by Brian J. Redding
The American Bar Association Standing Committee on Ethics and Professional Responsibility (hereinafter "ABA") has long suggested that a law firm has a non-consentable conflict when one of its lawyers has confidential information from Source A that is material to a representation undertaken by another firm lawyer representing Client B, if that information cannot be used in the B matter because of confidentiality obligations to A. It is the thesis of this article that the ABA's position is too restrictive, at least in some circumstances, and should be reexamined.
Assume the following hypotheticals:
Lawyer 1, a partner in a law firm ("Firm"), is approached by prospective client A seeking representation on a real estate development matter. In the initial interview (done prior to the Firm's conflicts check) A reveals information (an intention to purchase certain real estate) that is relevant to the representation of B, a current client of Lawyer 2, another partner in the Firm. These facts are uncovered in the conflict checking process.
A is a current client of Law Firm (represented by lawyer 1). During the representation, Lawyer 1 learns confidential information. The Firm comes to learn of the information and recognizes that it is material to Lawyer 2's current representation of Client B. That information would be useful and material to the B matter, but its absence will not cause disastrous consequences to the B representation.
ABA Opinion 90-358
Hypothetical 1 above is taken from Formal Ethics Opinion No. 90-358 of the American Bar Association Standing Committee on Ethics and Professional Responsibility. That opinion holds that Law Firm has a conflict of interest, because Lawyer 1 has a duty of confidentiality to the prospective client. Consequently, Lawyer 1's duty of confidentiality to the prospective client is a "material limitation" under ABA Model Rule 1.7(b) on the Firm's ability to represent B. (That is, Lawyer 1 would have such a limitation and his conflict of interest is imputed, under Model Rule 1.10, to all other lawyer's in the Firm.) The opinion goes on to consider whether this conflict can be cured by consent. The ABA concludes the conflict is probably nonconsentable, in the absence of disclosure of the confidential information of the prospective client:
"The constraints of Rule 1.6 have the practical effect, however, of severely limiting the law firm in obtaining [Client B's] consent to continue the representation because, to do so, it would first need to obtain [prospective client A's] consent to reveal [A's] interest in acquiring the parcel."
The assumption underlying the ABA's "nonconsentability" determination is that the Law Firm's conflict-the inability to disclose certain information to Client B-is not waivable because the client is unable to make an adequately informed decision on waiver in the absence of disclosure of prospective Client A's confidences. That is, the Law Firm must withdraw because it can't tell the Client what it can't tell them. In some circumstances, this decision may make sense. In others, it clearly does not, and, if followed, it has the potential to impose substantial hardship upon both law firms and clients.
What is the Problem?
The problem is simply that under the ABA Opinion the Law Firm not only must keep confidential A's information, but, because it cannot disclose that information to B, it must withdraw from the existing representation of B. That will cause harm not only to the Law Firm, but also to Client B, who will have to obtain new counsel, and incur the delay and expense of educating that counsel. In all probability new counsel won't be able to inform B of A's intentions, because it won't know of them. Thus, Client B is deprived of its long-standing counsel of choice, may suffer increased legal expenses, and still has no use of the information causing all the fuss. That makes Formal Opinion 90-358 a problem for law firms conducting "initial interviews" with prospective clients. The problem, however, may be broader.
Some lawyers might contend that if confidentiality obligations owed to a prospective client create a "material limitation" as to representation of another client where the information is relevant, then it should be an a fortiori proposition that similar confidential information learned from a current client that is relevant (but not useable) in the representation of a second client also presents a conflict under Model Rule 1.7(b). That is, there seems little reason to afford greater protection to the confidential information of a prospective client than to similar information provided by an actual current client. Indeed, one state has specifically adopted a form of the rule articulated in Formal Opinion 90-358 in the context of representation of two clients. Rule 1.7(c) of the North Carolina Rules of Professional Conduct provides as follows:
A lawyer shall have a continuing obligation to evaluate all situations involving potentially conflicting interests, and shall withdraw from the representation of any party the lawyer cannot adequately represent without using the confidential information of another client or former client except as Rule 1.6 allows.
