March 2017 Bar Bulletin
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March 2017 Bar Bulletin

Forewarned Is Forearmed:

In-House Counsel Discipline after Chism v. Tri-State

By David C. Burkett
and Michael R. Caryl

 

The compensation of lawyers serving as in-house counsel is not a common topic and until now had escaped both of us. But Washington employers with in-house counsel and their own outside, retained counsel need to carefully consider the implications of a recent Division I decision, Chism v. Tri-State Construction, Inc.1

The Court of Appeals in Chism held that the trial court had no power to order an in-house counsel (Geoffrey Chism) to disgorge $1.1 million of total damages that had been awarded to him in his lawsuit for unpaid wages, despite the trial court’s findings that he had committed multiple violations of the Rules of Professional Conduct.

Several aspects of the Chism decision must be considered by employers of in-house counsel, and their outside counsel. The trial court ordered disgorgement based on findings that Chism had, inter alia, misrepresented facts to Tri-State when negotiating changes to his base compensation package and misrepresented facts in connection with bonus determinations. The trial court concluded that these changes in compensation had resulted in an unreasonably large compensation package. The Court of Appeals noted that while Chism had assigned error to many of the trial court’s findings, “he does not persuasively contest that any of them are unsupported by substantial evidence.”2

Nevertheless, the Court of Appeals reversed. Disgorgement is a disciplinary remedy for a public wrong (e.g., violation of the Rules of Professional Conduct), and not a remedy for private injury, the Court determined.3 The Court held that a trial court can only discipline an attorney — in this case Chism — for misconduct for which the Washington Supreme Court would impose disciplinary sanctions.4 With respect to attorney discipline, the Court of Appeals has barred trial courts from exercising their traditional common law function of developing the law in the face of new fact patterns, at least with regard to discipline of in-house counsel.5

Tri-State had argued that RPC 1.5 applied to in-house counsel and prohibited Chism from agreeing to receive or receiving an unreasonable compensation package. However, as of the time Chism had negotiated his compensation, the Washington Supreme Court had not clearly stated that wages paid to in-house counsel are subject to RPC 1.5. Consequently, the Court of Appeals held that RPC 1.5 could not be the basis for disgorgement of any wages paid to Chism.6

The Court of Appeals has thus removed the protection of RPC 1.5 from employers of in-house counsel, at least when it comes to the protection against unreasonable attorney compensation. Once an attorney goes in-house, it seems that Washington law relegates the employer to the good old days of caveat emptor.

Tri-State had also argued that RPC 1.7 applied to in-house counsel and prohibited Chism from advising Tri-State that a $500,000 bonus was owed to him. Chism had proposed the bonus to Tri-State’s president and obtained agreement from him. As found by the Court, Chism had previously observed that the president was suffering from memory lapses to the extent that Chism had suggested he would likely need to step down.

As with RPC 1.5, the Court of Appeals held that because the Supreme Court had not previously held that RPC 1.7 applied to in-house counsel, there was no authority to order disgorgement.7 The Court of Appeals thus removed the protection of RPC 1.7 from employers of in-house counsel, allowing in-house counsel to ignore the conflict of interest inherent in negotiating compensation without fear of disgorgement of compensation.

Tri-State further argued that RPC 1.8 applied to in-house counsel, and prohibited Chism from negotiating a bonus without complying with RPC 1.8 because it was not an ordinary fee arrangement. RPC 1.8 requires that in a transaction entered into between an attorney and an existing client, the transaction and terms be fair and reasonable to the client, and be fully disclosed in writing in a manner that can be reasonably understood by the client.8

It also requires that the client be advised of the desirability of seeking advice of an independent lawyer,9 and that the client give informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in it, including whether the lawyer is representing the client in the transaction.10

The Court of Appeals declined to apply giving RPC 1.8 protection to employers. The Court noted “the essential differences between fee agreements and wage contracts.”11 It concluded that the result of the trial court’s decision “would disturb the settled expectations of many lawyer-employees.”12 However, the deciding factor for the Court was the lack of precedent, compelling the conclusion that no penalty was available for the conduct.13

Finally, Tri-State asserted that RPC 8.4 applied to in-house counsel, and authorized disgorgement based on the attorney’s misrepresentation of facts to the employer. In this regard, it is professional misconduct for an attorney to engage in conduct involving, inter alia, misrepresentation.14

Returning to the theme of the distinction between fees and wages, the Court of Appeals again held that the trial court had no disciplinary authority over Chism. Because there was no precedent for ordering disgorgement of wages, and because there is a strong legislative policy in favor of the payment of earned wages, the Court held that the trial court exceeded its disciplinary authority by ordering disgorgement as a sanction for Chism’s misrepresentations.15


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