FactsMr. Darth Vaadar is an attorney working for Imperial Developers, Inc. ("IDI"). He has recently been demoted, and IDI has retained our services as outside counsel to advise the company regarding potential claims by Mr. Vaadar against IDI for wrongful demotion. We have also been asked to advise IDI regarding factors affecting Mr. Vaadar�s potential claims against the company inasmuch as he is still employed as in-house-counsel for IDI.
Mr. Vaadar is a skilled and successful litigator who has been employed as General Counsel for IDI for almost ten years. In a recent incident involving the Death Star Joint Venture Deal, Mr. Vaadar gave IDI advice which was intended to financially benefit IDI, but resulted in a lawsuit alleging deceptive and unfair business practices. The lawsuit has caused the Death Star project to collapse, and may expose IDI to a substantial judgment. Mr. Vaadar maintains that his advice regarding Death Star was misunderstood. There have been other incidences in which Mr. Vaadar�s legal advice was not in IDI�s best interest or sound legal advice.
As a result of these problems, a division existed on the Board of Directors as to how to reprimand Mr. Vaadar. Some members wanted him terminated, others, including the Board�s chair and a close associate of Mr. Vaadar, wanted him demoted. Termination would most likely have resulted in a wrongful termination lawsuit, as well as a deep personal loss for Mr. Vaadar in terms of salary and prestige. A wrongful termination lawsuit would have exposed IDI�s confidential business transactions and would cause additional problems with the Death Star Deal lawsuit. The Board finally demoted Mr. Vaadar to a position as in-house-counsel. The demotion was made after a specific decision not to follow the Company�s discipline policy, as a compromise to several members of the Board who wanted Mr. Vaadar terminated due to the lost confidence in Mr. Vaadar�s legal judgment.
IDI�s personnel manual details a system of progressive, constructive discipline intended to correct problems in performance. The policy states that "barring exceptional circumstances" the steps include oral and written warnings regarding deficient performance as well as support from supervisors. Demotion is warranted for an "ability deficiency."
On October 1, 1997 Mr. Vaadar sent a letter to the president of the company stating that he is entitled to "for cause" protection and that this implied contract term was breached when IDI failed to follow its own policy by demoting him in the manner in which it did. He stated that unless reinstated to his old position, he intended to seek legal action against IDI while still employed as an in-house counsel.
Question PresentedAssuming that Mr. Vaadar, the General Counsel of the corporation, had an implied contract term supporting "for-cause" protection against demotion, can he sue for breach of this contract term while he is still employed by IDI as an in-house attorney, or do public policy and ethical obligations placed upon the attorney-client relationship, as well as a client�s right to discharge his attorney, preclude such a suit?
ConclusionMr. Vaadar can bring a claim against IDI for breach of an implied contract term supporting "for-cause" protection against demotion while he is still employed by IDI as an in-house attorney, but the court will most likely limit his ability to prove the breach due to public policy and ethical reasons as well as the protections of the attorney-client relationship. The confidences and relationship which exists between Mr. Vaadar and IDI must not be compromised in a lawsuit by the attorney against the client, if the court finds the lawsuit has merit. If Mr. Vaadar is to bring a claim against IDI while he continues his employment with the company, he must not act in an unethical manner or in a manner contrary to the best interests of IDI.
DiscussionIn order to proceed with his claim against IDI, Mr. Vaadar will have to establish that his demotion violated an implied contract term for "good cause" protection, and that his suit against IDI would not be precluded by public policy and ethical limitations on an attorney�s ability to sue an existing client. The well known "Foley" limitations on at-will termination employees similarly apply to demotion under Scott v. PG&E, 904 P.2d 834 (Cal. 1995). Enforcement of these contracts have been limited by public policy and ethical considerations which support the attorney-client relationship of confidentiality and loyalty. General Dynamics Corporation v. San Bernadino County, 876 P.2d 487 (Cal. 1994). In this case, a presumption of for-cause protection exists, but due to the continued employment of Mr. Vaadar as an attorney for IDI, specific public policy and ethical limitations would most likely limit his ability to maintain a cause of action against IDI.
It is established that in this case, for-cause protection against termination exists as evidenced by the "Foley factors," well known to this law firm. Such protection against termination similarly applies against demotion. Scott, 904 P.2d 834. The question of whether the courts will allow a claim for breach of this implied contract term is, however, not as clear cut.
Santa Clara County v. Woodside, 869 P.2d 1142 (Cal. 1994) holds that attorneys do not have a right to sue their existing employers on claims related to employment disputes unless a statute exists which specifically protects their claim. The court imposes this limitation due to public policy and ethical protections of the attorney-client relationship. In Woodside, County attorneys formed a bargaining unit in accordance with the MMBA statute, and attempted to sue the County over a wage increase dispute. The County contended that because of the attorney-client relationship, the bargaining unit could not sue the County while the attorneys represented the County on various legal issues. The court found that the MMBA enabled the bargaining unit to sue the employer in order to seek enforcement of the statute. Id. at 1150. This right was upheld despite concerns regarding ethical obligations of the attorney to his client. The court recognized that a suit against an existing client may cause the attorney to violate duties, loyalties or confidentialities owed to the client, but found that such violations were proscribed by other statutes. Id. at 1152.
The Rules of Professional Conduct, specifically Rules 3-300, 3-310 and 3-110, were interpreted by the Woodside court to bar lawsuits which are not an attempt to redress a legal wrong, which present conflicts of interest without the consent of the client, and cause the attorney to fail to perform his legal services with competence. Id. at 1152. The court found that these ethical boundaries limit the attorney�s right to sue his client/employer unless the suit causes the attorney to "overstep the boundaries of the employer/employee bargaining relationship and has actually compromised client representation." Woodside, 869 P.2d at 1157. The court is very cautious in extending the right to sue an employer to attorneys, stating that unless the attorney is an independent contractor or protected by a statute, the "attorney�s general duty of loyalty dictates that the attorney not sue the present client." Id. at 1158.
