October 01, 2013 Top Story

Unsigned Conflict Waiver Letter Found Enforceable

Client waived advance conflicts despite never signing letter

Joseph Callanan

An unsigned advance conflict waiver is enforceable, according to a New York appellate court, allowing a law firm to continue to represent a large national retailer in a dispute with another large national retailer over the sale of Martha Stewart products. In Macy’s Inc. v. J.C. Penney Corp., the Supreme Court of the State of New York, Appellate Division, First Department affirmed the trial judge’s denial of J.C. Penney’s motion to disqualify the law firm from representing Macy’s due to a conflict. Specifically, the court held that through a March 2008 engagement letter in which J.C. Penney hired the firm to perform intellectual property litigation and trademark registration in Asia, J.C. Penney waived its right to protest by accepting the engagement—even though it never signed the letter.

Asian IP Engagement Letter Constitutes Advance Conflict Waiver in NY Dispute

The engagement letter informed J.C. Penney about the possibility that the firm’s clients, including future clients, may be direct competitors or have interests contrary to J.C. Penney. The firm warned J.C. Penney that its clients might also seek to retain the firm in transactions and litigation adverse to the retailer.

The law firm’s “conflict waiver was unusually detailed, expressly stating that the law firm would not undertake the J.C. Penney representation unless the client agreed that the firm could handle matters directly adverse to J.C. Penney’s interests,” although not in substantially related matters, says Thomas G. Wilkinson, Jr., Philadelphia, cochair of the Conflicts of Interest Subcommittee of the ABA Section of Litigation’s Ethics and Professionalism Committee.

The court found the “agreement unambiguously explained” that the firm would not represent J.C. Penney unless the retailer agreed to the firm’s arrangement, thereby “waiv[ing] any conflict of interest” and the right to disqualify the firm in potential future matters adverse to J.C. Penney.  The agreement also noted that J.C. Penney’s instructions in the 2008 matter “will constitute your full acceptance of the terms” and create an advance conflict waiver.

J.C. Penney did not dispute that after receipt of the retainer letter it continued to instruct the firm regarding its Asian trademark portfolio. The court found that the retailer accepted the terms of the agreement, waiving the future conflict, even though J.C. Penney never returned the engagement letter countersigned, as requested by the law firm.

“The waiver expressly provided that if the client proceeded with the representation, the waiver would be deemed effective and enforceable. There are states that more strictly require that conflict waivers be signed by the client and may not have credited the waiver language absent a client signature,” states Wilkinson.  The trial court even noted during argument that “basically performance creates the contract, not so much the signature.”

“Ultimately, the court concluded that it would be prejudicial to disqualify the plaintiff’s attorney” for multiple reasons, says Nicholas B. Reuhs, Indianapolis, cochair of the Conflicts of Interest Subcommittee of the Section of Litigation’s Ethics and Professionalism Committee.  First, the conflict was “contemplated and clearly disclosed to the defendant,” he says. And second, the conflict “involved two wholly unrelated matters [which were unlikely to] present any risk that confidential information would be misused.”

Since J.C. Penney’s interests in the Asian intellectual property matters “are entirely unrelated” to J.C. Penney’s interests in the dispute over Martha Stewart home products, the court additionally found no conflict. “The court implicitly concluded that it was unlikely that any client confidences gleaned from the work in Asia would have any bearing on the dispute with Macy’s,” says Wilkinson.

Current Rules Require Signature, but Code Did Not

ABA Model Rule of Professional Conduct 1.7(b) allows concurrent conflicts of interest, if each “client gives informed consent, confirmed in writing.”  However, New York did not adopt the Model Rules until December 2008.  Thus, New York’s version of the predecessor Code of Professional Responsibility controlled J.C. Penney’s March 2008 retainer agreement. DR 5-105(c) allowed concurrent adverse representation “if a disinterested lawyer would believe that the lawyer can competently represent the interest of each” client and the clients consent after full disclosure of the relevant implications, advantages, and risks.

The Association of the Bar of the City of New York Committee on Professional and Judicial Ethics considered in 2006 the propriety of whether a “law firm may ethically request a client to waive future conflicts,” which it found permissible under certain circumstances. The formal opinion noted that its view was consistent with the ABA’s Standing Standing Committee on Ethics and Professional Responsibility conclusions in Formal Opinion 05-436.

“This particular matter straddles New York’s transition from the Code of Professional Conduct to the Rules of Professional Conduct,” states Reuhs.  The Code and the Rules both allow advance conflict waivers, if clients give informed consent. The New York ethics opinion found under the Code that advanced waivers “need not be in writing if informed consent can be found under the circumstances,” but that “under most circumstances written confirmation of the advance waiver is salutary because it may avoid disputes over the nature and extent of the waiver.”

The courts found without difficulty informed consent due in part to the sophistication of J.C. Penney. “Courts are more likely to enforce prospective waivers agreed to by sophisticated clients and in-house counsel,” concludes Wilkinson.  Both formal opinions cautioned that advanced conflict waivers are more appropriate with sophisticated clients.

The New York ethics opinion noted, “blanket or open-ended advance waivers that are accompanied by relatively limited disclosure about the prospective conflicting matters should nevertheless be enforceable” against sophisticated clients. The ABA formal opinion similarly supported finding an effective waiver against “an experienced user of the legal services . . .  particularly if, e.g., the client is independently represented by other counsel in giving consent.”  “The adequacy of informed consent will depend on the specificity of the waiver language and the sophistication of the client,” cautions Reuhs. 

Keywords: advance conflict waiver, conflict of interest, prospective waiver, informed consent

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