SCU – Legal Profession

Sixth Week – Loyalty

February 14, 2012

FAQ’s / All Students Read
Ex. 6.1 / All Read
Ex. 6.2 / All Read
Ex. 6.3 / All Read; Q-Z ready to discuss
Ex. 6.4 / All Students Read and try to discuss; feel free to share your answer with any student who has tried to develop his or her own answers
Ex. 6.6 / All Read; Students with Last Names N-P ready to discuss
Ex. 6.7 / All Read; Students D-K ready to discuss
Ex. 6.8 / All Read; students A-C ready to discuss
Ex. 6.9 / All Read

Read M.R. 1.7, 1.8, 1.9, 1.10, 1.11, 1.12.

Read CRPC 3-300; 3-310.

6.Frequently Asked Questions

(6.1): Whatisthelawyer’sdutyofloyalty?

Alawyer must put theinterest oftheclient beforeany other interest. Quite often, this dutyisanalyzedin thecontext of “conflicts of interest.”

(6.2):Whatisaconflictofinterest?

It’s any interest that might prevent you from fulfilling your fiduciary dutiesto theclient. It’s any duty you might haveto currentclients, formerclients, third persons, orto yourself,that might impede how you serve yourclient.

(6.3):Whatistheframeworkforanalyzingthedutyofloyaltyandconflictsofinterest?

The key Model Rulesare 1.7– 1.12. Caselaw may imposeadditional requirements.

The rules’ basic distinctionis betweena lawyer’sconflicts asto currentclients andasto formerclients. Theyare sometimescalled “concurrentconflicts”and “successiveconflicts.”In this course, your instructor will probably refer to them inclassas the “currentclient rule” andthe“formerclient rule.”

The rulesalso determine how onelawyer’sconflictsaffect otherlawyersin the same work setting (“imputation”), and howconflictscan be resolved (i.e., waivers).Finally,the rulesaboutconflictsand imputationare modified whenappliedto judgesand governmentlawyers.

Therules:

  1. MR1.7isthe generalruleon concurrentconflictsofinterest(i.e.,currentclientconflicts).
  2. MR1.8regulatesspecifictypesofconflictsbetweenattorneysandclients.
  3. MR1.9regulatesconflictswithformerclients.
  4. MR1.10determineswhena lawyer’sdisqualificationisimputedto otherattorneys.
  5. MR1.11preventsa lawyerfromutilizinggovernmentalemploymentforprivategain.
  6. MR1.12governsformerjudgesorarbitratorsandthirdpartyneutrals.

(6.4): Whatisthedutyofloyaltyowedto currentclients?

MR 1.7 defines two types of concurrentconflicts: (1)acting “directlyadverse”to a currentclient; and (2) situations wherethe representation ofaclient will be“materiallylimited” bythelawyer’s dutiesto others. Those two definitionsare foundatMR 1.7(a)(1)and (a)(2),andare fleshed outin the Comments.You should beableto articulate, withexamples, what “directlyadverse” meansand whatconstitutesa“materiallimitation.”

The “currentclient rule”isa rule of sweeping breadth. It’s often saidthat the broadestconflict of interest rules of any professionare the ones that govern USlawyers. Adversityto a currentclient isa conflicteven if theadverse matteriscompletely unrelatedto what the firm does forthat client. Suppose you represent Acme regarding trademarks and Bravo,another one of yourcurrentclients, asks youto negotiatea realestateleaseadverseto Acme. That’sa conflict of interest.

While MR 1.7creates two broadcategories ofconflicts, MR 1.8isa laundrylist of specificconflicts. (How do you think that sucha complicated rulearose overtime?)You might be amazedat what’s in MR 1.8, so readitcarefully andask yourself why it was necessary to enact each subparagraph.

(6.5):Howcanconflictsbe resolved,ifatall?

Usually, the presence ofa conflict is resolved by notcommencing the problematic ACR, byterminatingthe problematicACRs, or by obtainingconsent fromeach affectedclient. (If you have made anappearanceina litigation, you probablyalso needthecourt’sapprovalto withdraw.)

Sometimes thelawyer will decide notto proceed with the problematic ACR.Supposethat Alpha, Inc.is your firm’s largestclient anda potential newclientasks youto negotiatea contractacross from Alpha. Eventhougha waiver might be obtained, you might noteven wantto considerthat representation.

