Reform of the Law Governing In-House Counsel

At the end of April 2015, the Federal Ministry of Justice and Consumer Protection officially presented its ministerial draft bill on the reform of the law governing in-house counsel. The draft is primarily intended to resolve the problems that arose following the judgments of the Federal Social Court of 3 April 2014, in particular the loss of the possibility for in-house counsel to be exempted from compulsory statutory pension insurance.

I. The “in-house counsel admitted as attorney”
The BMJV draft bill provides for the creation of a status-defining provision regulating the so-called in-house counsel admitted as attorney as a further sui generis type of lawyer. The statutory definition makes clear that such a person is a lawyer within the meaning of sections 1 to 3 of the Federal Lawyers’ Act (BRAO). Departing from the previous case law of the Federal Court of Justice, the term in-house counsel admitted as attorney therefore includes not only professionals who advise their employer on the employer’s own legal matters, but also those who, within an employment relationship with an association, provide legal advice to its members in their legal affairs.

II. Admission
Unlike admission as an attorney-at-law, admission as in-house counsel admitted as attorney is activity-related, in order to distinguish it from other legal services provided within an employment relationship. A newly proposed provision sets out the detailed requirements. It identifies cumulative criteria that characterise the legal work of in-house counsel admitted as attorney and must be met as mandatory minimum requirements. The core elements are personal responsibility and professional independence.

These criteria are linked to section 3(1) BRAO and to the so-called four-criteria theory developed by the German Federal Pension Insurance Institution in the context of section 6 of the German Social Code Book VI. Legal advice includes the independent analysis of facts and examination of legal issues, the professionally independent development and assessment of legal solutions, and the professionally independent provision of legal advice. Legal representation includes the ability to represent the employer externally in a binding manner. Moreover, the activity of in-house counsel admitted as attorney must be directed towards shaping legal relationships, in particular through the independent conduct of negotiations, or towards the enforcement of rights. It is necessary that the employment relationship be at least “characterised” by the above criteria and activities. This is intended to take account of the fact that employment relationships may exist which are permanently characterised by a mixture of legal and non-legal activities. Finally, it is clarified that a professionally independent activity is not performed where an in-house counsel must comply with instructions that preclude an independent analysis of the legal position and case-specific legal advice. The activity of in-house counsel admitted as attorney does not, however, require the exclusion of any right of instruction on the employer’s part. Even self-employed lawyers are not entirely free from instructions, but are bound by their clients’ instructions within the mandate relationship.

If the in-house counsel admitted as attorney also wishes to practise as an attorney outside the company or association in addition to his or her employed activity, a second admission as attorney is required.

III. Partial prohibition on representation
The currently applicable section 46 BRAO provides that in-house counsel may not represent their employer before courts or arbitral tribunals in their capacity as attorneys. The BMJV ministerial draft does not maintain this absolute prohibition. As a rule, in-house counsel admitted as attorney should not be able to represent their employer before courts as employed attorneys in civil or labour court proceedings, or in non-contentious proceedings, where representation by an attorney is mandatory or where a written submission must be signed by an attorney. In the BMJV’s view, a prohibition on representation within the employment relationship is necessary in these proceedings to prevent an imbalance between the parties, in accordance with the principle of equality of arms. Such an imbalance would arise if individuals or small and medium-sized enterprises without their own legal department had to pay an attorney — for whom the statutory minimum fees under the Lawyers’ Remuneration Act would also apply — while large companies could be represented by their own in-house counsel admitted as attorney and thereby reduce their cost risk.

In contrast to the current legal position, however, the draft provides for no prohibition on representation by in-house counsel admitted as attorney in administrative, fiscal and social court proceedings, or in proceedings before arbitral tribunals. In the future, in-house counsel admitted as attorney should also be able to represent their employer in criminal and administrative fine proceedings, provided that the employer is not involved as a defendant or confiscation participant, but for example as an injured party or private accessory prosecutor.

Finally, for constitutional reasons, the BMJV considers it necessary to permit in-house counsel admitted as attorney to represent their employer outside the employment relationship, that is, within the framework of activity as an independent attorney. Such activity would then be billed under the Lawyers’ Remuneration Act.

IV. No legal privilege
In-house counsel admitted as attorneys will continue to be unable to rely on a right to refuse testimony in criminal proceedings or on protection against seizure.

The reason and justification for restricting attorney-client privileges is the requirement of effective criminal prosecution. The Federal Constitutional Court has repeatedly emphasised the interest in establishing the truth as fully as possible in criminal proceedings and has described the effective investigation of serious criminal offences in particular as an essential task of a community governed by the rule of law. The investigation of criminal offences pursued through criminal prosecution measures, and their contribution to the enforcement of criminal laws, could be significantly impaired by rights to refuse testimony or comparable procedural restrictions on criminal prosecution. The Court of Justice of the European Union has also held that the special professional position of in-house counsel justifies excluding them from the special criminal procedural confidentiality protection applicable to attorneys in private practice. In the BMJV’s view, including in-house counsel admitted as attorneys within the scope of sections 97 and 160a of the German Code of Criminal Procedure would create the risk that relevant evidence would not be available to the criminal prosecution authorities.

In civil proceedings, by contrast, in-house counsel admitted as attorneys have a right to refuse testimony and, derived from this, the right not to comply with a court order to produce documents. This may also be relevant in connection with comparable rules of foreign civil procedure, for example in relation to so-called pre-trial discovery proceedings under US law.

V. Amendments to social security law
Finally, additional amendments to the German Social Code Book VI are intended to ensure that, in conjunction with the exemption provisions under pension law, the professional-law provisions can largely restore the status quo that existed before the Federal Social Court’s decisions of 3 April 2014, both prospectively and with retroactive effect. It is to be clarified that the blocking effect laid down in section 6(1) sentence 3 SGB VI against an expansion of the exemption right through an unlimited extension of the circle of chamber members is not affected within the scope of the professional-law definition of in-house counsel admitted as attorneys. In addition, by granting a retroactive right of exemption to those who, under the amended BRAO, may be admitted as in-house counsel admitted as attorneys and exempted from compulsory statutory pension insurance, the status quo is also to be restored for the past.
Source: NJW-Spezial 12/2015