The purpose of this paper is to assist corporate counsel in understanding and making decisions about conflicts and waivers. It has been produced by Peter R. Jarvis and Mark J. Fucile at the direction of the American Corporate Counsel Association.
This paper contains citations to the American Bar Association Rules of Professional Conduct (the “RPCs”), to the Restatement (Third) of the Law Governing Lawyers (2000) (“Restatement”), and to selected cases and ethics opinions. No attempt is made, however, to provide a detailed look at the conflicts rules of all jurisdictions.
What appears below is a summary of Section II: The Basic Conflicts Rules.
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Attorneys as Fiduciaries
The relationship between client and attorney is a fiduciary relationship, and the duty of loyalty is at the heart of that relationship. Lawyers generally owe their clients a duty of “undivided loyalty.”
The principal purpose of formal conflict-of-interest rules such as the RPCs is to codify those aspects of the duty of loyalty whose violation can lead to attorney discipline. It is also difficult, however, for attorneys to defend against breach-of-fiduciary claims when the conflicts rules have been violated. In addition, an increasing body of case law supports the view that attorneys who violate the conflicts rules may not only be prohibited from collecting their fees but may also have to disgorge fees already received.
Although the conflicts rules are not identical in all American jurisdictions, they are similar in many respects. A fair one-sentence overview is provided in Restatement § 121: A conflict of interest is involved if there is a substantial risk that the lawyer’s representation of [a] client would be materially and adversely affected by the lawyers’s own interests or by the lawyer’s duties to another current client, a former client, or a third person.
Current-Client Conflict
Simultaneous Adverse Relationships Are Generally Prohibited. The core of the current-client conflicts rules can be simply stated: except as noted below, American lawyers and law firms may not represent one current client adversely to another current client on any matter unless, at a minimum, both clients consent to the conflict after full disclosure. In other words, current clients generally have veto power that allows them to prevent their current counsel from opposing them on any matter, whether it is related or unrelated to the work that is being done for that client.
To the authors’ knowledge, the only American exception to this general rule is in Texas. Pursuant to Texas RPC 1.06, a Texas lawyer may ethically represent one current client adversely to another current client without disclosure to or consent from either client if the matters are unrelated. Of course, this does not mean that the clients must accept such a dual relationship; the client is free, even in Texas, to terminate an attorney-client relationship at any time and for any reason. The effect of this Texas rule may also be limited if the work that a Texas lawyer is doing for one or both clients involves other jurisdictions. For example, a Texas firm that wanted to represent Current Client A adversely to Current Client B in litigation in State X would likely find that the State X conflicts rules applied to State X litigation and that out-of-state Texas lawyers who were appearing pro hac vice were therefore disqualified. The same would be true, of course, if the Texas firm appeared in the litigation through local members of its State X office.
Other countries may have other rules. Whether, or to what extent, American conflicts rules will apply to the multinational conflicts of multinational law firms remains to be seen.
The Prohibition Generally Applies to Entire. The reference above to the disqualification of “lawyers and law firms” is, of course, intentional. Pursuant to what is sometimes called the “firm unit rule,” all lawyers presently at a firm are typically disqualified due to a current-client conflict if any lawyer is disqualified. This includes not only partners and associates but also “of counsel” attorneys and even some contract attorneys who have regular relationships with particular firms.
The only exception to the firm unit rule as applied to current-client conflicts exists in the context of lawyers who change jobs. In some jurisdictions, “screens” or “ethical walls” allow firms to avoid disqualification if, but only if, the conflict is a result of work done by a laterally hired lawyer before he or she joined his or her present firm. This subject is addressed further in Section III below.
The “Hot-Potato” Rule. The former-client conflicts rules are more generous to law firms than the current-client conflicts rules. This makes sense: the duty of undivided loyalty that lawyers owe to current clients should be broader than the duty owed to former clients.
On any number of occasions, law firms have attempted to fire current clients in the middle of handling a matter in an attempt to turn those clients into former clients for conflicts purposes. These attempts, which generally do and should fail, have given rise to what is called the “hot-potato” rule: a firm cannot drop a client like a hot potato simply because a more desirable client comes along. This rule applies also when the conflict is a result of a merger of two previously independent law firms. In fact, conflicts waivers are required once law firm merger negotiations reach an advanced stage.
