January 12, 2015

Ethical Conflicts and ADR Using Screening Walls and Advance Waivers to Manage Conflicts of Interest

Paul M. Lurie and Sharon Press

In this feature, Paul M. Lurie and Sharon Press raise issues of professionalism and their practical applications.

Assume that you have just successfully mediated a commercial dispute between A and B concerning a product developed by A that was being licensed by B. During the course of the mediation, you learned in confidence from A about the history of development of the product. A year later, one of your law partners at the XYZ law firm is asked to represent C in a claim against A involving the same product, but in a product liability context. Under what circumstances is a member of your firm precluded from taking on the representation of C? This article discusses this issue and suggests an approach for managing potential conflicts.

Licensed attorneys are obligated to comply with the applicable rules governing conflicts of interest. Most state rules are based on the American Bar Association Model Rules of Professional Conduct, which note that confidential information creating potential conflicts could be obtained by an arbitrator, mediator, or other third-party neutral who is also a licensed lawyer. This knowledge could be attributed to the neutral’s law firm, thereby preventing the acceptance of a new matter. Model Rule 1.12 allows another lawyer in the firm to take on the new matter notwithstanding such information being obtained by the neutral under the following circumstances: (1) informed written consent of the affected parties; or (2) the neutral is timely screened from participation in the matter, and written notice is given to the affected parties to “enable them to ascertain compliance with the [rule].”

Litigators can exploit the many ambiguities in Rule 1.12 by attempting to disqualify opposing counsel. These attempts will create expense or delay, even if removal is not ultimately successful. (See Armstrong v. McAlpin, 625 F.2d 433, 437 (2d Cir. 1980) (en banc), recognizing “proliferation of disqualification motions and the use of such motions for purely tactical reasons” vacated on other grounds, 449 U.S. 1106 (1981). See also Sports Med. Serv. of Gramercy Park v. Perez, 657 N.Y.S.2d 314, 315-16 (Civ. Ct. 1997), in which the court noted, “Disqualification motions have become a cottage industry. All too frequently attorneys bring such motions as a litigation tactic. Even where the situation presented seems to implicate a disciplinary rule if read literally, the court must be wary to prevent its misuse, particularly when it is unnecessarily detrimental to the adverse party's rights.”)

Advantage of Prospective Waivers

After an ADR proceeding has concluded, obtaining consent to the representation can be difficult, as parties may refuse to consent to protect their own interests or for other reasons. Rather than relying on written notice after the ADR case has concluded and on the firm’s own screening wall that aims to keep other lawyers in the firm from learning information that may create a conflict in a future case, neutrals practicing within law firms should ask the parties to execute an advance waiver of future conflict excluding the neutral but allowing the firm to undertake a representation.

The effectiveness of a prospective waiver depends upon the adequacy of the disclosure that is made at the time of execution of the mediation agreement containing the consent. This concern is addressed in ABA Formal Opinion 05-436, issued in May 2005, which acknowledged that the 2002 changes to Rule 1.7 now allow for advanced waivers with proper informed consent. This advanced waiver procedure has been approved in a recent case, Galderma Labs., LLC. V Actavis Mid. Atl., LLC, 927 F.Supp.2d 390, 395 (N.D. Tex. 2013). In this case, the court refused to disqualify counsel based on the following advanced waiver language:

We [law firm] understand and agree that this is not an exclusive agreement, and you [client] are free to retain any other counsel of your choosing. We recognize that we shall be disqualified from representing any other client with interest materially and directly adverse to yours (i) in any matter which is substantially related to our representation of you and (ii) with respect to any matter where there is a reasonable probability that confidential information you furnished to us could be used to your disadvantage. You understand and agree that, with those exceptions, we are free to represent other clients, including clients whose interests may conflict with yours in litigation, business transactions, or other legal matters. You agree that our representing you in this matter will not prevent or disqualify us from representing clients adverse to you in other matters and that you consent in advance to our undertaking such adverse representations.

Mediators operating in law firms would be prudent to incorporate into their mediation agreements a waiver of prospective conflicts of interest, conditioned on the use of effective screening walls to protect confidential information disclosed to the neutral during the proceeding in which the neutral acts. The screening wall should give the parties to the mediation an incentive to waive future conflicts by providing needed comfort that their confidential communications to the neutral will be protected. A screen that allows confidential information to leak to others in the firm will not prevent imputation of the firm under the rule.[i]

Here is a sample waiver of prospective conflicts of interest clause:

During or after the pendency of the Mediation, the Neutral’s law firm may provide services on matters for or against any Party or any competitor of any Party or any other person or entity involved in the Proceeding and may be opposing or competing counsel. These representations may include matters substantially related to the Proceeding or concerning confidential information related to a participant in the Proceeding (such information is collectively referred to as “Confidential Information.”) The parties have been adequately counseled concerning this risk and waive any prospective conflicts of interest on the condition that: (a) the Neutral does not participate in such matters; and (b) an effective screening procedure is established by the Neutral’s firm to insulate the Neutral from such subsequent matters and to insure that other attorneys, support staff, and employees of the Neutral’s firm do not have access to any Confidential Information obtained by the Neutral during the course of the Proceeding.

In commercial mediations where all parties are represented by counsel, a future waiver, if permitted under state law, should be effective. However, when the party whose waiver is sought is not represented by counsel, such as in consumer and product liability disputes, the quality of informed consent may be more problematic. A cautious mediator should discuss with the party the implications of such a waiver and be confident that the party offers consent freely.[ii]

Paul M. Lurie is a partner with Schiff Hardin LLP in Chicago. He has been legal counsel for major real estate owners, developers, and design and construction firms for more than 40 years. He now is a professional mediator and arbitrator. He can be reached at plurie@schiffhardin.com. Sharon Press is Professor of Law and Director of the Dispute Resolution Institute at Hamline University. Previously, she served for 18 years as director of the Florida Dispute Resolution Center. She can be reached at spress01@hamline.edu.

[i] McKenzie Constr. v. St. Croix Storage Corp., 961 F. Supp. 857, 859-861 (D.V.I. 1997) (disqualifying attorney and imputing disqualification to the entire firm after screening wall mechanism did not function correctly); Kassis v. Teacher’s Ins. & Annuity Assoc., 93 N.Y.2d 611, 618-619 (N.Y. 1999) (stating that an inconsequential screening wall does not prevent attorney disqualification or the imputation of the attorney’s law firm).

[ii] Jacqueline M. Nolan-Haley, Informed Consent in Mediation: A Guiding Principle for Truly Educated Decision-making, 74 Notre Dame L. Rev. 775, 777-778 (1999). See also, Peter Jarvis et al., A “Safe Harbor” for Future Conflicts of Interest, in 29 ABA/BNA Lawyers Manual on Professional Conduct 384 (2013) (discussing what has been learned from the Galderma case).


Paul M. Lurie and Sharon Press