Neither the text, nor the comments, to the North Carolina rule cast any light on whether the conflict raised by Rule 1.7(c) is consentable. The author has had personal conversations with members of the drafting committee that proposed the new North Carolina rules to the North Carolina Supreme Court, and they were not clear on the consentability issue, though one individual indicated a view that waiver ought to remain a possibility, even in the absence of disclosure of what the Firm couldn't disclose. In North Carolina, like most jurisdictions, there are few, if any, court decisions to guide the lawyer or Law Firm. Thus, well-intentioned lawyers are left to guess how the courts, or the jurisdiction's ethics committee, would rule on this issue.
Other ABA Formal Ethics Opinions give us some additional insight as to the ABA's views. In ABA Formal Ethics Opinion 93-372 the ABA considered whether an advance waiver of future conflicts could be valid. The Opinion concludes that such waivers may sometimes be valid, but then limits that holding:
Informed consent by the client is as necessary for effectiveness of a prospective waiver as for a contemporaneous waiver, but in the nature of things the consent is much less likely to be fully informed. Given the importance that the Model Rules place on the ability of the client to appreciate the significance of the waiver that is being sought, it would be unlikely that a prospective waiver which did not identify either the potential opposing party or at least a class of potentially conflicting clients would survive scrutiny. Even that information might not be enough if the nature of the likely matter and its potential effect on the client were not also appreciated by the client at the time the prospective waiver was sought.
Thus, ABA Formal Opinion 372, like Formal Opinion 358, assumes that the absence of detailed knowledge concerning the specifics of the conflict, and how it will play out in the future, render the conflict nonconsentable, regardless of circumstances - for example the sophistication of the client or the presence of waiver counsel.
In a more recent opinion, Formal Opinion 97-407, the ABA Ethics Committee holds that when a lawyer serves as an expert witness, and obtains confidential information from the party for whom she testifies, neither that lawyer, nor others in her firm, may represent another client in a matter if the confidential information is material to the second matter. The opinion holds that the inability to use the information is a "material limitation" (under Model Rule 1.7(b) on the testifying lawyer's ability to represent the second client. The opinion then imputes the disqualifying conflict to all others in the Firm. The opinion concludes this conflict requires withdrawal, without even discussing the issue of consentability, leaving little reason to believe the ABA Ethics Committee has softened its stance in this area. When these decisions are put together there seems little reason to doubt that the ABA's views, at a minimum, discourage use of waiver as a device to deal with the "confidential information" conflict.
Why Should the ABA Reexamine Its Views on Waiver and Consent?
We believe the ABA should reconsider its stance on consentability and waiver of conflicts, in this and other areas, particularly where the waiving party is a sophisticated client represented by waiver counsel (including in-house counsel). But what standard should apply? We believe the standard is suggested by the rule itself. Model Rule 1.7(b) permits a waiver where the lawyer's representation "may" be "materially limited" if:
1) The lawyer believes the representation will not be adversely affected; and,
2) the client consents after consultation.
How do these two requirements reasonably apply here? We suggest that first the Law Firm facing a confidential information conflict must assess the likelihood that if the Firm withdraws, substitute counsel may come across the information in a manner that will allow them to use the information to the benefit of the nondisclosing client. If there is such a likelihood, the Firm should withdraw, because it cannot "reasonably believe the representation [of the nondisclosing client] will not be adversely affected."
If, however, the Law Firm believes that it is highly likely that upon withdrawal the relevant information will remain secret, then the Law Firm should determine if going forward it can provide essentially adequate (though imperfect since it cannot use certain information) representation. If not-for example if the confidential information is so crucial to the representation of the other client, that the client will suffer a devastating loss without it-the Firm should probably withdraw. If, on the other hand, the Firm can do as good a job as substitute counsel, and no disaster of monumental proportions will result from the matter going forward, the Firm should be allowed to consult with sophisticated clients, particularly those represented by other counsel. Disclosure would be made that others in Law Firm have information that, if disclosed, might be relevant, but which is confidential. For obvious reasons, neither the source of the information, nor the nature of the information could be disclosed. The conflict - i.e., the nature of Rule 1.7(b) conflicts - could be explained. It would then be up to the client, perhaps aided by waiver counsel, to decide whether to replace the Firm, or to waive the conflict. If the client chooses to waive, the conflict should normally be considered consentable, for the same reason an advance waiver without detailed particulars, should normally be consentable. See, e.g., Unified Sewerage Agency v. Jelco Inc., 646 F.2d 1339 (9th Cir. 1981); Interstate Properties v. Pyramid Co. of Utica, 547 F. Supp. 178 (S.D.N.Y. 1982).