You mightterminate the problematic relationship.Supposethat you representa criminal defendantanda few months into thecase you realizethatthe best strategy isto pointthe fingerat another person—who happensto bea currentclient inanother matter.You might declarea conflictandterminatethe relationship. (When wecoverthe rule on withdrawalsandtermination oftheACR (1.16), you will see thatconflicts might requiretermination.)

You mightconsider whetherto obtaina waiver. MR 1.7and 1.8 eachcontain their own provisionsabout whether, and how,conflictscan be waived.Someconflictscan’t be waived underanycircumstancesand otherscan be waived only whenit is “reasonable”to do so.

When theycan be waived,the usual formula isto disclosethe risks andalternatives (MR 1.0(e)),andthen obtain “informedconsent,confirmedin writing” (let’s refer to it by the acronym ICCW)—which isthe basic form of conflict waiver underthe Model Rules.[1]ICCWcan beaccomplished byeither (1)a writtenconsent from the affectedclient(s) or (2) oral consents from theaffectedclient(s)and prompt writtenconfirmation from thelawyerto theaffectedclients.

In somecases,the MR will require different forms ofconsentthan ICCW.Forexample, theconsent required by MR 1.8(a) requiresthe use of very specific wordsandtherearethree rules (1.5(c), 1.8(a), 1.8(g))that requirea writing signed by theclient (WSC). Thereisa shortcheat sheetat AppendixAto this reading.

Later, we’llconsider the specialcase ofthe “advance waiver,” which is one of thecontested, “hot button”issuesin legalethics.

Inthecontext of motionsto disqualifylawyers,courts mightconsiderequitable defensestoanassertedconflict. Thatis,thelawyer opposinga motionto disqualify mightargue,“whether or notit’sa conflict, the moving party either never hadthe rightto asserttheconflict orlost that right bycommitting inequitable conflict.”

(6.6):Whatabout“advancedwaivers”?Howdo theywork?

Thisis one of the mostcontestedissuesinlegalethics. Recallthe breadth of thecurrentclient rule. Taking onany newclient,especiallya large client,can prevent the firm fromtaking ona wide variety of new work inthe future. Forthat reason, manylarge firms ask newclientsto agree in advance thatthe firmcan be adverseto the newclient onany matter unrelatedto whatthe firm does forthe newclient. That’s an “advanced waiver”that wouldexempt thelaw firm from the normalapplication ofthe currentclient rule.

The basic problem isthis: waivers requireinformedconsent,andthe mostthatthe firmcan sayis thatit wantsto be adverseto the newclient incertain categories oflegal workinthe future. By definition, the firmcan’t specify exactly what mattersthose will be. Is disclosure bycategory sufficient undertheethics rules? Twenty years ago,theanswer wasalmost surely“no.” In ten years, the answer may well be “yes.” Theanswer today isthat thecourtsare struggling with that question. Comment [22]to MR 1.7 suggeststhat theyareenforceablein many situations.

Fromtheclients’ point of view, the widespread practice of seekingadvance waiverscan destroya client’s sense of trust evenat the outset of theACR.From the firm’s point of view,advance waiversare necessaryto protectthe interests ofexistingclients andto protectthe firm’sability to take onthe new business thatleadsto growth.

(6.7):Howdo conflictsworkwithentityclientsthathaveaffiliates?

Whenanalyzingconflicts of interest, we once again needto ask who the client is. Theansweris often obvious. Ifa natural person hires us,we owea dutyto thatcurrentclient. If theclientis an organization,theclient isthe entityitself and notthe people workingatthe entity. (MR 1.13) But how should wetreatcorporateaffiliates? If you represent Parent Corp., may you undertakea representationadverseto Subsidiary Corp.? Whatabout two corporationsthatare wholly owned subsidiaries of the samecorporate parent?

Thereareatleastthree ways to analyze this issue.One isto say that you mustalwaystreat theaffiliatesas ifthey were oneentity. To my knowledge,thatapproach has been urged bycritics but is not thelawanywhere.Another approachisto say that if the twoentitiesarelegally distinct—which wouldalways be thecase for separately incorporated subsidiaries—then youcan beadverseto a currentclient’s affiliates. Onecase from Californiatakes thatapproach. Brooklyn Navy Yard Cogeneration Partners v. Superior Court, 60 Cal.App.4th 248 (1998).Athird approachistakea case bycaseapproach,lookingatallthe factsandcircumstances,andthen “collapsing” the corporateaffiliates into oneentity when fairness demandsit or when beingadverseto the client’s affiliate offends theclient’s reasonable expectations ofloyalty. That’s theapproachtaken bya newSecond Circuitcase, (GSI v. BabyCenter LLC) and by Morrison Knudson Corporation v. Hancock, Rothert & Bunshoft, 1998 Cal. App. Lexis1091 (1999).

