January 10, 2020 Feature

Corporate Family and Thrust-Upon Conflicts

A look at what to do if a client does something mid-representation that creates a conflict for another client.

Michael Downey

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“If a client does something mid-representation that creates a conflict for another client, do we have to terminate both representations?” Paradox asked.

“What did the first client do to create the problem?” Ethox responded.

“We defend ACME in cases alleging defects in ACME’s rocket sleds. Other lawyers at our firm represent Big Corporation, which is acquiring patents from Inventors LLC. We learned that ACME is acquiring Inventors LLC,” Paradox said. “So now we represent Big Corporation as buyer of patents and, through ACME, Inventors LLC as the potential seller of those patents.”

“That may be a problem,” Ethox empathized. “But the right thing to do here may not be so clear-cut.”

“Why?” Paradox asked.

“Because we need to figure out whether ACME’s acquisition of Inventors prevents us from being adverse to Inventors,” Ethox answered.

“The American Bar Association Formal Opinion 95-390 states that a lawyer’s representation of one corporate entity does not automatically disqualify the lawyer from being adverse to all related corporations.

“ABA Model Rule 1.7 comment 34 states that a lawyer who represents a corporation or similar entity does not necessarily represent all corporate affiliates. Instead, a disqualifying conflict exists only where the circumstances are such that the affiliate should also be considered a client of the lawyer, where the lawyer and client have agreed that is how corporate family conflicts will be handled, or where other circumstances indicate the lawyer’s representation adverse to the corporate affiliate would likely be materially limited such that there is a Rule 4-1.7(a)(2) conflict.”

“What agreement might a lawyer and client have?” Paradox asked.

“Sometimes corporations use standard engagement terms that say if a law firm representing one corporate entity should be deemed to represent all corporate affiliates as if they were a single entity,” Ethox answered. “Then all the corporate affiliates would need to be considered clients for purposes of analyzing conflicts.

“Other times, a law firm will include language in its engagement agreement that it represents only a specific corporation, and not any of its affiliates. This should help the lawyer avoid disqualification from matters adverse to corporate affiliates.”

“I did not see any language like that,” Paradox said. “So what types of circumstances create problems in a corporate family conflict?”

“The inquiry is fact-driven,” Ethox answered. “Is ownership the same? Are the same corporate officers and in-house counsel involved? Are they all officed at the same location? Those types of issues. If two corporate affiliates operate as one entity, then a lawyer representing one corporate entity will likely be prevented from taking a matter adverse to the other, without consent.”

“Inventors LLC was merging all its operations, including in-house counsel, into ACME,” Paradox said. “ACME’s lead patent lawyer is also getting involved in the patent sale.”

“Then we probably need to consider the corporate family conflict a problem,” Ethox agreed. “The next issue is whether we can get consent.

“Will ACME and Big Corporation allow us to continue handling both representations—defending ACME in the rocket sled cases while negotiating opposite ACME’s subsidiary in the patent sale? Here, everyone knows about the patent deal, so improper client confidences should not be a problem.”

“What if we cannot get consents?” Paradox asked. “Will we need to withdraw from both representations?”

“Possibly. But the conflict that arose when ACME purchased Inventors LLC is known as a ‘thrust-upon’ conflict,” Ethox said, “because neither our firm nor Big Corporation caused the conflict. Under Rule 1.7 comment 5, we may be forced to withdraw from only one conflicted representation—here, probably the ACME representation—while continuing to handle the other.

“But let’s first see if we can get consent from Big Corporation and ACME,” Ethox counseled Paradox. “Both may be willing to waive the conflicts, particularly if we agree to create an ethics screen between the lawyers working for ACME and those negotiating for Big Corporation against Inventors LLC.”

Michael Downey

The author is a legal ethics lawyer at Downey Law Group LLC, in St. Louis.

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