Many law firms have a policy against associates accepting unauthorized outside legal employment. But other than the threat of termination for being caught, what consequences might befall an associate who chooses to violate that policy and succumbs to the temptation of making a little money on the side?

Employers will be pleased to learn of two recent out-of-state decisions that should give any associate good cause to think twice about accepting secret, unauthorized legal employment. One involves professional discipline and the other civil liability for damages caused to the employer.

The problems inherent in secret clients are obvious to employers but not always to associates. So, for those associates who are reading this column, I will spell them out.

Contrary to popular opinion, the principal problem is not failure to share fees with the employer (although many employers resent what they perceive as a diversion of funds). Rather, employers are concerned with professional responsibility issues and civil liability.

The most obvious professional responsibility issue is the identification and avoidance of conflicts of interest. Secret clients may be adverse to existing clients, and future clients may be accepted who are adverse to secret clients.

As for civil liability, associates are likely to have apparent authority from their employer to accept legal representation of the client. Consequently, the employer is likely to be liable for any malpractice committed by the associate, even though the employer has no knowledge of the legal representation and receives no benefit from it.

To make matters worse, the employer's professional liability insurance carrier is much more apt to have policy defenses to coverage, such as late notice of claim.

Secret, unauthorized clients are a nightmare, plain and simple. That undoubtedly is why some employers are approaching breaches of policy aggressively and why some courts are backing up their need to do so.

In The Florida Bar v. Cox, 655 So.2d 1122 (1995), the Florida Supreme Court ordered a 30-day suspension from the practice of law of an associate who, contrary to firm policy, did a little "moonlighting." In particular, the associate accepted unauthorized cases, corresponded with clients on these matters, and billed clients on firm stationery. He collected and kept some of these fees. Moreover, he denied having done so until confronted with the written evidence.

Significantly, the court acknowledged that the lawyer's conduct may not have caused harm to the clients or to the firm where he was employed, but it was unimpressed with this "no harm, no foul" defense. The associate's conduct involved dishonesty and misrepresentation toward his employer and his clients, and that was sufficient to warrant a 30-day suspension.

In Kramer v. Nowak, 908 F.Supp. 1281 (E.D.Pa. 1995), Kramer, a lawyer, claimed that a legal malpractice judgment against him was caused by the negligence of Nowak, another lawyer, whom he employed to assist him in the underlying matter. Kramer sued Nowak for contribution, negligence and breach of contract. The Pennsylvania District Court determined that New Jersey substantive law controlled.

As to the contribution claim, the court held that defendant Nowak was entitled to summary judgment unless Kramer could prove that they operated as separate economic entities with respect to the underlying legal matter. The typical associate/employer relationship has no such characteristic, and thus the case stands for the proposition that an employer ordinarily may not seek contribution from an associate whose negligence results in a legal malpractice judgment against him.

With respect to the tort and contract claims, however, the court recognized a legal right of recovery in favor of the employer and against the subordinate attorney. The court based its decision upon the general rule of agency found in the Restatement (Second) of Agency, which provides that: "unless he has been authorized to act in the manner in which he acts, the agent who subjects the principal to liability because of a negligent or other wrongful act is subject to liability to the principal for the loss which results therefrom."

The court held that Kramer had a cause of action against Nowak to recover the amount of the legal malpractice judgment against him if Nowak's conduct was not authorized, if Kramer did not ratify Nowak's conduct, and if the conduct could not have been discovered through reasonable inquiry.

The rule in Kramer did not arise out of the context of a secret, unauthorized file; but it is based upon an employee's duty to his employer as opposed to the client. I, for one, believe it is good law - associates do owe duties to their employer. The duty not to accept unauthorized outside legal employment does not conflict with the rights of the client; if anything, it protects clients.

Employers should not assume that associates understand the importance of accepting only authorized work. Therefore, they should take time to explain the professional responsibility and civil liability ramifications of breaches of firm policy.

Associates, on the other hand, should not assume that their only professional responsibility is to the client. When they undertake unauthorized work that results in a professional responsibility or civil liability problem for the employer, there may be serious personal consequences.

This publication has been prepared by Hinshaw & Culbertson LLP to provide information on recent legal developments of interest to our readers. It is not intended to provide legal advice for a specific situation or to create an attorney-client relationship.