and were free to hire and pay for their own attorneys. The letters explained that the company retained the attorneys because it recognized that the employees' personal rights may conflict with the interests of the company, and advised that the company had the right to stop paying the company-retained attorneys at any time. The company announced to its other employees that it had retained a lawyer, free of charge to them, with whom they could consult and who was available to represent them in respect of the grand jury inquiry.

The State moved before the trial court to disqualify the company-retained attorneys. In response, each employee submitted a certification asserting that he or she was unable to afford separate counsel and was satisfied with and wished to remain with the company-retained counsel.

The trial court analyzed the Rules of Professional Conduct relevant to the State's motion to disqualify. Noting the quality of the attorneys retained by the company for the employees, and based on the provisions of the retainer agreements and the letters that the company sent to the employees, the court denied the State's motion to disqualify. However, the court imposed additional requirements. With regard to the confidentiality of information between a lawyer and a client and to cure any suggestion that billings sent to the company might reveal significant aspects of the grand jury investigation, the court required going forward that all bills sent to the company be redacted so that no specific information would be detailed. The court also required that the company and the individual attorneys, prior to ending any relationship for payment or any representation of an employee, make an application to the court, following which a hearing would be conducted.

In an unpublished order, the Appellate Division denied the State's motion for leave to appeal. The State filed a motion for leave to appeal in the Supreme Court, which granted the motion. 198 N.J. 306 (2009).

HELD: The Rules of Professional Conduct forbid a lawyer from accepting compensation for representing a client from one other than the client unless three factors coalesce: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the lawyer-client relationship; and (3) information relating to the representation of the client is protected. Applying these Rules, the Court affirms the trial court's denial of the State's motion to disqualify attorneys retained and paid by an employer to represent employees who were potential witnesses in a grand jury investigation into the employer's conduct.

1. A court's evaluation of an alleged actual or apparent conflict is fact specific. To warrant disqualification of counsel, the asserted conflict must have some reasonable basis. (Pp. 11-12)

2. The law of this State has been that an attorney for an employee may not accept an employer's promise to pay his or her bill because such an arrangement risks dividing the attorney's loyalty between the client and the client's employer. Beginning in 1984 and over a course of years, however, the State revised its ethics rules, including making changes pertinent to this matter. One of the Rules of Professional Conduct, RPC 1.8(f), now states that a lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the lawyer-client relationship; and (3) information relating to the representation of the client is protected. Additional rules pertinent to this matter include RPC 1.7(a)(2), which forbids a lawyer from representing a client if there is a significant risk that the representation will be materially limited by the lawyer's responsibilities to a third person, and RPC 5.4(c), which provides that a lawyer "shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services." (Pp. 12-15)

3. Harmonizing RPC 1.8(f), RPC 1.7(a)(2), and RPC 5.4(c) results in a salutary, yet practical principle: a lawyer may represent a client but accept payment, directly or indirectly, from a third party provided each of six conditions is satisfied. Those conditions are: (1) the informed consent of the client is secured; (2) the third-party payer is prohibited from, in any way, directing, regulating or interfering with the lawyer's professional judgment in representing the client and the lawyer-client relationship remains sacrosanct; (3) there is no current attorney-client relationship between the lawyer and the third-party payer; (4) the lawyer is prohibited from communicating with the third-party payer concerning the substance of the representation of the client, which includes redaction of details from any billings submitted to the third-party payer; and (5) the third-party payer pays all such invoices within the regular course of its business, consistent with the manner, speed and frequency it pays its own counsel. The final condition is that the third-party payer shall not be relieved of its continuing obligation to pay without leave of court brought on prior written notice to the lawyer and the client. In this application, the third-party payer shall bear the burden of proving that its obligation should cease. If a third-party payer fails to pay an employee's legal fees and expenses when due, the employee shall have the right, via a summary action, for an order to show cause. (Pp. 15-19)

4. Applying the principles to this case, the trial court properly denied the motion to disqualify. Through the combined product of the good faith of the employer, the diligence of competent counsel and the exercise of the trial court's supervisory authority, the net result of the company's retention and payment of counsel for its employees complied with the Rules of Professional Conduct. The Court provides some guidance, however, for the future. First, the letters to the employees from the company explained that it was providing counsel on a "take-it-or-leave-it" basis and the employees could retain and pay their own counsel if they wished. Although this does not satisfy the informed consent requirement of RPC 1.8(f), each employee certified that he or she was satisfied with the assigned counsel and wished to remain that attorney's client. In the future, no limitation on the choice of counsel should be imposed on the employee except for reasonable limitations on fees and expenses. Second, future retention letters should clearly note that nothing in the representation shall limit the lawyer's responsibilities to the client, and that the third-party payer shall not, in any way, seek to direct or regulate the lawyer's professional judgment in rendering such legal services. Third, although the record established that the attorneys do not have a current relationship with the company, future retention letters should clearly spell out that fact. Fourth, the trial court appropriately imposed additional conditions on the provision in the retention letters that the attorneys were not required to disclose information to the company. Future retention letters should affirmatively state that the lawyer will not disclose any part of the substance of the representation of the client to the third-party payer and all billings provided to the third-party payer must have any detail information redacted and simply state the sum due for services and the sum due to expenses. Finally, as the trial court required, if the employer wishes o discontinue paying the legal fees and expenses of an employee, it may do so only by leave of court granted. (Pp. 19-22)

