July 22, 2014

ETHICS CORNER: When Conflicts Rules Conflict

James P. Tallon

Consider the following hypothetical: Lawyer A is admitted to practice in New York and resident in his firm’s New York office. Currently, A represents Del Corp., a Delaware corporation headquartered in New York City, as borrower negotiating a significant credit facility from a bank syndicate. Lawyer B is A’s partner; B is admitted as a solicitor of the Senior Courts of England and Wales and is resident in the London office of the firm in which A and B are partners. Euro Corp., a long-time client of B, has asked her to represent it in connection with the purchase of Del Corp.’s wholly-owned English subsidiary. B would like C, who also is admitted in New York, but resident in the firm’s London office, to work on the transaction. Can B take on the engagement for Euro Corp.? If so, can C work on the deal?


This hypothetical focuses attention on a set of issues that arise from a troublesome lack of clarity in New York Rules of Professional Conduct 1.10(a) and 8.5(b). Despite a thoughtful and well-reasoned proposal to amend these rules made by the Committee on Professional Responsibility of the Association of the Bar of the City of New York in 2010, the rules haven’t been amended, but should be. (See Report on Conflicts of Interest in Multi-Jurisdictional Practice: Proposed Amendments to New York Rules of Professional Conduct 8.5 (Disciplinary Authority and Choice of Law) and 1.10 (Imputation of Conflicts of Interest) (March 2010) (“City Bar Report”) 

Essentially the problem is this: the hypothetical tells us that Del Corp. is the firm’s current client. Euro Corp wants the firm to represent it as purchaser of Del Corp.’s English subsidiary. Del Corp. and Euro Corp. have “differing interests” as that term is defined by Rule 1.0(f) and, consequently, representing both clients in the transaction, absent informed consents, confirmed in writing, constitutes a conflict of interest within the meaning of Rule 1.7(a). 

What does this have to do with B, who is neither admitted to practice in New York nor resident there? Rule 1.10(a) provides that “[w]hile lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rule 1.7, 1.8 or 1.9. . . .” (“Knowingly” denotes actual knowledge, which may be inferred from the circumstances, according to Rule 1.0(k); presumably, such knowledge is available through records firms are required to have by Rule 1.10(e)). One way to read Rule 1.10(a), as applied to the hypothetical, is that B, who is “associated in a firm” with A, cannot “knowingly” represent Euro Corp. if A can’t. 

If Euro Corp. had contacted A directly, it would be clear that A, and therefore the firm, had a conflict in representing Euro Corp. opposite Del Corp. in the proposed sale transaction, even though the matters are completely unrelated. Both companies may want the transaction and be willing to bend to get the deal done, but fundamentally they have differing interests with respect to price and terms. So, absent informed consents, A would be prohibited from representing Euro Corp. in the proposed transaction and, under one reading of Rule 1.10(a), B would be burdened by the same prohibition. 

The comments to Rule 1.10(a) note that “[t]he rule of imputed disqualification stated in paragraph (a) gives effect to the principle of loyalty to the client[; . . .] each lawyer [in a firm] is vicariously bound by the obligation of loyalty owed by each lawyer with whom the lawyer is associated.” This rationale suffers from a failure to recognize that client loyalty is not uniformly measured in every jurisdiction. For example, the City Bar Report notes that in the European Union, France, the United Kingdom, and Texas, lawyers are prohibited from acting against current clients only in the same or related matters, or where there is a risk that a client’s confidences will be used against the client. The current version of the Handbook of the Solicitors Regulation Authority, the regulatory body for solicitors in England and Wales, provides that “conflicts of interests” means “any situation where . . . you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict.” In other words, so far as B is concerned, her duty of loyalty is defined by her regulator in England and Wales and is defined differently than A’s duty of loyalty is defined by the rules. 

It is certainly true that clients, even the most sophisticated clients, may not want to see their law firm opposite them in transactional engagements or contested matters. That said, clients accustomed to the rules in England and Wales, France, the E.U. and elsewhere, may take the view that so long as the matters are unrelated, they are not troubled. A strict reading of Rule 1.10(a) assigns greater weight to the views of clients in the former category. 

The City Bar’s Report suggests that a different way to read Rule 1.10(a) is that B, if practicing alone, would not be prohibited from representing Euro Corp., and, consequently, should be free to take on the engagement. This way, the focus is on whether B is compliant with her regulated ethical obligations – as though she was a solo practitioner – rather than searching the firm to see if any lawyer in the firm is subject to ethics rules that would be disqualifying if applied to the firm as a whole and to B in this situation. 

There are compelling policy reasons for concluding that Rule 1.10(a) does not have the reach that it may seem to have based on a simple reading. For one thing, there’s no apparent, defensible rationale for New York disciplinary authorities regulating lawyers not admitted to practice in New York and not practicing there. Moreover, it’s not at all clear that New York has the power to regulate lawyers admitted in other jurisdictions when their conduct is compliant with the laws and rules of their admitting jurisdictions. 