Inside counsel make decisions about such matters on a daily basis. They understand the nature of the risk involved, even when not aware of the precise nature of the nondisclosed information. Requiring perfect information to validate such a waiver gilds the lily. Indeed, it does more. It chokes the lily by denying the sophisticated client the right to decide for itself what risks it should run, and whether or not it should replace counsel in midstream, with all the disruption and cost associated with replacement of counsel. It is presumptuous for ethics committees to tell sophisticated clients represented by waiver counsel (including in-house counsel) that they cannot choose to retain their preferred lawyer because one of his partners knows something the client will probably never learn, even if substitute counsel is chosen.
We do not suggest that every client, no matter how frail or unsophisticated, is capable of executing a meaningful and valid waiver on "confidential information" conflicts. Nor are we prepared in this article to draw precise bright lines to determine when such waivers are, or are not, valid. Such matters inherently require focus on the precise fact situation giving rise to the conflict. We are prepared to argue, however, that a bright line test suggesting that such conflicts are never consentable, even where waiver counsel is present, goes further than the rules require.
What About the Rights of the Disclosing Client or Prospective Client?
In some situations, the question of whether or not the "confidential information conflict" discussed in this article is waivable becomes moot. For example, if the facts are that a second proceeding is initiated and the disclosing client is directly adverse to the Firm's other client, the Firm must withdraw or face possible disqualification. What, however, about the common situation that is set forth in Hypothetical 2 above? In a transactional matter one lawyer in a Firm learns something material-but not totally crucial-to another lawyer's representation of a different client. The first client desires-and is entitled to-confidentiality concerning its disclosure. That is, however, all that is entitled to. It has no inherent right to prevent Client B from agreeing to proceed with its transaction using the same Law Firm, so long as there is no real danger that the Firm's duty of confidentiality will be breached. Thus, if the Firm puts up an effective ethical wall, Client A's rights have been preserved. It is entitled to no more than that under the rules.
Some may argue that the ethics rules don't provide for use of ethical walls in this situation. The problem with that analysis here is that the only conflict in the "confidential information" conflict arises under Model Rule 1.7(b), and that conflict creates duties only to the second client (Client B in our hypotheticals above). The duty of confidentiality that Law Firm owes to Client A simply requires Law Firm to maintain the client's confidences. Lawyers and law firms do that thousands of times each day. Situations sometimes arise where circumstances create, in a court's view, an undue risk that information may be disclosed, or inadvertently used against the disclosing party, and the court takes action. An example are cases disqualifying counsel who "heard too much" from a prospective client. Other courts and the proposed Restatement of the Law Governing Lawyers, have disagreed, and have permitted the use of ethical walls in circumstances where the law firm's only duty was one of confidentiality to a prospective client from whom it "heard too much." We agree with the latter view. In any case, where the disclosing party is not directly adverse to Client B, there is clearly no reason to allow the disclosing party to preclude the representation, so long as the Firm takes adequate steps to preserve the confidentiality of the disclosing party's information.
The Maritrans Case
Maritrans GP Inc. v. Pepper Hamilton & Scheetz, 607 A.2d 1277 (Pa. 1992), is a high-profile case that, at first blush, might appear to undercut the position articulated in this article. We believe a close reading of Maritrans demonstrates that it does not. In Maritrans the Pennsylvania Supreme Court affirmed entry of an injunction barring a law firm ("Pepper") from representing a client ("Competitor") that was a competitor of Maritrans, a former client of Pepper (Pepper had withdrawn from its representation of Maritrans shortly before the injunction action was brought). The court reasoned that Pepper had confidential information from Maritrans that was relevant to Pepper's representation of Competitor and that Maritrans was entitled to assurance that its information would remain confidential. The Maritrans case is sometimes viewed as precluding representation of two competitors, or of a client on matters where the Firm has confidential information of another client relevant to representation of the second client. Properly viewed, it stands for neither proposition.
