In Synthes USA HQ Inc. v. Commonwealth, 2023 LEXIS 230, (Mar. 22, 2023), Pennsylvania’s Supreme court affirmed the authority of the Pennsylvania attorney general to take a position in litigation different from that of a state agency, while also providing a rare analysis of the application of attorney ethics rules to attorney general practice.
The substantive question in the case was how the plaintiff corporation (Synthes) should apportion its income between Pennsylvania and other states when calculating its Pennsylvania corporate net income tax. As part of its calculation, Synthes needed to determine the ratio of “total sales of the taxpayer in this State” to the “total sales of the taxpayer everywhere.” 72 P.S. § 7401(3)2(a)(15). The issue was how to determine what sales should be “sourced” to Pennsylvania. The attorney general (OAG) argued for a “Cost of Performance Method” which relied on the location where the taxpayer produced the affected services. The Pennsylvania Department of Revenue had consistently applied a “Benefit-Received Method” which relied on the location where the customer received the benefit of the services. If the Cost of Performance Method was applied, Synthes would receive no tax refund, and it would receive a refund of approximately $2.1 million if the Benefit-Received Method was applied. After losing several administrative appeals based on a failure of evidence rather than the application of a specific theory, Synthes appealed to the Commonwealth Court. Synthes named the Commonwealth of Pennsylvania as respondent as required by statute, and OAG appeared on behalf of the Commonwealth.
OAG and Synthes stipulated to the appellate court that the Department had used the Benefit-Received Method in past tax calculation cases, that the administrative appeals boards had approved this use, but that the Department had not promulgated regulations or issued formal guidance adopting that method. Past cases involving the issue have all been settled, so Pennsylvania courts have not yet opined on which method should be used. OAG, representing the Commonwealth, filed a brief urging use of the Costs of Performance Method and the denial of a refund to Synthes. OAG asserted that the Benefits-Received method was unsupported by the plain language of the statute. This argument conflicted directly with the Department’s long-standing use of the Benefit-Received Method.
The Department sought to intervene in the appeal, arguing that it had an interest in the proceedings that was not represented by either OAG or Synthes. On the one hand, OAG was contesting the validity of the Department’s statutory interpretation and stated that it did not represent the Department. OAG had emphasized that the Attorney General was an independent, elected entity, separate from the Department, with statutory authority under the Commonwealth Attorneys Act (CAA) 71 P.S. § 732-201 et seq., to “represent the Commonwealth” “in any action brought by or against the Commonwealth. On the other hand, Synthes was only seeking a refund and was not advocating for the Department’s position.
The appellate court permitted the Department to intervene and criticized OAG for “assertion in this case of a legal position directly adverse to that of its client, the Department.” The court stated, as dicta, “to the extent the Attorney General believed itself entitled to control the position to be advocated in [the appellate] Court, and upon reaching a legal interpretation contrary to that of the Department, the Attorney General should have so advised the Department” which would have allowed the Department to seek declaratory relief. Or OAG “could have authorized counsel for the Department or the Board to litigate this matter” to avoid “this unseemly conflict between the Commonwealth and its own agency concerning a statutory construction issue within the agency’s expertise.”
The appellate court adopted the Benefits-Received method, and OAG appealed. On appeal, the Department challenged OAG’s authority to represent the “Commonwealth” as a stand-alone party separate from the Department. The Department argued that the CAA did not make the attorney general a “fourth branch of government” to serve as a check and balance against the executive branch. According to the Department, the governor is vested with the supreme executive power of the state and exercises that power through the executive branch agencies.
The Pennsylvania Supreme Court began by reviewing the CAA. The court found,
While the Attorney General regularly represents the Department, it is not merely the Department’s law firm. Instead, the Pennsylvania Constitution designates the Attorney General as the “chief law officer” for the Commonwealth as a whole, accountable directly to the Pennsylvania voters, and independent of the Governor and the Commonwealth agencies.
The court pointed to a specific provision of the CAA to illustrate the attorney general’s role. Section 303 allows the Governor or another executive branch official to request that the Office of General Counsel represent a state agency. If the attorney general does not agree, the governor may authorize the General Counsel to intervene in the litigation. In that case, the statute specifically provides that “the General Counsel has the obligation to represent the Governor and the Executive Department, i.e., the agency, and the Attorney General shall at all times continue to represent the Commonwealth.”
The supreme court disagreed with the Department’s argument that the appeal filed by OAG was not an “action” within the meaning of the CAA, noting that it was inconsistent with the plain meaning of the statute and would conflict with the long-standing practice by OAG of representing agencies on appeal. The court concluded,
We therefore preliminarily conclude that the Attorney General, as an independently
elected, constitutional officer, is authorized by the CAA to represent the Commonwealth separately from the Department on appeals from the Commonwealth Court generally. We have little hesitation in concluding that the Attorney General can do so in this case . . . . [W]e reject the Department’s contention that the Commonwealth, as represented by the Attorney General, does not have standing, as the Commonwealth is indisputably aggrieved by an order remanding the case for the Board of Finance and Revenue to issue a tax refund.
The supreme court next addressed how legal ethics rules apply when OAG takes a position adverse to an executive branch agency. Although OAG is permitted to do so by statute, the ethics rules adopted by the supreme court state that a lawyer shall not represent a client (in this case, the Department) if the representation involves a conflict of interest with a concurrent client (the Commonwealth). OAG attorneys and the Attorney General are subject to this rule unless exempted by law. The supreme court found that section 303, rather than providing such an exemption, provided for separate representation of the agency and the commonwealth.
Although the process described by the statute is to be initiated by the executive branch, the supreme court found that “OAG was ethically bound to advise the Department of its conflicting interpretation of the tax provision at issue in this case.” The court acknowledged that OAG attorneys may be authorized by state statutes to take actions that would otherwise be prohibited by the ethics rules. But there is no such authorization in this case. Section 303 provides the mechanism to resolve the conflict, and unlike private attorneys, OAG attorneys are not required to withdraw from representing both parties.
The Supreme Court concluded,
Within the context of the CAA, the Rules of Professional Conduct provide clear ethical guidance to the OAG, as counsel with two clients with conflicting interests. It is the duty of the OAG to advise the agency of the conflict — only then does the agency have the statutory obligation to trigger supersession under Section 303 by requesting, through the Governor, for the OAG to allow General Counsel to take over the case on its behalf and then, if not granted, to exercise its right of automatic intervention. By virtue of Section 303(b), the OAG at all times, continues to represent the Commonwealth.