Let’sconsider two examples ofthe thirdapproach.Suppose you represent Parent, Inc., on some matters and proposeto represent Alpha, Inc.,against Bravo, Inc. Asit turns out, Parent owns 25% ofthe shares of Bravo. Is undertaking themattera violation ofthe currentclient rule?Suppose further thatthe matters for which you represent Parent have not given youaccessto anyconfidencesthat would be useful in the proposed matter adverse to Bravo.Undera factsandcircumstanceapproach,a court may rule thatthe matteris not a violation of theethics rules.Ofcourse,it might bea poor business decision!Andit might be something that discredits you inthe eyes ofParent orinthe eyes of decent people. Butit may not bean ethics violation.On the other hand,the recentcase,GSIv. BabyCenter LLC, foundthatthat fact patterncreateda conflict of interest.Obviously, there remains uncertainty inthelaw onthis point.

Asa counter-example, supposethat Parent owns 100% of Bravo,the generalcounsel of Parent servesas the general counsel of Bravo,andthereis some overlapin what you do for Parentandthe matter on which you’d beadverseto Bravo.Acourtapplying the“facts andcircumstances”approach might decidethatthe proposed representation isa violation ofthe currentclient rule.

Nowlet’sapply thecurrentclient rule in thecontext of partnerships.Generally, thecourts willlookatthe extent and nature ofthecontacts betweentheattorney andthe partnersto determineif the partnersandthe partnership should betreatedasa single entity for purposes ofapplyingtheconflicts rules.So,there iseven more uncertainty applyingconflicts rulesto the representation of partnershipsthanto corporations.

In practice, manylawyerseliminatethe uncertainty by reachinga writtenagreement withtheclientasto which corporateaffiliates areclients. Law firms mightincludea“oneclient”clause in the fee agreement,attemptingto define just onecorporationastheclientandexcluding the possibilitythat the firm represents any individual employees or officers of the corporation orany corporateaffiliates.Sophisticatedclients may ask thelawyerto agreeto terms andconditionsthat defineall affiliatesasclients orthat providethatallaffiliates will betreatedasif they wereclients for purposes oftheconflict ofinterest rules.

(6.8):Whatisthedutyowedto formerclients?

We discussed this briefly during our discussion oftheattorney-client relationshiplifecycle. The basic dutya lawyer owesa formerclientistiedto the duty ofconfidentiality;a lawyercantake on representations materiallyadverseto formerclients unlessit would breachthecontinuing duty ofconfidentiality. To understand how this issue plays out, we needto readeach subparagraph of MR 1.9.

MR 1.9(a)applies when thelawyer formerly represented a client ina matter.Supposethat Lisa Lawyer formerly represented Acmeand now wishesto undertakea representationadverseto Acme. It’sa conflict of interest if the new matteradverseto Acme isthe “same or substantially relatedto”the matter she handled for Acme. (MR 1.9(a)) Iftheadverse matter isthe“same or substantially related,” then thecourt presumesthat thelawyer would necessarily make use ofthe formerclient’sconfidences.Soit’sa conflict of interest.

MR 1.9(b) deals withanother situation—one where thelawyer didn’t representthe formerclient. Supposethat Lawyer worksat Able Baker whilethat firm represented Echo, Inc., but Lawyer didn’twork onthat matter. Lawyer movedlaterallyto the firm of CharlieDeltaand proposesto work ona matter adverseto Echo. Because Lawyer didn’t represent Echo, 1.9(a) doesn’t govern. But the other subparagraphs do.Under 1.9(b),it would bea conflict ofinterest for Lawyerif she hadacquired material confidences from Echo. Thatis,it’sa conflict if Lawyer learned Echoconfidences that could be useful inthe matter adverseto Echo. Lawyercould havelearnedthose confidences from chatter inthe hallways of Able Baker, or during lunchtime presentations, or whatever,even if she didn’t represent Echo.