In General Dynamics, the court held that an in-house-counsel may sue his employer, but the plaintiff must be able to establish the breach of an implied contract term without violating any ethical obligations, the attorney-client privilege, or endangering the values of the professional relationship. General Dynamics, 876 P.2d at 490. In General Dynamics, the plaintiff is an in-house-counsel for the company, and after fourteen years was in a position comparable to Mr. Vaadar. His job was terminated in retaliation for bringing internal security problems to the attention of the company. "Good cause" protection against termination was found to exist, and he filed suit against the company for wrongful termination.
The court examined the absolute right and power of a client to discharge his attorney "with or without cause" and found that the right to do so can be limited by statute (see supra Woodside) or contract, and finds that monetary damages can be awarded, but a judgment ordering reinstatement of the employee is not an available remedy. Id. at 495. The professional code of ethics place a greater demand on the in-house counsel to act not simply in accordance with how the employer desires, but in accordance with public policy as well, and that increased demand warrants more judicial protection than a non-attorney employee would receive. General Dynamics, 876 P.2d at 498. Should the claim by the attorney against the employer necessitate the breach of the attorney-client privilege in order to establish the claim, the suit must be dismissed. Id. at 503. An attorney may not violate a confidence of a client, regardless of perils to that attorney. Cal. Bus. & Prof. Code � 6068(e) (Deering 1997).
Mr. Vaadar will acknowledge that Woodside prevents an attorney from suing his employer while he continues to be employed, in the absence of a statute protecting his claim, but argue that the case does not exclude the possibility that an employment contract could protect such a suit, similar to a statute�s protection. Freedom to contract is a generally recognized right, and an employment contract between in-house counsel and his employer could include terms limiting circumstances for demotion and termination. Under Scott, implied contract terms stand on equal footing as express contract terms, and implied contract terms giving employees "for cause" protection from termination and demotion are enforceable. Scott, 904 P.2d at 838.
Mr. Vaadar will argue that General Dynamics prohibits suits of this nature only when ethics would necessarily be violated in proving the cause of action. IDI claims that a suit by Mr. Vaadar would be particularly detrimental to IDI and that the only way IDI could defend the demotion would be to reveal details of the legal advice which Mr. Vaadar had given them about the Death Star Deal and other IDI transactions. The company claims there are confidential communications which would need to be revealed in order to defend itself. None of IDI�s arguments supporting confidentiality, however, apply in view of the General Dynamics decision. General Dynamics limits only suits in which the claim cannot "be fully established without breaching the attorney-client privilege." General Dynamics, 876 P.2d at 503. Because the privilege protects the client, not the attorney, and the attorney has the burden to establish the claim, Mr. Vaadar would not necessarily have to violate ethical rules in order to establish his claim. If IDI chooses to disclose confidences in order to defend itself, General Dynamics would not restrict the claim.
IDI will argue that the Woodside decision was specifically aimed at a class of people who were protected by a statute, and the court stated that its decision did not apply to a "general proposition that an attorney suit against a present client is ethically permissible." Woodside 869 P.2d at 1158. The court went on to state that when no statute protects an attorney�s employment rights, "it may well be the case that the attorney�s general duty of loyalty dictates that the attorney not sue the present client." Id. at 1158. No statute exists protecting Mr. Vaadar in this case, and therefore the Woodside protections would not be applicable.
IDI will argue that because the claim in this case is a direct result of Mr. Vaadar�s actions on the Death Star Deal, information and communications regarding the Deal would necessarily be revealed. Because of a lawsuit pending against IDI as a result of the demise of the Death Star Deal, a key factor in the demotion of Mr. Vaadar, revelation of such information would be particularly detrimental to IDI, and would severely harm the company if it was forced to defend itself against Mr. Vaadar�s claim. This information is confidential and protected by the attorney-client relationship, and therefore IDI should not be forced to defend a suit in which the information would have to be revealed.
In the Woodside dissent, Justice Panelli argues that claims which put the plaintiff at a great unfair disadvantage should not be permitted due to fundamental unfairness. The unfair disadvantage to IDI is created because the plaintiff is still an employee of the defendant, and therefore privy to confidential internal communications, and awareness of defendant�s strategies, all of which are resources which non-employee plaintiffs would not have access. These products of the former relationship of trust and confidence turn into "an unfair tactical and informational advantage that the client may well view as a serious betrayal." Woodside 869 P.2d at 1162.
IDI will argue that the General Dynamics case differs from the facts in this case because the in-house counsel in General Dynamics claimed he was being terminated for refusing to perform an unethical function. The court stated that "[being] forced to choose between the demands of the employer and the requirements of a professional code of ethics have, if anything, an even more powerful claim to judicial protection than their nonprofessional colleagues." In our case, Mr. Vaadar is not claiming he was forced to perform an unethical function or face demotion. Rather, IDI is claiming, and Mr. Vaadar does not dispute, that his performance, without any question to ethics, was performed unsatisfactorily, and solely caused his demotion.
The court will most likely allow the claim for breach, but limit or narrow his ability to establish the claim due to the public policy and ethical reasons cited above. Due to the connection of this case to the pending Death Star Deal litigation, probably Mr. Vaadar would not be able to prove his claim without relying on confidential communications and information resulting from the Death Star Deal, and therefore his claim would fail.