North Carolina Administrative Code › Title 27 - STATE BAR › Chapter 02 - RULES OF PROFESSIONAL CONDUCT OF THE NORTH CAROLINA STATE BAR › Section .0100 - CLIENT LAWYER RELATIONSHIP › Section 02 RULE 1.13 - ORGANIZATION AS CLIENT

Current through Register Vol. 39, No. 2, July 15, 2024
(a) A lawyer
				employed or retained by an organization represents the organization acting
				through its duly authorized constituents.
(b) If a lawyer for an organization knows
				that an officer, employee. or other person associated with the organization is
				engaged in action, intends to act or refuses to act in a matter related to the
				representation that is a violation of a legal obligation to the organization,
				or a violation of law which reasonably might be imputed to the organization,
				and is likely to result in substantial injury to the organization, then the
				lawyer shall proceed as is reasonably necessary in the best interest of the
				organization. Unless the lawyer reasonably believes that it is not necessary in
				the best interest of the organization to do so, the lawyer shall refer the
				matter to higher authority in the organization, including, if warranted by the
				circumstances, to the highest authority that can act on behalf of the
				organization as determined by applicable law.
(c) If, despite the lawyer's efforts in
				accordance with paragraph (b), the highest authority that can act on behalf of
				the organization insists upon action, or a refusal to act, that is clearly a
				violation of law and is likely to result in substantial injury to the
				organization, the lawyer may reveal such information outside the organization
				to the extent permitted by Rule 1.6 and may resign in accordance with Rule
				1.16.
(d) Paragraph (c) shall not
				apply with respect to information relating to a lawyer's representation of an
				organization to investigate an alleged violation of law, or to defend the
				organization or an officer, employee, or other constituent associated with the
				organization against a claim arising out of an alleged violation of
				law.
(e) A lawyer who reasonably
				believes that he or she has been discharged because of the lawyer's actions
				taken pursuant to paragraphs (b) or (c), or who withdraws under circumstances
				that require or permit the lawyer to take action under these Rules, shall
				proceed as the lawyer reasonably believes necessary to assure that the
				organization's highest authority is informed of the lawyer's discharge or
				withdrawal.
(f) In dealing with an
				organization's directors, officers, employees, members, shareholders or other
				constituents, a lawyer shall explain the identity of the client when the lawyer
				knows or reasonably should know that the organization's interests are adverse
				to those of the constituents with whom the lawyer is dealing.
(g) A lawyer representing an organization may
				also represent any of its directors, officers, employees, members, shareholders
				or other constituents, subject to the provisions of Rule 1.7. If the
				organization's consent to the dual representation is required by Rule 1.7, the
				consent shall be given by an appropriate official of the organization other
				than the individual who is to be represented, or by the shareholders.
Comment
The Entity as the Client
[1] An organizational client is a legal
				entity, but it cannot act except through its officers, directors, employees,
				shareholders and other constituents. Officers, directors, employees and
				shareholders are the constituents of the corporate organizational client. The
				duties defined in this Rule apply equally to unincorporated associations.
				"Other constituents" as used in this Rule means the positions equivalent to
				officers, directors, employees and shareholders held by persons acting for
				organizational clients that are not corporations.
[2] When one of the constituents of an
				organizational client communicates with the organization's lawyer in that
				person's organizational capacity, the communication is protected by Rule 1.6.
				Thus, by way of example, if an organizational client requests its lawyer to
				investigate allegations of wrongdoing, interviews made in the course of that
				investigation between the lawyer and the client's employees or other
				constituents are covered by Rule 1.6. This does not mean, however, that
				constituents of an organizational client are the clients of the lawyer. The
				lawyer may not disclose to such constituents information relating to the
				representation except for disclosures explicitly or impliedly authorized by the
				organizational client in order to carry out the representation or as otherwise
				permitted by Rule 1.6.
[3] When
				constituents of the organization make decisions for it, the decisions
				ordinarily must be accepted by the lawyer even if their utility or prudence is
				doubtful. Decisions concerning policy and operations, including ones entailing
				serious risk, are not as such in the lawyer's province. Paragraph (b) makes
				clear, however, that when the lawyer knows that the organization may be
				substantially injured by action of an officer or other constituent that
				violates a legal obligation to the organization or is a violation of the law
				that might be imputed to the organization, the lawyer must proceed as is
				reasonably necessary in the best interest of the organization. As defined in
				Rule 1.0(g), knowledge can be inferred from circumstances, and a lawyer cannot
				ignore the obvious.
[4] In
				determining how to proceed under paragraph (b), the lawyer should give due
				consideration to the seriousness of the violation and its consequences, the
				responsibility in the organization and the apparent motivation of the person
				involved, the policies of the organization concerning such matters, and any
				other relevant considerations. Ordinarily, referral to a higher authority would
				be necessary. In some circumstances, however, it may be appropriate for the
				lawyer to ask the constituent to reconsider the matter; for example, if the
				circumstances involve a constituent's innocent misunderstanding of law and
				subsequent acceptance of the lawyer's advice, the lawyer may reasonably
				conclude that the best interest of the organization does not require that the
				matter be referred to higher authority. If a constituent persists in conduct
				contrary to the lawyer's advice, it will be necessary for the lawyer to take
				steps to have the matter reviewed by a higher authority in the organization. If
				the matter is of sufficient seriousness and importance or urgency to the
				organization, referral to higher authority in the organization may be necessary
				even if the lawyer has not communicated with the constituent. Any measures
				taken should, to the extent practicable, minimize the risk of revealing
				information relating to the representation to persons outside the organization.