MR 1.9(c),a sort of “catch-all” provision, goes one final step furtherin protectingtheconfidences of formerclients. It providesthattheconfidencescannot be usedto the detriment of the formerclient or revealedto anyone without permission.

Isthatall thereisto the formerclient rule?No. Thereisalsocaselaw holdingthata lawyercannotattack his or prior work product,evenif thereis no adversityto a former client. Thisisa nebulous, poorly-definedaspect ofthe formerclient rule.

(6.9):Whatdoes“substantiallyrelated”mean?

Theterm ofart “substantially related” needs some defining. In H.F. Ahmanson & Co. v. Soloman Brothers, Inc. (1991) 229 Cal.App.3d 1445, 280 Cal.Rptr. 61,thecourt heldthatthere was no “substantial relationship” betweena particularattorney’s prior representation ofa party whileata previouslaw firm and his new firm’s representation adverseto that party. Thecourt notedas follows:

A formerclientmayseekto disqualifyaformerattorneyfromrepresentinganadversepartyby showingtheformerattorneyactuallypossessesconfidentialinformationadverseto theformer client.However,itiswellsettledactualpossessionofconfidentialinformationneednotbeproved inorderto disqualifytheformerattorney.Itisenoughto showa“substantialrelationship”betweentheformerandthecurrentrepresentation.Iftheformerclientcanestablishtheexistence ofa substantialrelationshipbetweenrepresentations,thecourtwillconclusivelypresumethe attorneypossessesconfidentialinformationadverseto theformerclient.

The “substantial relationship”test was announced in T.C. & Theater Corp. v. Warner Brothers Pictures (S.D.N.Y.1953) 113F.Supp. 265, 268, in which thatcourt stated “the formerclient need show no morethanthe matters embraced withinthe pending lawsuit wherein his formerattorneyappears on behalf of his adversaryare substantially relatedto matters orcause ofaction wherein theattorney previously represented him, the former client.” The Ahmanson court notedthat the substantial relationshiptestis sometimes unfair:

While most courts and commentators agree with prophylactic approach to disqualification established by T.C. & Theater Corp., they also recognize the drawbacks to this approach. It is over inclusive. It may impose a significant hardship on the current client. It may unfairly limit the employment opportunities of lawyers and, finally, it may stifle development of expertise in complex areas of law.

The Ahmanson courtalso notedthatitis sometimes difficultto define “substantial relationship”:

Use of theword “relationship” implies a connection, but offers no guidance as to what is being connected: subject matters, facts or issues. (See T.C. & Theater Corp. v. Warner Brothers Pictures, supra, 113 F.Supp. at p. 268 (subject matter); Trone v. Smith (9th Cir. 1980) 621 F.2d994, 998 (facts); Government of India v. Cook Indus (2nd Cir. 1978) 569 F.2d 737, 739-40 (issues); and see Global Van Lines, Inc. v. Superior Court, supra, 144 Cal.App.3d at pp. 486-89 (finding a substantial relationship between subject matter, issues and facts).

Hence “substantially related”isa term ofartthat permits thecourtto gauge, ona case-by-case basis,the real risk that the formerclient’sconfidences will be usedagainsttheclient.

Thereisa newlegal theorythat may expand the definition of “substantially related”andtherefore reducea lawyer’s abilityto beadverseto formerclients. Underthe so-called“playbook theory” of formerclientconflicts,the former clientcanassert thateven if thereis no legal or factual overlap between thecurrentadversityand the formerACR, thelawyerlearned howthe formerclienttendsto handlelegal matters, how it negotiates, and howit valueslegal claims.

(6.10):Ifyoucansometimesbeadverseto aformerclient,canyoufiretheclientinorderto beadverseto the client?

Maya lawyer“fire”a currentclient forthe purpose of undertakinga representationadverseto the“fired”client? She may not.Underthe so-called “Hot Potato” doctrine, you may notterminatea client forthe purpose of being immediatelyadverseto it. See, e.g., Truck Ins., Exchange v. Fireman’s Fund Ins. Co.,6 Cal.App.4th 1050 (19 )

But may youterminate your relationship withclients not because you havea lucrative piece of work against them but rather because youare rationalizing yourclient base for thelongterm? Cana law firmthat representsauto accident victims decideina generalized way thatitcannot representinsurancecompaniesanymore? Theanswer appearsto be yes, so long as you don’t firetheclient forthe purpose oftaking ona contemplated piece of business against theterminatedclient.

(6.11):Whatrulesgoverntheimputationofconflicts?

