Risky Business: Identifying, Preventing, and Managing Conflicts of Interest
By Merri A. Baldwin – May 20, 2014
Contemporary law practice requires sophisticated management of conflicts of interest, including the detection of potential conflicts, the prevention of actual conflicts through advance waivers or active practice management, and, increasingly, the litigation of motions to disqualify, especially in high-stakes cases. The reasons for the increasing prominence of conflicts are many: lawyer mobility among law firms; law firm mergers; increased specialization of lawyers’ practices, with an ever-smaller client pool; and the tendency of large corporations to spread out their work among multiple law firms, rather than concentrate their legal work in one national firm. The larger the law firm, the greater the likelihood that conflicts will arise. The risks of failing to manage conflicts effectively can be significant: disqualification, fee disgorgement, civil liability for breach of fiduciary duty, and discipline by state bars, courts, and government agencies.
Conflicts of Interest
Conflicts of interest include concurrent conflicts—conflicts of interest between two current clients of the law firm—or former client conflicts, which involve conflicts of interest between a current client and a former client of the firm. Different ethical rules and principles apply to each.
Concurrent conflicts are governed in most jurisdictions by some form of Model Rule 1.7. Model Rule 1.7 defines a concurrent conflict as a “situation in which the representation of one client will be directly adverse to another client,” or where there is a “significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person . . . .” In either situation, a lawyer may not commence (or continue) the representation absent informed written consent of both clients. Former client conflicts are governed by Model Rule 1.9, which provides that “[a] lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.” In all jurisdictions, most conflicts that prevent one lawyer in a firm from representing a client in a matter are imputed to all others in the law firm. See Model Rule 1.10.
The “playbook theory” of conflicts has gained traction in recent cases. That theory is based on the idea that a lawyer’s prior representation of a client may have been so extensive that the lawyer should be prevented from being adverse to that client in future matters, regardless of whether there is a specific factual or legal similarity between the two matters sufficient to otherwise constitute a substantial relationship. Federal district courts recently disqualified prominent IP litigators from matters in which the lawyers were adverse to former clients, based primarily on the fact that the lawyers had had extensive access to their former clients’ decision making, strategies and business operations in a way that conferred an unfair advantage on the new clients. While not necessarily portending an increase in playbook disqualifications by courts, these and other recent decisions suggest former client conflicts may be broadly construed, and law firms should proceed carefully.
Early Detection of Conflicts
Every law firm, regardless of size, needs to have in place an effective system for checking conflicts. Depending upon the size of the firm, this will likely include an automated search of a comprehensive conflicts database as well as individual attorney review of conflict information.
Conflicts checks will yield accurate results only if the information provided and utilized is up to date and accurate. The prospective new client and matter must be correctly identified, as must the potential adverse parties. Information must be updated as a matter develops, and lawyers should run supplemental conflicts checks to reflect additional parties, witnesses, and counsel. Certain practice areas may require additional information. For example, to minimize the risk of a conflict arising during the representation, lawyers involved in patent prosecution may want to obtain the names of the prospective client’s chief competitors.
A conflicts database is only as good as the information it contains. Accuracy is critical. If clients’ names change, it is important that the database be updated to reflect those changes. This can be efficiently done by linking certain information in the conflicts database to other databases within the firm. The information should also be complete. If, as is increasingly common with large corporate clients, a client representation agreement provides that representation of the client for conflicts purposes includes subsidiaries and affiliates, it is important to include those entities in the conflicts database.
Lawyer mobility poses challenges for law firms. Many high-profile disqualifications are the result of lawyers moving to new firms and bringing with them conflicts arising from prior representations that are then imputed to the new firm. Firms need to carefully vet conflicts prior to bringing on a lateral lawyer, focusing not only on current matters the lawyer is handling, but also on prior matters the lawyer was personally involved in. (Matters handled by the lawyer’s prior firm that the lawyer was not involved in do not normally create conflicts for the new firm.) Jurisdictions vary in the extent to which prior representations may create conflicts. In Washington, D.C., for example, a lawyer’s “peripheral involvement” in a prior matter would not create a conflict for the lawyer’s new firm, because the lawyer would not have learned any client confidences during the course of that representation. See D.C. Bar Ethics Opin. No. 273. Other states have a stricter standard: Once a factual or legal similarity is shown between the two matters, almost any involvement in the prior matter will disqualify the lawyer and the lawyer’s new firm.
In 2012, the ABA amended Model Rule 1.6 to expressly allow the disclosure of client information for a conflict check done as part of a lateral hire or law firm merger. The amended rule provides that once substantive discussions concerning the hire or merger have occurred, client information may be revealed for the purpose of checking conflicts if disclosure would not compromise the attorney-client privilege or otherwise prejudice the client. Model Rule 1.6(b)(7). Comment  to MR 1.6 provides: “Any such disclosure should ordinarily include no more than the identity of the persons and entities involved in a matter, a brief summary of the general issues involved, and information about whether the matter has terminated.” Specific measures may be required when the identity of a client or a matter may be too confidential to be disclosed to the prospective new firm, including the use of a third-party lawyer to act as an intermediary to perform the conflict check, or limited disclosure of information, perhaps in stages, to ensure that no conflicts exist.
Ethical walls are available in many jurisdictions as a tool to manage conflicts arising from a lawyer’s association with a prior law firm. See MR 1.10(a)(2). A number of states permit screening in a former client conflict scenario, but only where the “tainted” lawyer was not directly and substantially involved in the prior representation. Others allow screening even where the tainted lawyer participated substantially in the prior matter giving rise to the conflict. The California Rules of Professional Conduct do not expressly permit the use of ethical screens, although courts have approved their use in certain instances. See Kirk v. First American Title Ins. Co., 182 Cal. App. 4th 776, 891 (2010). No states expressly allow the use of an ethical screen to cure a concurrent conflict.