In 2010, the New York City Bar’s Committee on Professional Responsibility proposed that Rule 1.10 should be amended to add a new section to clarify that no conflict would be imputed in a law firm if the conflict arose because of the conduct of lawyers in a foreign jurisdiction, so long as the conduct was permitted in that jurisdiction. The Committee’s proposal, which has been recognized as a sensible solution, hasn’t been acted on to date. 

Professor Roy Simon has suggested that Rule 1.10(a) does not “govern the world,” despite its broad language, because of Rule 8.5, titled “Disciplinary Authority and Choice of Law.” Rule 8.5(a) is clear: a lawyer admitted in New York is subject to discipline in New York no matter where the lawyer’s conduct occurs, but may also be subject to discipline in another jurisdiction. Rule 8.5(b)(1) addresses discipline with respect to conduct in connection with a court proceeding, and provides that the governing rules of professional conduct are those in the jurisdiction in which the court sits, unless the court’s rules provide otherwise. 

Rule 8.5(b)(2) speaks to the rules governing any other conduct (i.e., other than litigation in a court) and therefore applies in the context of the hypothetical. Rule 8.5(b)(2)(i) makes clear that if a lawyer is only admitted in New York, the New York rules govern. Rule 8.5(b)(2)(ii) applies to lawyers admitted in New York and another jurisdiction: the rules where the lawyer principally practices govern, unless the conduct at issue has a predominant effect in another jurisdiction in which the lawyer is admitted, in which case, the rules of that jurisdiction govern. 

Rule 8.5 doesn’t address what law governs the conduct of a lawyer not admitted to practice (or licensed) in New York. In theory, it is possible to read this omission, together with the language of Rule 1.10(a), as extending New York rules to all lawyers in a firm, no matter where they are licensed, by implication. Professor Simon takes the more pragmatic view that, while Rule 8.5(b) doesn’t address the question directly, it points in the direction of having the conduct of a solicitor in England and Wales governed by the Solicitors Regulation Authority. 

New York Rule 8.5(b) differs from ABA Model Rule 8.5(b). Model Rule 8.5(b)(2) provides that rules by which a lawyer’s conduct will be judged are those of the jurisdiction where the lawyer's conduct occurred, or the rules of the jurisdiction where the lawyer’s conduct had a predominant effect. In addition, Model Rule 8.5(b)(2) provides a safe-harbor for lawyers by exempting lawyers from discipline “if the lawyer's conduct conforms to the rules of a jurisdiction in which the lawyer reasonably believes the predominant effect of the lawyer's conduct will occur.” 

The differences between New York Rule 8.5(b) and Model Rule 8.5(b) are material. Although Model Rule 8.5 preserves the ability of the admitting jurisdiction to discipline lawyers according to the rules of the admitting jurisdiction, Model Rule 8.5(b) also excuses a lawyer from discipline based on the lawyer’s reasonable belief that his conduct conformed to the rules of a jurisdiction where his conduct would have predominant effect. Applying Model Rule 8.5(b) to the hypothetical, Lawyer C, who is admitted in New York, but resident in the firm’s London office, could work on the proposed transaction for Euro Corp., even though there is a Rule 1.7(a) conflict, so long as C has a reasonable belief that his conduct will have a predominant effect in England and will conform to the Solicitors Regulation Authority Handbook. By contrast, applying New York Rule 8.5(b), C could not work on the transaction without fear of being disciplined for having represented Euro Corp. in the face of a conflict with Del Corp. 

The New York City Bar’s Committee on Professional Responsibility also recommended amending Rule 8.5(b) in their 2010 report. Essentially, the Committee proposed striking the existing text of Rule 8.5(b) and substituting new language with the same purpose and effect as Model Rule 8.5(b)(2). Like the Committee’s proposed amendment of Rule 1.10(a), the proposed amendment of Rule 8.5(b) has seemingly died on the vine. 

It is possible, even probable, that there’s been no official push to amend these rules because there’s no perceived need to do so. It may be the case that there’s no real need to make clear that New York disciplinary authorities would never attempt to export New York law in what Professor Simon calls “ethical imperialism.” Nevertheless, the lack of clarity in how Rules 1.10(a) and 8.5(b) actually regulate lawyers in multinational firms is itself good reason to amend the rules as proposed by the City Bar’s Committee on Professional Responsibility.

James P. Tallon

Shearman & Sterling LLP

James P. Tallon is a partner in the Litigation Group at Shearman & Sterling LLP in New York. “Ethics Corner” is sponsored by the Professional Responsibility Committee, and is edited byRobert Evans III, a partner at Shearman & Sterling LLP.