In 2009,the ABA changedthe rulethat governs most imputationissues, so we will needto know the “old rule”and the “new rule.”

First,let’s geta handle on what “imputation is.”Strictly speaking,conflicts pertainto individuallawyers underthe currentclientand formerclient rules. But once weidentify anylawyer who hasa conflict,thatconflict might be “imputed”to otherlawyersas well.

Second,let’s recognize that thereare four different imputation rules: (1) rule 1.10(a) which governs whenlawyers move from one private practice jobto another private practice; (2) rule 1.11, which governs whenlawyers workedas government-employedlawyers; (3) rule 1.12, which governs formerthird party neutrals, suchas judges; and (4) rule1.8(k), which governs the specificconflicts thatarise under rule 1.8.

Nowlet’s turnto the specifics. We’ll start withthe pre-2009 version of rule 1.10(a), which I’llcallthe “old rule” on imputation. Itapplies whena privatepracticelawyer switches jobs.Underthe old rule,thelaterallawyercarries with herallthe formerclient conflicts she has amassed.Once shearrivesat her new place of employment,all of those formerclientconflictsare imputedto allthelawyersat her new firm. Can you see why hiringa laterallawyer raisesall sorts ofconflicts risks? It’s possiblethat the formerclients will waive their rightsand permitthelateral or the otherlawyersat her new firmto beadverseto the formerclient. If so,then the rules require “informedconsent, confirmedin writing,” or ICCW. Butthe formerclient may notconsent,in whichcase thelateral’s formerclient conflictsare imputedto everyoneat her new firm.

Although we willcall thisthe “old rule” on imputation,the old ruleis stillthe predominantapproachintheUnitedStatestoday. Although theABA amendedits model rules, most states have retainedthe old rule.Whataboutthe“new rule”?As of 2009,the Model Rules providethat whena lawyer is prohibited from representinga client under 1.7 or 1.9,that prohibitionis imputedto allthe otherlawyers in the firm, unless (i)the prohibitionis based ona personalinterest of the disqualifiedlawyerand does not presenta significant risk of materiallylimitingthe representation oftheclient by the remaininglawyers inthe firm (1.10(a)(1)); or (ii)the prohibitionarises froma lawyer’s previous workata former firm andthe new firm properly screensthe prohibited lawyer (1.10(a)(2)).

What’san example ofthe first exception, which is foundat 1.10(a)(1)?Supposethata lawyerata firmis intensely pro-choiceand pro-Democrat,andisaskedto undertakea highly politicizedcase seeking to overturna statelaw passed bya Republican state legislaturelimiting reproductivechoice.Under 1.7(a)(2),that’sa materiallimitation conflict. But because theconflictarises from personalconsiderations,if the otherlawyersinthe firm wouldn’t be limited in representing theclientchallenging the statute, the firstlawyer’sconflict is not imputedto the other lawyersat the firm.Note, however,that these “personalconflicts”are unusual.

The secondexception,at 1.10(a)(2), providesthat whena lawyer moveslaterally from one private practice settingto another, she remains burdened by her formerclientconflicts butif the new firmacts promptlyandappropriately,it can prevent imputation ofthelateral’s formerclientconflictsto othersatthe new firm. The new firm must give noticeto the affected formerclient, must build anadequate screen,and mustcontinue statements ofcompliance with the screen.See 1.10(a)(2) for details.

We’ve nowcoveredthe basic rule on imputation ofconflict, but you must remember that screening haslong beenan optionto prevent imputation ofconflictswhen thelawyerwasa governmentlawyer (rule 1.11) ora third party neutral(1.12).For details on howto buildthe screen, readthose rules.

Finally,let’slookat the imputation rules forthe 1.8conflicts. Rule 1.8 (k) says thatall the 1.8conflictsare imputed to othersatthe firm—except forarising under 1.8(j), which regulates sexual relations withclients.

(6.12):Does1.10coveranyotherfactpatterns?

Yes, 1.10(b) deals with an unusual situation involvinga departinglawyerand the old firm’sabilityto beadverseto the departedlawyer’sclients. Ifthe departedlawyer’sclientis no longera clientat the old firm andif no lawyerleft atthe firm hasconfidences ofthe departedlawyer’s former client, then the old firmcan undertakeadverse mattersto that formerclient.See rule 1.10(b) for details.

6.1Example: Walking through the Rules