Commentary—Loyalty by Contract: A Sad Reflection on Lawyer Ethics

Vol. 22 No. 3

By

Lawrence J. Fox is a partner of Drinker Biddle & Reath LLP in Philadelphia and a member of the ABA House of Delegates. Mr. Fox is also the Crawford Lecturer at Yale Law School, where he teaches professional responsibility. He is the founder and the supervising lawyer for the Ethics Bureau at Yale.

The conscientious lawyer does not relish being micro-managed. I for one have always been dismissive of the elaborate guidelines for outside counsel imposed by so many sophisticated corporate users of legal services. To be sure, there are good reasons corporate GC’s have been put in this position. The guerilla warfare waged by so many law firms, using their retainer letters as a way of “contracting out” from provisions of the rules of professional conduct, is one. And relentless amendments to the ABA Model Rules of Professional Conduct and their comments, enabling lawyers to squirm out of what was once an unshakable duty of loyalty to the client, is another. Lawyers cannot expect to launch these bazookas at prospective clients and not endure heavy artillery in response.

But so many of the emergent corporate client controls on outside counsel have gone too far, in my view, taking dead aim at the heart of good lawyering. Emblematic of that phenomenon are prohibitions on paying for meetings among law firm lawyers to discuss the client’s matter. The law firm can hold the meetings—the client simply won’t pay for them, a disappointing prohibition that reflects a distrust of the client’s own lawyers. That distrust is, perhaps, well-earned, given the too frequent examples of billable hour churning. Nonetheless, it is dismaying given that arguably the most valuable benefit law firm clients receive occurs when the law firm gathers a group of bright lawyers together to brainstorm a problem or coordinate work that must involve a team of lawyers. We can charge for emails to each other, but not for far more productive face-to-face meetings.

The Primacy of Client Loyalty

My baseline antipathy toward these tactics made it all the more amazing, in a good way, when I recently had a chance to review key elements of a major corporation’s standard outside counsel guidelines, not in connection with a representation, but during an in-house CLE on ethics. What sets these guidelines remarkably apart, mirabile dictu, was their primary and persistent emphasis on a notion nearly lost on a profession increasingly consumed by pecuniary self-interest: Client Loyalty. Indeed, the introduction to the guidelines was labeled Client Loyalty and, to me, that word choice itself spoke volumes. Though loyalty is the goal of our rules, the modern American law firm rarely speaks of loyalty; rather, it talks about conflicts of interest, and about how close it can come to the line, even venture across the line, to avoid an ethics rule construction that might—heaven forefend—cost them business.

How chest swelling it was, then, to see this topic addressed through the bifocals of the client and learn that the fiduciary duty is not only recognized, but emphasized. What a refreshing change from the BigLaw approach that too often treats this topic like a taxpayer’s dealings with the IRS, i.e., “as little loyalty as we can possibly get away with.”

The first lesson of these guidelines, for me, was the reminder that our fiduciary duties to clients must guide every aspect of our service to them, and every decision made in that service. Here we have, from one thoughtful corporation, carefully crafted expectations of the client relating to its goal of undivided loyalty, its requirements for identifying conflicts, representations the law firm must make in undertaking an assignment, and the procedures to be followed if a conflict waiver is to be sought.

Should These Instructions Be Necessary?

The next lesson I drew from these instructive guidelines arose from a question: why was it necessary for this company to go to this effort? Why should the client have to be telling the lawyer that the lawyer has to be loyal? Why should the client have to develop guidelines when we already have rules, binding rules, which address this topic? The very fact that this company and so many others like it need to remind these sophisticated lawyers of their obligations is nothing short of an embarrassment.

Only the Powerful Clients Receive Respect

There was yet a third lesson I drew from this review: The corporation that developed these guidelines is a very powerful one. Billions in sales and profits to match. It is powerful enough to dictate the terms of the engagements it enters into with its outside lawyers. It has bargaining power. Law firms that want to work for this enterprise will adhere to these guidelines, even if the rules of professional conduct applicable to all representations remain in an unopened rule book.

