Effective January 1, 2010, the Illinois Supreme Court has issued new ethical rules applicable to Illinois attorneys. While this may seem an irrelevant topic for non-attorneys, the rules can have an impact on how an attorney deals with a corporate client and the individuals representing the corporate client (such as employees, officers, directors and shareholders).

For the most part, the new rules do not greatly change the existing rules applicable to a corporate attorney. But the new rules impose greater responsibilities on, and provide options to, attorneys representing corporations who may be engaged in illegal or fraudulent conduct. This is well illustrated by the new Illinois Rule 1.13, entitled "Organization as Client."

An attorney employed or retained by an organization (such as a corporation or business entity) represents the organization "acting through its duly authorized constituents." (Rule 1.13(a)) The rule recognizes that an organization is a real legal entity, but that, in the real world, an attorney will be dealing with individuals who speak for, or purportedly speak for, that organization.

What if an attorney knows someone within the organization is acting fraudulently or illegally on behalf of the organization? Illinois Rule 1.13 states that, if the action "is likely to result in substantial injury to the organization," the attorney shall proceed "as is reasonably necessary in the best interest of the organization." This can include referring the matter to higher authorities in the organization. (Rule 1.13(b))

As would be expected, since circumstances can vary greatly, the rule is very general. But the rule makes clear that an attorney can, without violating any obligation to the organization as the client, take affirmative steps to stop or mitigate an illegal or fraudulent act that could harm the corporation.

Cynics might point out that a corporation usually engages in fraud to make money (or avoid losing money) for the purpose of benefiting the corporation and its shareholders. If an attorney sees the corporation is engaging in illegal conduct that will be profitable, does this section apply? Actually, the rules and comments do not answer this question directly. But it can be safely assumed that the rules reflect a view that illegal and fraudulent conduct should be viewed as harmful, regardless of any short-term profit.

Suppose an attorney has referred the matter to the highest authority in the company and the highest authority has either supported the illegal or fraudulent activity or failed to address it? If the activity is clearly a crime or fraud that is "reasonably certain to result in substantial injury to the organization," then the attorney may reveal information to the extent necessary to prevent the injury, even if the information would be considered confidential and privileged information. (Rule 1.13(c))

This rule is quite striking. It is an exception to the rule, which most attorneys view as sacred, that an attorney must protect a client's confidential information. While this is not the only exception, the other exceptions focus on disclosures required to protect third parties. But the exception in Rule 1.13(c) permits an attorney to use his or her own independent judgment to reveal confidential information to protect the organization itself. It is potentially an extraordinary responsibility on an attorney.

But the exception actually appears quite narrow. First, an attorney is permitted, but not required, to disclose the information. Second, the activity must be "clearly" a crime or a fraud. Third, the crime or fraud must be "reasonably certain to result in substantial injury to the organization." Fourth, the attorney is permitted to reveal information "only if and to the extent the lawyer reasonably believes necessary to prevent" the substantial injury.

One could see an attorney in anguish over the application of this rule. Disclosing information detrimental to a client is a serious matter. What if the attorney is wrong? What if the conduct is legal? What if the likelihood of discovery is very small?

Illinois Rule 1.13(e) provides another alternative. If the attorney believes he or she has been discharged for pointing out the illegal or fraudulent conduct within the organization or has withdrawn because of the conduct, the attorney "shall" proceed as the attorney reasonably believes necessary to assure that the organization's highest authority is informed of the lawyer's discharge or withdrawal. This is sometimes referred to as the "noisy withdrawal," where an attorney, without revealing any confidential information, makes clear that his or her withdrawal, or discharge, is based on the attorney's actions under Rule 1.13, relating to illegal or fraudulent conduct by the organization.

As noted above, there are other exceptions that could permit disclosure of confidential and privileged information, such as preventing death or substantial bodily harm or to prevent a crime in advance. (Rule 1.6). But Rule 1.13, specifically applicable when an attorney is representing an organization, such as a business entity, is an important rule for corporate attorneys to consider when dealing with possible illegal or fraudulent conduct by their corporate clients.