In Maritrans the court made several key factual findings. First, that Pepper had confidential information from Maritrans material to its representation of Competitor. Second, a prior ethical wall set up as part of a waiver agreement with Maritrans had been breached by lawyers in the Pepper firm. Third, a key lawyer in Pepper had further breached the consent agreement by "parking" Competitor (whom Pepper had agreed not to represent) with a friendly lawyer, and then bringing that lawyer (with Competitor in tow) into the firm. The ultimate situation created was one where a lawyer who had Maritrans' confidential information relevant to the representation of Competitor was actively representing Competitor (requiring one human being to compartmentalize his mind in order to maintain confidentiality).
Thus, the injunction entered in Maritrans was supported by findings that Pepper breached its ethical wall and non-representational agreements and that a lawyer involved in those breaches was representing Competitor and had confidential information from Maritrans. Whether those factual findings were correct or not, those findings provide the logical underpinnings for the court's injunctions. That is, given the finding of the firm's prior breach of its internal confidentiality obligations, a predicate existed for requiring more than an internal screening mechanism to protect client confidences and supplied the likelihood of injury necessary for a grant of injunctive relief. The holding in Maritrans is not, we suggest, logically applicable to cases lacking the factual predicate underlying that court's decision.
Use of an Ethical Wall is Reasonable in "Confidential Information" Conflicts
Ethical walls are applied in law firms thousands of times each year. Most of those are consent walls, but some nine states appear to allow ethical walls, without consent, in lateral transfer situations. Moreover, most states allow ethical walls in connection with the hiring of government lawyers. See ABA Model Rule 1.11, which has been adopted in a substantial majority of the states. In the vast majority of these ethical wall situations, no problem arises, and all relevant confidential information is protected. Thus, we believe that in cases similar to hypothetical two above, Law Firm should be able to use an internal ethical wall to preserve Client A's information. Law Firm should then be able to continue representation of B, if B is a sophisticated client (or is represented by independent waiver counsel) and can appreciate the nature of the "confidential information" conflict and chooses to waive it.
Loss Prevention Suggestions
ALAS Member Firms need to keep in mind that our proposal is just that-a proposal. The ABA opinions discussed above are only advisory, and the law on the subjects discussed in this article is scarce and ambiguous. Nevertheless, some courts or ethics committees may follow the ABA's apparent position. Thus, caution is dictated. If your firm has a confidential information conflict and your inability to use confidential information for the benefit of a client threatens to cause a disaster for that client, we suggest you withdraw from that representation, for both loss prevention and, ultimately, client-relations reasons. On the other hand, if you have determined that substitute counsel is highly unlikely to discover the secret information, and you believe the client will be substantially harmed by your withdrawal, you may want to consider the consent (and ethical wall) procedure discussed above. If you use the procedure, you should recognize that you run a risk that a court or ethics committee aggressively applying ABA Formal Opinion 90-358 (and the related opinions discussed above) may find fault with your conduct, even though you are doing only what you consider to be in the best interest of your client. That is a risk assessment that each firm must make on a case-by-case basis.
The "confidential information" conflict is likely to grow in significance in coming years. It is a problem that, in everyday practice, is difficult to uncover. Often, firms have confidential information from one representation that is relevant to representation of another client and never recognize the situation. If a firm's only option upon discovering this difficult to discern conflict is to withdraw from the second representation-even though the client will be harmed by withdrawal and would like to consent to the firm's continued representation-there will exist substantial disincentives to search for confidential information conflicts. Moreover, in many instances, the withdrawal by the firm will harm a client and serve no useful purpose. To be sure, the disclosing client is entitled to have its confidences protected. An ethical wall can provide such protection in virtually all such cases. Obviously, these are difficult issues, but we believe they merit reconsideration. Since the ABA is currently reviewing all of its rules, now is an opportune time for that reconsideration.