But what of the smaller companies? What of the individual clients? Should they be forced to have bargaining power in order to get the benefit of the guidelines this powerful company demands? Of course not. But that is in fact the case. We have gone so far down the road of accepting “contracting out” from the rules of professional conduct that too often the only clients who can get the benefit of these rules are the largest corporations in America, the clients that arguably need the protections the least, but the ones who recognize the game that law firms play.

For example, I remember when the ABA Standing Committee on Ethics and Professional Responsibility was asked whether it was permissible for a lawyer to take a position directly adverse to a member of a 100 percent owned corporate family member of the lawyer’s client (i.e., the client’s parent, subsidiary or sibling). I dissented from the Committee’s opinion, which permitted such representations, where I argued, inter alia, that the result was particularly unfortunate because the large sophisticated clients with in-house counsel would be smart enough to add to their retainer letters a prohibition on taking on representations in violation of Rule 1.7 vis-à-vis corporate family members. That fact would leave just the less sophisticated clients to suffer the ill effects of that bitterly divided decision.

This Is an Important Issue

A fourth lesson I drew from the guidelines arose from the fact that this corporate client felt the need to remind its high-powered lawyers how important the law firm’s process of checking for conflicts was to the retainer. Counsel is instructed:

Outside Counsel’s acceptance of an engagement without written disclosure of any conflict of interest constitutes Outside Counsel’s representation that an adequate conflicts of interest check has been conducted and there are no conflicts of interest. Outside Counsel’s acceptance of an engagement or continued representation of us in a matter, after written disclosure of one or more conflicts of interest and our written waiver of same, constitutes Outside Counsel’s representation that an adequate conflicts of interest check has been conducted and there are no conflicts of interest, other than those for which a waiver has been sought and granted by us.

Again, this instruction should be unnecessary if we as a profession did not see, time and again, law firms taking a chance the firm will not be disqualified by taking on a representation known to be way over the line on the theory that the worst that can happen is finding the firm on the wrong side of a successful motion to disqualify. These are motions that some firms apparently treat not as an embarrassment, but as a badge of honor. Their mantra: “Our law firm was courageous enough to make its uniquely valuable services available to clients who want to retain the best, the rules of professional conduct be damned.”

Conflict Waivers Are Anything but Trivial

Fifth, these guidelines put the lie to the notion that, when it comes to seeking the waiver of a conflict on informed consent from so-called sophisticated clients, little, if any, discussion is required. Observe what this client seeks from its law firms:

Relevant Facts to Be Included in Waiver Request:

  • Identity of the other client or proposed client
  • Specific work to be performed for the other client (after obtaining the client’s authorization)
  • Type(s) of work performed by Outside Counsel for us
  • Whether Outside Counsel has obtained a conflict of interest waiver from the other client
  • Identity of individuals within the firm who will perform the engagement for the other client and their location (e.g., Chicago office)
  • Individuals within the firm who perform or may perform work for us
  • Steps to be taken to maintain separate and independent representations of us and the other client and to preserve and protect our confidences, including, without limitation, the advice/counsel provided to us
  • Whether representation of either us or the other client concerns a subject matter or substantive law that may be important to us
  • Outside Counsel’s analysis under the applicable code or rules of professional conduct that a waiver is consistent with the ethics requirements applicable to the jurisdiction
  • A list of all in-house counsel or business contacts whose matters may be affected by the conflict of interest waiver request

That request for information tells us (I hope my students are listening) how important our fiduciary duty of loyalty is to our clients and how solemn should be the process of seeking a conflict waiver. Note particularly how the lawyers are required to identify every lawyer and other corporate employee affected by the waiver so that each can be notified to help the enterprise decide whether to waive and how this company’s lawyers must avoid seeking a waiver of any conflicting representation that involves a subject matter important to the client.