For an ethical screen to “cure” a conflict and prevent disqualification, it is important to understand the rules of the particular jurisdiction. In Kirk, the court described the elements that would be required for an enforceable wall, including that it be timely established, that the tainted attorneys be separated in some manner from the others in the firm working on the new matter, and that preventive measures be imposed to prevent disclosure of the prior client’s confidential information. 183 Cal. App. 4th at 810–815. Model Rule 1.10 contains a number of conditions, including that the disqualified lawyer must be timely screened, must not share in any apportionment of the fee to be earned from the new matter, and that written notice must be provided to the former client, along with certificates of compliance. MR 1.10(a)(2)(ii) and (iii).
Waiver and Consent
If a concurrent or former client conflict exists, the law firm may undertake the new representation only with the informed written consent of the clients or former clients affected. Effective consent is commonly referred to as a conflicts “waiver,” even though that term does not appear in the Model Rules. It requires sufficient disclosure by the lawyer, who “must explain the risks and advantages, if any, of representation burdened with a conflict of interest, as well as reasonably available alternatives. . . .” Model Rule 1.7, comment . The client should be given time to consider the risks, to raise concerns, and to consult with another lawyer if desired. Whether the lawyer’s disclosure was adequate to afford informed consent will usually determine whether the waiver is effective. Therefore, it is a good idea to confirm the disclosure in writing, even in states that do not require that step.
Certain conflicts may not be consented to. Most prominent of these are litigation matters, where the same lawyer or law firm could end up representing parties with adverse interests. Additionally, Model Rule 1.7 provides that lawyers should not undertake a representation where there is a conflict unless they reasonably believe that they can provide competent and diligent representation.
Advance Conflicts Waivers
Many firms have tried to minimize the risk of disqualification through the use of advance conflict waivers, whereby a client consents in advance to waive certain types of conflicts that may arise between it and other current or former clients of the law firm. Advance waivers vary in terms of their specific provisions, but, to be enforceable, they generally must contain sufficient information to constitute a full disclosure to the client of the intended conduct, an explanation of the material risks to the client of that conduct, and an explanation of reasonably available alternatives.
In a recent case, a United States district court in Texas denied a motion to disqualify and upheld an advance waiver in part because of the sophistication of the client. In Galderma Laboratories, L.P. v. Actavis Mid Atlantic LLC, 927 F. Supp. 2d 390 (N.D. Tex. 2013), a law firm provided a corporate client with an advance waiver that provided, in critical part:
We understand and agree that this is not an exclusive agreement, and you are free to retain any other counsel of your choosing. We recognize that we shall be disqualified from representing any other client with interests materially and directly adverse to yours (i) in any matter which is substantially related to our representation of you and (ii) with respect to any matter where there is a reasonable probability that confidential information furnished to us could be used to your disadvantage. You understand and agree that, with those exceptions, we are free to represent other clients, including clients whose interests may conflict with ours [sic] in litigation, business transactions, or other legal matters. You agree that our representing you in this matter will not prevent or disqualify us from representing clients adverse to you in other matters and that you consent in advance to our undertaking such adverse representations.
927 F. Supp. 2d at 393 (emphasis added.)
The court found that the law firm’s disclosure was adequate. Specifically, the waiver identified when the law firm would and would not represent other clients adverse to Galderma; the waiver explained “the material risk of waiving future conflicts of interest” in the form of adverse representation; and it informed the client of “reasonably available alternatives to the proposed course,” including the fact that the company could retain other counsel of its choosing instead of the law firm. Id. at 394.
The court also based its ruling on the sophistication of the client, including the fact that “[a]s a complex, global company, [Galderma] routinely encounters legal issues and the legal system.” Id. at 399–400. The court noted that the company had an in-house legal department, and that in the last 10 years, the company had hired at least three large law firms to represent it, along with a number of smaller law firms. Id. “When a client has their own lawyer who reviews the waiver, the client does not need the same type of explanation from the lawyer seeking a waiver because the client’s own lawyer can review what the language of the waiver says and advise the client accordingly.” Id. at 401. Galderma has been widely hailed as representing an emerging consensus by courts willing to uphold advance waivers against large, corporate clients.
The following practice tips may enhance the likelihood that a court will uphold an advance waiver to “cure” a conflict. First, involve the client’s in-house counsel. In-house counsel should review all waivers prior to execution, and outside counsel should confirm (and indeed encourage) participation by the in-house lawyer. Second, the disclosure should be as detailed as reasonably possible, and identify specific adverse parties where known, as well as any known conflicts, and the types of clients and matters the law firm may take on adverse to the waiving client. It is a good idea to exclude from the waiver matters that are substantially related to the law firm’s representation of the client providing the waiver, and any matters that potentially involve any confidential information the law firm obtained from the client. Lastly, firms should spell out the risks and alternatives, including that the client has the option to not proceed with the representation. The possible risks to the client of granting an advance waiver include the fact that the law firm could end up on the other side of a matter, notwithstanding the fact that the adverse party remains a current client of the firm.
Keywords: woman advocate, litigation, conflicts of interest, model rules, ethics, ethical walls, advance conflicts waivers
Merri A. Baldwin is a shareholder in the San Francisco, California, office of Rogers Joseph O'Donnell, an adjunct professor at Golden Gate University School of Law, and a coeditor of The Law of Lawyers' Liability (2012, ABA/First Chair Press).