				Even in circumstances where a lawyer is not obligated by Rule 1.13 to proceed,
				a lawyer may bring to the attention of an organizational client, including its
				highest authority, matters that the lawyer reasonably believes to be of
				sufficient importance to warrant doing so in the best interest of the
				organization.
[5] Paragraph (b)
				also makes clear that when it is reasonably necessary to enable the
				organization to address the matter in a timely and appropriate manner, the
				lawyer must refer the matter to higher authority, including, if warranted by
				the circumstances, the highest authority that can act on behalf of the
				organization under applicable law. The organization's highest authority to whom
				a matter may be referred ordinarily will be the board of directors or similar
				governing body. However, applicable law may prescribe that under certain
				conditions the highest authority reposes elsewhere, for example, in the
				independent directors of a corporation.
Relation to Other Rules
[6] The authority and responsibility provided
				in this Rule are concurrent with the authority and responsibility provided in
				other Rules. In particular, this Rule does not limit or expand the lawyer's
				responsibility under Rule 1.6, 1.8, 1.16, 3.3, or 4.1. If the lawyer reasonably
				believes that disclosure of information protected by Rule 1.6 is necessary to
				prevent the commission of a crime by an organizational client, for example,
				disclosure is permitted by Rule 1.6(b)(2). If the lawyer's services are being
				or have been used by an organizational client to further a crime or fraud by
				the organization, Rule 1.6(b)(4) permits the lawyer to disclose confidential
				information to prevent, mitigate, or rectify the consequences of such conduct.
				In such circumstances, Rule 1.2(d) may be applicable, in which event,
				withdrawal from the representation under Rule 1.16(a)(1) may be
				required.
[7] Paragraph (d) makes
				clear that the authority of a lawyer to disclose information relating to a
				representation in circumstances described in paragraph (c) does not apply with
				respect to information relating to a lawyer's engagement by an organization to
				investigate an alleged violation of law or to defend the organization or an
				officer, employee, or other person associated with the organization against a
				claim arising out of an alleged violation of law. This is necessary in order to
				enable organizational clients to enjoy the full benefits of legal counsel in
				conducting an investigation or defending against a claim.
[8] A lawyer who reasonably believes that he
				or she has been discharged because of the lawyer's actions taken pursuant to
				paragraphs (b) and (c), or who withdraws in circumstances that require or
				permit the lawyer to take action under these Rules, must proceed as the lawyer
				reasonably believes necessary to assure that the organization's highest
				authority is informed of the lawyer's discharge or withdrawal.
Government Agency
[9] The duty defined in this Rule applies to
				governmental organizations. Defining precisely the identity of the client and
				prescribing the resulting obligations of such lawyers may be more difficult in
				the government context and is a matter beyond the scope of these Rules. See
				Scope [18]. Although in some circumstances the client may be a specific agency,
				it may also be a branch of government, such as the executive branch, or the
				government as a whole. For example, if the action or failure to act involves
				the head of a bureau, either the department of which the bureau is a part or
				the relevant branch of government may be the client for purposes of this Rule.
				Moreover, in a matter involving the conduct of government officials, a
				government lawyer may have authority under applicable law to question such
				conduct more extensively than that of a lawyer for a private organization in
				similar circumstances. Thus, when the client is a governmental organization, a
				different balance may be appropriate between maintaining confidentiality and
				assuring that the wrongful act is prevented or rectified, for public business
				is involved. In addition, duties of lawyers employed by the government or
				lawyers in military service may be defined by statutes and regulation. This
				Rule does not limit that authority. See Scope.
Clarifying the Lawyer's Role
[10] There are times when the organization's
				interest may be or become adverse to those of one or more of its constituents.
				In such circumstances the lawyer should advise any constituent, whose interest
				the lawyer finds adverse to that of the organization of the conflict or
				potential conflict of interest, that the lawyer cannot represent such
				constituent, and that such person may wish to obtain independent
				representation. Care must be taken to assure that the individual understands
				that, when there is such adversity of interest, the lawyer for the organization
				cannot provide legal representation for that constituent individual, and that
				discussions between the lawyer for the organization and the individual may not
				be privileged.
[11] Whether such a
				warning should be given by the lawyer for the organization to any constituent
				individual may turn on the facts of each case.
Dual Representation
[12] Paragraph (g) recognizes that a lawyer
				for an organization may also represent a principal officer or major
				shareholder, director, employee, member, or other constituent.
Derivative Actions
[13] Under generally prevailing law, the
				shareholders or members of a corporation may bring suit to compel the directors
				to perform their legal obligations in the supervision of the organization.
				Members of unincorporated associations have essentially the same right. Such an
				action may be brought nominally by the organization, but usually is, in fact, a
				legal controversy over management of the organization.
[14] The question can arise whether counsel
				for the organization may defend such an action. The proposition that the
				organization is the lawyer's client does not alone resolve the issue. Most
				derivative actions are a normal incident of an organization's affairs, to be
				defended by the organization's lawyer like any other suit. However, if the
				claim involves serious charges of wrongdoing by those in control of the
				organization, a conflict may arise between the lawyer's duty to the
				organization and the lawyer's relationship with the board. In those
				circumstances, Rule 1.7 governs who should represent the directors and the
				organization.