Sixth, one of the profession’s failings when it comes to answering the question whether to seek a waiver is the wholesale ignoring of Rule 1.7(b)(1), the critical provision that establishes as non-waivable any conflict of interest unless a reasonable lawyer (not the drooling lawyer seeking the waiver) would conclude that the lawyer can represent each affected client “diligently and competently.” It is my view that this provision prevents a lawyer from seeking a waiver of a conflict that, inter alia, involves the lawyer’s suing his own client (with the possible exception of those situations that arise in some bankruptcies and environmental cases where dozens or hundreds of parties are deemed to have claims against each other). Thus, I found it so interesting to read this client’s special representations that must be made by outside counsel in the required conflict waiver letter:

Representations to Be Made by Outside Counsel in Conflict Waiver Letter:

  • The matter is not related to, does not arise out of, and will not result in a litigated matter between us and the other client.
  • It appears there is no chance of the parties becoming fundamentally antagonistic or that our interests could in any way be prejudiced.
  • Outside Counsel agrees that it will withdraw completely from the matter if litigation ensues between us and the other client or if we subjectively believe that the Company and the law firm’s other client, or their respective positions, have become fundamentally antagonistic or that we will suffer prejudice.
  • Outside Counsel has not learned anything through its representation of us, and/or does not anticipate learning anything through the proposed engagement, that is substantially related to the subject of the representation of the other client.
  • It appears that the representation of the other client will not adversely affect the relationship between us and Outside Counsel or dilute the law firm’s loyalty to and zeal in its representation of us.
  • Failure to grant the waiver will cause an unreasonable hardship for the Outside Counsel’s other client (for example, where the law firm acts as the other client’s de facto real estate department, and it would cost the client a significant amount of money to bring another law firm up to speed on the transaction).
  • Outside Counsel confirms that a conflict waiver by us does not waive the law firm’s duty to keep confidential all information about us and all our confidences.
  • The representation will not be undertaken unless both we and the other client consent to the waiver in advance and in writing.

Each of these categories is important and instructive. Particularly worthy of note is the prohibition on waiving any conflict where the client’s interests would be “fundamentally antagonistic,” a formulation that captures most litigation plus other non-litigation representations, for example, negotiations that could have the same result. Equally fascinating is the obligation on the law firm that is seeking the waiver only to request one if the alternative—declining the conflicting representation—would work an “unreasonable hardship” on the other client, a representation designed to implement the next lesson I draw from these guidelines.

The profession’s infatuation with open-ended prospective waivers has become the poster child for everything that is wrong with the views of far too many lawyers regarding the loyalty we owe our clients. Virtually every BigLaw law firm has embraced, buried on page four of a ten-page standard single-spaced retainer letter, an open-ended prospective waiver that purports to allow the law firm to sue its present client at any time, on any matter, so long as it is not substantially related to the matters being handled for the client—RICO, fraud and treble damage claims included. Thus, I was delighted to find in this company’s guidelines the following unqualified instruction:

We expect a strong degree of loyalty from Outside Counsel. Circumstances giving rise to conflicts of interest are not preferred and should be avoided unless absolutely necessary. As such, we expect conflict of interest waiver requests to be made infrequently. General, prospective or unlimited conflict of interest waivers should never be requested.

Conclusion

Unless the client gives informed consent to a waivable conflict of interest, in the proper ordering of the relationship between lawyer-fiduciary and client-principal, the former owes the latter a level of loyalty that prohibits any representation directly adverse to a present client, no matter how unrelated to the work for the client. Further, if taking on the matter creates any material limitation that affects any client, the matter may not be undertaken—again unless all affected clients give informed consent to a waivable conflict. That should not be a level of loyalty for which the client must fight. It should be guaranteed by every lawyer representing every client. Yet this client’s need to establish elaborate guidelines that retained lawyers must meet demonstrates that this level of loyalty is otherwise not being provided today.

Equally troubling is the likelihood that only those clients with real bargaining power can achieve this desired level of commitment. That conclusion should prompt serious introspection by the profession as to how we reached this sorry state of affairs, what it says about our professionalism, and what steps we can take to recapture our proper role as loyal fiduciaries for our clients.

Meanwhile, as much as I do not like some client guidelines, I applaud the effort of this sophisticated and powerful client for holding up a mirror of self-reflection that demonstrates to us how far we need to go.

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