The order of the Law Division denying the State's motion to disqualify the counsel retained to represent the company's employees before the grand jury is AFFIRMED.

JUSTICES LONG, LaVECCHIA, ALBIN, WALLACE, and HOENS join in JUSTICE RIVERA-SOTO's opinion. CHIEF JUSTICE RABNER did not participate.

The opinion of the court was delivered by: Justice Rivera-soto

Argued September 14, 2009

Confronted with a grand jury inquiry that commanded the testimony of several of its employees, an employer elected to provide and pay for counsel to those employees for purposes of that investigation. Fearing that having individual employees/grand jury witnesses represented by counsel retained and compensated by the putative target of the grand jury inquiry violated several of the Rules of Professional Conduct, the State moved to disqualify those counsel. The trial court denied that application, limited the amount of information to be transmitted by such counsel to the employer, and, further, imposed restrictions both on the ability of the employer to discontinue paying the fees of counsel for the employees as well as on the ability of those counsel to discontinue representing the subpoenaed employees.

Regardless of the setting -- whether administrative, criminal or civil, either as part of an investigation, during grand jury proceedings, or before, during and after trial --whether an attorney may be compensated for his services by someone other than his client is governed in large measure by RPC 1.8(f) and, to a lesser extent, RPC 1.7(a) and RPC 5.4(c). The overarching Rule, which purposely is written in the negative, forbids a lawyer from "accept[ing] compensation for representing a client from one other than the client unless [three factors coalesce]: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the lawyer-client relationship; and (3) information relating to representation of a client is protected" as provided in the RPCs. RPC 1.8(f). A straightforward application of RPCs 1.7(a), 1.8(f) and 5.4(c) requires that we affirm the order of the trial court.

I.

The operative facts on which this appeal arise are readily stated. The State commenced a grand jury investigation into whether a corporate contractor had submitted fraudulent invoices for services purportedly rendered to a county government. That inquiry focused primarily on the contractor and three of its employees. In response, the company arranged for counsel for its employees. The company entered into four separate retainer agreements with four separate lawyers, three of whom were assigned to represent, respectively, the three specific employees noted, and the fourth was retained to represent "all non-target current and former employees of [the company] . . . in connection with the current state grand jury investigation."

The retainer agreements with each of the four lawyers, however, shared common characteristics and were, in all substantive and material respects, indistinguishable. A typical retainer agreement provided (1) that the company "will be ultimately responsible to [the] law firm for all reasonable and necessary legal fees and expenses incurred in this matter[;]" (2) that the "undertaking by the [c]ompany is made with the express understanding that the sole professional obligation of [the] law firm will be to [the named employee;]" (3) that the "law firm is not required to disclose any legal strategy, theory, plan of action, or the like, to the [c]ompany;" (4) that "payment of legal fees by the [c]ompany to [the] law firm in no way depends upon any such disclosure[;]" (5) that "no professional relationship will arise between the [c]ompany and [the] law firm as a result of the rendering of legal services by [the law firm] or the payment of legal fees and expenses by the [c]ompany[;]" (6) that "the reimbursement of legal fees and expenses . . . is neither conditioned upon nor dependent upon [the] law firm's cooperation with the [c]ompany or any other party[;]" (7) that while "[d]etailed invoices will be provided to [the represented employee,] to preserve the attorney/client privilege, [only] summary invoices will be submitted to the [c]ompany[;]" and (8) that the company would be responsible to pay those invoices "upon receipt."

Based on the company's retention of separate counsel for each of three employees identified by the State, the company wrote to each such employee, informing them that:

As you know, . . . the New Jersey Attorney General's office served [the company] with a Grand Jury subpoena seeking various billing and payroll records related to [the company]'s contract with [the specified county government]. The company has been fully cooperative with the State's investigation.

Recently the Attorney General's office has begun interviewing some of our employees at the [identified] project. Given your position with the [c]ompany and involvement in this project, and based upon the advice of our attorneys in New Jersey, we believe it would be prudent to retain separate counsel to represent you personally in connection with the State's investigation. Accordingly, [the company] has retained [a specially retained lawyer] to represent you in connection with the State's investigation. ...


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