IN THE PREVIOUS ENTRY TO THIS COLUMN, I addressed the administrative procedures that enable a law firm to identify whether or not the potential for a conflict of interest exists. Once identified, the process of analyzing whether the conflict prohibits the law firm from undertaking a new representation or withdrawing from an existing one begins. This analysis may be daunting, but it is necessary. It’s important to remember when analyzing a conflicts issue that the appearance of a conflict is nearly as devastating as the existence of a true conflict. The perception of whether a conflict exists emanates from the point of view of the client or potential client, and it is often made from the vantage point of hindsight.
Mastering the ethical rules associated with conflicts analysis is the first step in the process. In most jurisdictions, conflict analysis is divided into four major categories: (1) personal conflicts between a lawyer and client, (2) conflicts confronted in the simultaneous representation of clients with differing interests, (3) conflicts between a current and former client, and (4) conflicts involving third parties. At its essence, a conflict exists if there is a significant risk that a lawyer’s professional judgment would be impaired by his or her personal interests, or by the responsibilities owed by a lawyer to a current client, to a former client or to a third party. Although the verbiage of ethics rules may differ depending upon the jurisdiction, the basic principles are analogous. This column specifically addresses the ABA Model Rules of Professional Conduct, but attorneys should become familiar with the controlling rules in their jurisdictions.
WHO IS THE CLIENT?
In every representation, an attorney must define the identity of the client. Doing so in the context of the retainer agreement is not sufficient where the client, whether an entity or an individual, that believes the attorney is representing its interests is not privy to the terms of retention. Letters must be sent to individuals or entities that may reasonably believe their interests are being represented by the attorney in any given transaction when in fact this is not the case. Once the attorney has defined who the client is and is not, the attorney must take care that his or her actions are consistent with the representation. It is what the attorney actually does that will define who the client is.
CONFLICTS OF INTEREST BETWEEN LAWYER AND CLIENT
ABA Model Rule 1.7 provides that a lawyer shall not represent a client if there is a significant risk that the representation will be materially limited by the lawyer’s own financial, business, personal or other interests. The nature of what constitutes the lawyer’s interest is broadly interpreted and applies to familial relationships. For instance, related lawyers may not represent clients with differing interests in the same or substantially related matter unless the lawyers obtain the informed consent of each affected client.
Conflicts based upon the personal interests of the attorney are generally not imputed to the attorney’s law firm (with exceptions), and may be waivable if (1) an attorney reasonably believes that he or she will be able to provide competent and diligent representation to the affected client, (2) the law does not prohibit the representation and (3) the client provides informed consent to the waiver, confirmed in writing. However, a number of specific situations involving conflicts based upon the attorney’s personal interests warrant mention.
Engaging in a business relationship with a client is a constant source of claims and ethical complaints. Under Rule 1.8(a) an attorney may not transact business with a client or acquire an ownership, possessory, security or other interest adverse to the client unless: the terms of the transaction are fair and reasonable to the client; the terms of the transaction have been fully disclosed in writing to the client in layman’s terms; the client is advised in writing that he or she should seek the advice of independent counsel (and is given sufficient time to do so); and the client provides his or her informed consent, in writing and signed by the client, to the basic terms of the transactions and the lawyer’s role in the deal—including whether the client believes the lawyer is representing his or her interests. Although ethically permissible if the conditions are met, from a risk management perspective, entering into a business transaction is never a good idea and should be avoided.
Similarly, unless a lawyer is related to the client, Rule 1.8(c) prohibits a lawyer from soliciting significant gifts from the client and from preparing any instrument (e.g., a will, trust or deed) giving the lawyer, or a person related to the lawyer, a substantial gift.
Although an attorney may advance the costs of a case depending upon the outcome or may pay for the court costs of an indigent client being represented on a pro bono basis, he or she may not otherwise lend funds to a client (Rule 1.8(e)). Similarly, an attorney may not obtain a proprietary interest in the subject of a client’s litigation except to the extent a permissible contingent fee arrangement exists or the law permits a lien to secure the attorney’s fee (Rule 1.8(i)). During the time the attorney-client relationship exists, a lawyer may not enter into an agreement that would give the lawyer literary or media rights based in large part upon information relating to the representation (Rule 1.8(d)).
Rule 1.8(h) delineates the conditions under which an attorney may limit prospective liability to a client or resolve a legal malpractice claim. Unless independent counsel represents the client, an attorney may not enter into an agreement with a client to prospectively curtail the attorney’s liability to the client. In the event a client possesses a potential legal malpractice claim against his or her attorney, the attorney may not settle the claim unless the client is advised in writing that retaining independent counsel is advisable and the client is given reasonable time to do so. From a practical point of view, an attorney should always notify his or her professional liability carrier before making any attempt to settle a potential claim, even if the amount falls within the insurance policy deductible.
