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In-House Lawyer Accused of Ethics Breaches Doesn't Have to Disgorge Pay

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By Casey C. Sullivan, Esq. on June 07, 2016 3:57 PM

For three decades, Geoffrey Chism worked with Tri-State Construction, a construction company in the Pacific Northwest, first as outside counsel, then general counsel and sole in-house attorney. In that role, Chism renegotiated his salary and bonus agreements, then sued Tri-State a few years later for failing to honor them. After a month-long jury trial, Chism won $1.5 million.

But the judge, finding "numerous misrepresentations and omissions" in Chism's negotiations with Tri-State, ordered him to disgorge $1.1 million of that award. The ruling shocked many in-house attorneys. But in-house lawyers can breathe a sigh of relief now, as the trial court's disgorgement order was recently reversed on appeal.

A Fiduciary Duty in Salary Negotiations?

In requiring Chism to disgorge the majority of his award, the Washington State trial judge found that in-house counsel are bound by fiduciary and ethical duties when negotiating salaries with their employers and that a breach of those duties should be treated similarly to attorney's fees, requirement disgorgement.

According to the court, Chism's contracts with Tri-State "contained terms that were much more favorable" to him than the company, and which "resembled neither a typical outside lawyer's fee structure nor a typical inside lawyer's compensation," such that they were "unfair and unreasonable to Tri-State."

It was a ruling that "strikes at the heart of the in-house counsel's relationship with his or her corporate client," the Association of Corporate Counsel said in an amicus brief. The "breathtaking scope" of the trial court's ruling could "undermine employment negotiations and agreements between in-house counsel and their employers not only in Washington, but across the country," the ACC argued. Should in-house attorneys be bound by a fiduciary duty to their employers when negotiating salary, they would hardly be in a position to adequately advocate for themselves.

Discipline Based on Novel Interpretation Exceeded Court's Authority

The Washington appellate court agreed. In relying on "novel interpretations" of Washington's professional conduct rules, the court "exceeded the disciplinary authority delegated to it by our Supreme Court," the court of appeals wrote. "Moreover, the trial court disregarded the strong legislative preference in favor of payment of earned wages by failing to even acknowledge that, unsupported by precedent, it was ordering disgorgement of an attorney's wages, as opposed to an attorney's fee."

The ruling is a win for in-house attorneys, but it also emphasizes the unique relationship in-house counsel have to their employers. As James King, a malpractice attorney, tells Bloomberg, such lawyers operate in a "grey zone" where they are "not arm's length fiduciaries like outside counsel," but not free of the obligations of attorney ethics rules like corporate management is.

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