The hot-potato rule has two potential exceptions and one limitation. One potential exception applies when a conflict is not a result of anything that a lawyer or firm may have done. Suppose, for example, that Adverse Party A in Matter A acquired a firm’s client in Matter B and then sought to use that new client relationship to disqualify the firm from Matter A. Some courts, at least, will allow the firm to withdraw from either Matter A or Matter B (but not keep both) rather than giving the adverse party/acquiring company the right of control.
The second possible exception is that lawyers with a clear primary client and an equally clear secondary or accommodation client may sometimes be allowed to fire the accommodation client and continue with the primary client. As a practical matter, however, the accommodation client is unlikely to be a business entity. It is more likely to be, say, a middle-level manager whose business entity-employer has allowed its counsel to defend the manager as well as the entity in a case in which both were accused of wrongdoing. In such circumstances, the business entity would also be very well advised not to rely solely on the accommodation client theory but to seek a formal conflicts waiver from the middle-level manager as well.
The limitation is that the hot-potato rule applies only to current-client relationships. If a client is already a former client at the time that the firm takes on an adverse matter, the hot-potato rule does not apply. Whether a client is a current or former client depends, inter alia, upon the client’s subjective belief in or the reasonableness of that belief under the circumstances.
Some Current-Client Conflicts Cannot Be Waived. There are some conflicts between current clients that the law regards as so severe that they cannot be waived. Thus RPC 1.7(a) prohibits simultaneous representation if the lawyer cannot “reasonably believe" the representation will not adversely affect the relationship with the other client.” Similarly, RPC 1.7(b) prohibits simultaneous representation if the lawyer cannot “reasonably believe" the representation will not be adversely affected.”
The nonwaivable-conflicts rules are not written or interpreted the same way in all jurisdictions. In some jurisdictions, for example, a lawyer or law firm cannot ethically represent both a buyer and a seller in a real estate transaction even if both clients consent after full disclosure. In others, a lawyer can do so if, and only if, the transaction is not too complex. In still others, such representations may be permissible if competent clients agree, if the differences between them are not too sharp, and if the work will require extensive advice to the clients. Although some states have disciplinary decisions or ethics opinions on this subject, there is presently no general and universal agreement among American lawyers about how this set of lines should be drawn.
The buyer-seller, lender-borrower, or landlord-tenant kind of dichotomy presents fixed-sum games in which “more” for one client typically means “less” for the other. Suppose, however, that several current or would-be clients simultaneously ask a single lawyer or law firm to represent all of them in putting together a corporation or other business entity through which they will do business together. In this type of situation, the adversity that is present in a straight buy-sell situation may as a practical matter be reduced, if not overcome, by the joint interests that the would-be incorporators or partners will have in putting together a profitable business. It should come as no surprise, therefore, that the general answer to the question of whether a single lawyer or law firm may represent multiple would-be incorporators or partners is “yes, qualified.” If the interests are wholly consistent, simultaneous representation may in fact be permissible even without a formal conflicts waiver. If the interests of the proposed multiple clients are too adverse, a single lawyer or firm cannot represent them all even if all consent. And in all situations in between (which, in our view, is about all of them), simultaneous representation is permitted only on the basis of informed consent from all the clients. Comment 12 to RPC 1.7 puts the matter as follows:
For example, a lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other, but common representation is permissible where the clients are generally aligned in interest even though there is some difference of interest among them.
Intermediation Is Not a Free Pass. RPC 2.2 allows a lawyer to act as an “intermediary” for multiple parties in ways that seem to some lawyers to supersede the current-client conflicts limitations in RPC 1.7. In our opinion, however, there is less wiggle room here than meets the eye. By its terms, RPC 2.2 does not apply unless, inter alia, the lawyer-intermediary “reasonably believes that the matter can be resolved on terms compatible with the clients’ best interests” and that “the common representation can be undertaken impartially and without improper effect on other responsibilities the lawyer has to any of the clients.” For the most part, the circumstances in which the normal current-client conflicts rules such as RPC 1.7 do not allow a waiver will likely parallel those in which intermediation is not allowed under RPC 2.2.
Corporate Families. Does a firm’s representation of one member of a corporate family constitute representation of all related or affiliated corporations or entities? The answer is “it depends.” The deciding factors are such issues as whether the entities operate as one or different businesses, whether the entities share counsel, and the like.
Conclusion: Current Clients Generally Have Veto Power. As is noted in the first paragraph of this subsection, the general rule of current-client conflicts is that current clients typically have veto power. If they do not wish to allow “their” lawyers to oppose them on any matter, their lawyers cannot do so.
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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. |