FILING UPDATE: ACC Prevails in Case Involving a Novel Application of Rules of Professional Conduct to In-house Counsel Compensation

ACC Position: 

On May 9, 2016, ACC and its Washington Chapter prevailed in a case in the Washington Court of Appeals involving one of the most bizarre application of the rules of professional conduct to in-house counsel that ACC Advocacy has ever seen. In the case, Chism v. Tri-State Construction, a former general counsel sued his company for withheld compensation after he left the company. After a trial, the jury found that the company violated Washington’s prohibition on withholding employee compensation and awarded Chism the bonuses he claimed he was due. The trial judge then reduced the judgment amount, finding that Chism had breached his fiduciary duty to Tri-State by violating Rule 1.7 (conflicts of interest) and Rule 1.8 (business relationships) of the Washington Rules of Professional Conduct (“RPC”). The court rejected Tri-State’s argument that Chism violated RPC 1.5 relating to unreasonable fee agreements.

Chism sought reversal from the Washington Court of Appeals, and ACC and its Washington Chapter filed an amicus brief on January 27, 2016, supporting the appeal on the ground that the professional conduct rules cited by the trial court and Tri-State do not extend to the specific and narrow context of in-house counsel compensation arrangements and that in performing the business function of negotiating salaries, in-house counsel acts as a member of an executive team, not on behalf of the company as its legal counsel. Indeed, ACC noted that to its knowledge, no court has ever inserted the rules of professional conduct into the salary negotiations of an in-house counsel. We argued that the lack of legal precedent not only showed the error of the trial court’s ways but also resulted in a failure to give fair notice to the in-house bar of its obligations. ACC maintained that if left undisturbed, the decision would unfairly put at risk the compensation earned by virtually every in-house counsel in Washington State.

The Court of Appeals reversed the decision below and reinstated the jury’s verdict. As an initial matter, it held that the trial court properly rejected Tri-State’s unreasonable fee argument, because RPC 1.5 applies only to fee agreements, not wages. The Court further ruled that the trial court erred in sanctioning Chism for violations of RPC 1.7 and RPC 1.8, because even if those rules applied to in-house counsel compensation negotiations (which the Court suggested they did not), the trial court’s order was unsupported by precedent and thus should not have resulted in a sanction. The Court further held that the trial court exceeded its authority in ordering disgorgement for violations of RPC 8.4 in light of the state’s strong legislative preference in favor of employers paying earned employee wages.

Click here to view the amicus brief.