The Association of the Bar of the City of New York Committee on Professional and Judicial Ethics Formal Opinion 2007

Brief Summary
In the absence of a clear agreement between the law firm and its corporate client, the NYC Bar Association Committee on Professional and Judicial Ethics (the “Committee”) rejected any “bright-line” rules regarding whether a law firm may undertake a representation adverse to the affiliate of a current corporate client. Instead, the Committee provided guidelines for a fact-specific determination as to whether the affiliate has become a de facto client of the firm; whether the proposed representation would materially limit the firm’s representation of the current client; or whether the firm has learned any confidences from the client or its affiliate that would be highly material to the proposed representation. If the answer to any of these queries is “yes”, written informed consent must be obtained from the corporate client before accepting representation of the adverse interest.

Complete Summary
In this opinion, the NYC Bar Association Committee on Professional and Judicial Ethics (the “Committee”) addressed the “who is the client” problems created for lawyers by the “ever burgeoning” world of corporate mergers and acquisitions. The Committee rejected three “bright line” rules regarding these situations:

1. The “entity theory,” which provides that the law firm only represents the entity or its affiliates for matters directly related to the interests involved in that matter. This rule is derived from New York DR 5-109 and Model Rule 1.13 which provide a law firm retained by an organization represents the organization and not its constituents. The “entity rule”, however, has never been used as a basis to argue that the firm always represents only the entity client and never any of its affiliates.
2. The “no-affiliates” rule, which provides that the law firm would only represent the current corporate client and could undertake representation adverse to the affiliate if the matter is unrelated to the current representation.
3. The “all affiliates” rule, which provides for the opposite result -- the law firm is held to represent all members of the corporate family and could never represent interests adverse to any of its affiliates without the required consent.

The Committee adopted a more nuanced approach and identified a number of factors to be considered in determining if adverse representation would violate New York DR 5-105(C) or New York DR 4-101 (B). New York DR 5-105(C) prohibits lawyers from undertaking representation if the interests of a current client would likely be adversely affected or if the lawyer would be representing differing interests. New York DR 4-101 (B) requires lawyers to preserve client confidences and secrets. For example, the Committee advised lawyers to determine if the affiliate is a de facto current client of the law firm.

This can be done by asking whether the corporate client has an objectively reasonable belief that its affiliate has become a current client of the law firm because of the law firm’s relationship and dealings with the affiliate during representation, or because of “significant overlaps” in the personnel and infrastructure between the corporate client and its affiliate. This inquiry would include looking at whether the corporate client and its affiliate share the same directors, officers or other personnel; share the same offices, the same legal department or report to the same general counsel; and share a substantial number of the same corporate services. The inquiry would also looking at whether there is substantial integration in infrastructure between the two, such as shared computer networks, business cards or health benefit plans.

The Committee stressed that it is not the presence of one or more of these factors alone that is determinative, but rather the greater the overlap, and the more the overlap relates to the existing representation of the current client and the adverse representation, the more objectively reasonable the belief will be that the affiliate is a de facto client of the law firm. The duty of loyalty additionally requires the firm to determine if representation of the current corporate client or the adverse party would be limited by duties to either. Finally, the law firm may have acquired confidences from representing the current corporate client that are so highly material to the representation that the law firm cannot represent one client without using or disclosing the information to the other.

The Committee noted that the easiest way to avoid these types of corporate family conflicts is to define the scope of engagement before the potential conflict arises. The law firm should take care to avoid agreements that would “unnecessarily compromise the policy in favor of providing the public with a free choice of counsel.” See ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 94-381 (1994).

Significance of the Opinion
The opinion provides a useful framework to explore the problems created by corporate clients that exist in a world of multi-national entities with hundreds of world wide affiliates. The opinion also underscores the benefits of considering this issue up front and before an actual crisis arises.

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