While codifying this particular provision is regrettable, Rule 1.8(j) prohibits an attorney from having sexual relations with a client unless the relationship predated the start of the attorney-client relationship.
REPRESENTING CLIENTS WITH ADVERSE INTERESTS SIMULTANEOUSLY
The next category of conflicts involves situations when an attorney represents clients with competing interests. Under Rule 1.7, an attorney may not take on a new matter or continue representing a client when the attorney’s professional judgment may be impaired or in a situation that might result in representing clients with directly adverse interests. It is allowable if the attorney reasonably believes that he or she can competently represent the interests of each client, and each client consents in writing to the representation after full disclosure of the implications of the simultaneous representation and the advantage and risks involved. If the representation is otherwise prohibited by law or involves the direct assertion of a claim by one client against another in the same proceeding, the concurrent conflict may not be waived.
Once again, the same pitfalls discussed in analyzing the existence of a conflict between an attorney and a client must be addressed where clients have competing interests—except the risks are now multiplied. Instead of being concerned with the understanding of one client and the comprehensiveness of full disclosure, the process must be repeated with respect to each client potentially involved.
When one client refuses to consent to a dual representation, an attorney may not jettison the uncooperative client in an attempt to convert a continuing representation into a past relationship. Care must be taken to explain to jointly represented clients that communications are not protected by privilege vis à vis each client. In the situation when an attorney represents two or more clients, there can be no aggregate settlement of the claims in favor of or against the clients unless each client gives informed consent, in writing signed by the client. In the case of a criminal matter, an aggregated agreement as to guilty or nolo contendere pleas also requires informed consent in writing signed by the client. In both situations, true informed consent requires the lawyer to disclose the existence and nature of all the claims or pleas involved and of the participation of each person in the settlement under Rule 1.8(g).
CONFLICTS BETWEEN A PRESENT AND FORMER CLIENT
Analyzing whether a conflict exists between a current and former client is slightly easier. Under Rule 1.9, unless a lawyer obtains the informed consent of the former client and it is confirmed in writing, an attorney may not represent a new client in the same or substantially related matter in which the new client’s interests are materially adverse to the interests of the former client.
The question arises about when a client can be characterized as a “former,” as opposed to a “current,” client. There’s no clear answer. A law firm may represent a client for 20 years and yet have no open matters for a one-year period (or more). If the relationship was such that the client expected the law firm to continue its services, the client may be considered current despite the lack of any open matters. I recommend that firms and lawyers get into the habit of sending closing letters confirming the termination of representation in any given matter. In addition to providing some contemporaneous documentation that the client could not reasonably expect the law firm to render further services, a letter also fixes the accrual date for the period of limitations.
In a lateral hire situation, absent the informed consent of the previous client, again confirmed in writing, a lawyer may not represent a person in the same or substantially related matter in which the lawyer’s prior firm previously represented a client if the lawyer received confidential information from that engagement. Conversely, absent the informed consent of the prior client (confirmed in writing), a law firm may not represent a person with interests materially adverse to the client represented by the now-departed lateral hire if any attorney still with the firm acquired confidential information during the former representation.
CONFLICTS INVOLVING THIRD PARTIES
The final category of conflicts to be examined involves the attorney’s relationship with third parties. We all know the touchstone of the attorney-client relationship is the attorney’s duty of loyalty to the client. This duty cannot be affected by the person paying for the attorney’s services. Under Rule 1.8(f), a third party may not pay the attorney’s fees unless the client gives his or her informed consent, the third party does not interfere with the attorney-client relationship or the lawyer’s independent professional judgment exercised solely for the benefit of the client and the lawyer maintains the duty of confidentiality owed to the client. Application of this rule ranges from a parent’s payment of a child’s attorney fees to an insurance company’s retention of defense counsel to represent one of its insureds.
Finally even if no attorney-client relationship is created, under Rule 1.18, an attorney consulted by a prospective client may not reveal any information obtained during the course of a consultation and may not thereafter represent a client with interests materially adverse to a prospective client in the same or substantially related matter when the information obtained from the prospective client would be materially harmful in the engagement under consideration. Absent the informed consent of both the prospective and current client, or the screening of the attorney receiving the information from the prospective client and notification to the prospective client, the lawyer’s firm would also be prohibited from representing the current client.
The effective analysis of conflicts is a skill every attorney must develop. It is not an easy process. However, the principle underlying the reason the various rules were developed is simple: Attorneys owe an undivided duty of loyalty to their clients. Common sense dictates that anything that would impede that duty of loyalty, or the exercise of the attorney’s independent professional judgment, constitutes a conflict that must then be addressed within the framework of ethical rules.