For every (ethical) lawyer, the thrill of receiving a phone call from a client about a new matter is soon tempered by the recognition that conflicts must be checked and that a conflict could end the representation before it starts. I believe conflicts administration is likely neck and neck with timekeeping in the contest for most- hated part of the lawyer’s job. In this way, conflicts are like the weather: They are unavoidable—even by solo practitioners who have only one client—but the risks they pose can be, indeed must be, planned for and mitigated. So with rain in the forecast, I suggest you pack an umbrella.
The first two parts of this article discuss conflicts from the perspective of outside counsel, with examples of the most common conflicts and suggested strategies for anticipating them and mitigating their risk. The third part of the article discusses conflicts from the client’s perspective, and particularly clients’ increasing pushback in the conflict-resolution process by, among other things, rejecting advance waivers and establishing client-friendly conflicts policies in their outside counsel guidelines. In the three parts combined, the article offers visibility into potential storms and tools to batten down the hatches.
When lawyers refer to “conflicts,” they are typically thinking of the “direct adversity” conflict. The Model Rules of Professional Conduct proscribe direct adversity with current clients and, in some cases, former and “prospective” clients. Model Rule 1.7(a) prohibits, subject to exceptions identified in Rule 1.7(b), a law firm from representing one client in a matter directly adverse to another current client. Model Rule 1.9 likewise prohibits direct adversity against a law firm’s former client, but the prohibition is narrower than in Rule 1.7 It applies only to representation in a matter that is either the same as or “substantially related” to a matter in which the firm previously represented the former client. And Model Rule 1.18 prohibits a law firm from representing a client whose interests are “materially adverse” to those of a prospective client in “the same or substantially related matter” if the lawyer received confidential information from the prospective client that the lawyer could use to harm the prospective client, unless the law firm implements certain prophylactic measures and notifies the prospective client.
A close, and sometimes neglected, cousin of the “direct adversity” conflict is the “material limitation” conflict. In addition to prohibiting a law firm from representing one client “directly adverse” to another client, Model Rule 1.7(a) prohibits a law firm from taking on a matter where there is a “significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.” Note that while a material limitation conflict may arise where there is also a direct adversity conflict, direct adversity is not required, and note also that the limiting factor may be the interest of a party other than the client. Interestingly, while material limitation conflicts are not explicitly referenced in Rule 1.9, Rule 1.7 acknowledges the possibility of a material limitation conflict with a former client.
Direct adversity and material limitation conflicts are almost inevitable—like rain in Seattle and wind in Chicago. Even a solo practitioner who spends her entire career representing a single client, and does not court new clients, could have a material limitation conflict arising from the interest in the matter of either the lawyer herself or a third party. Sometimes these conflicts are fatal to a representation, but not always. Particularly if the adversity is in a transaction, clients will often bestow grace on law firms by consenting to the adverse representation. But in my experience, such grace is rare when the adversity is in litigation. Such consents must be granted by both sides and must be “informed” to overcome the conflict.
Law firms typically muddle through conflicts by seeking consents at the time conflicts present themselves. And in many cases, there is no better option if the firm wants to take the conflicted matter. But a consent, like an umbrella in a flash rain storm, can be an imperfect tool—often too little, too late to keep you from getting wet. However, good judgment and advance planning can mitigate some of those risks.
The most common way to get ahead of a conflict is to obtain a broad advance consent in which the client agrees that the law firm may represent a party adverse to the client in any sort of future matter. These advance consents are often tempered by the firm’s agreement not to be adverse to the client in matters substantially related to work they have done for the client, or where the law firm has confidential information that the firm could use against the client in the conflicted matter.
Sophisticated clients, however, often refuse to sign such consents, and even when granted, such consents may not be up to the task. “Informed consent” to a conflict “requires that each affected client be aware of the relevant circumstances and of the material and reasonably foreseeable ways that the conflict could have adverse effects on the interests of that client.” Model Rules of Prof’l Conduct 1.7 cmt. 18. If a consent fails that test, the law firm could face a problem when the deal starts to go south and the opposing client has second thoughts about the consent it gave in happier times. The firm risks losing its fees and making at least one client unhappy. Alternatively, if a problem shows up in the deal documents, the conflict may even feature in a malpractice claim. For these reasons, while my firm has an advance waiver provision in our engagement letter, I regard it as a last resort. In 14 years as the firm’s general counsel, I have never relied on it.
Given the shortcomings of advance waivers, how can the risks of direct adversity and material limitation conflicts be mitigated before they materialize? The simple answer is that being thoughtful about the potential sources of future conflicts and carefully drafting a narrow advance waiver can get you to informed consent. Two examples illustrate this point.
First, imagine a firm that represents small local hospitals in employment and transactional matters. A major hospital system, we’ll call it “Big Health,” comes to the firm seeking representation exclusively in employment matters. This is a great opportunity, but the firm knows that Big Health may have its eye on acquiring some of the firm’s smaller clients, and it wants to preserve its ability to represent its local hospital clients in those transactions. Relying on either a generic advance waiver or Big Health’s magnanimity when the firm requests a specific waiver at the time of the acquisition is fraught with risk.
Fortunately, crafting an informed consent around direct adversity is relatively easy. Big Health knows exactly what types of direct adversity it is consenting to (representation of the target/seller in an acquisition), and it at least knows the types of clients (smaller hospitals) the law firm may represent in those transactions. It may even know some of the specific hospitals the law firm represents. So at the time of its engagement by Big Health, the law firm has an opportunity to craft an informed consent to direct adversity that will mitigate its risk of being conflicted out of representing an existing or potential local hospital client that Big Health may wish to acquire in the future. Such a consent should probably also include an acknowledgement by Big Health that the law firm cannot disclose a local hospital’s confidential information to Big Health.
But direct adversity is not the end of the inquiry. The firm should also consider whether there is a material limitation conflict and whether the law firm’s duties to a local hospital materially limit its ability to continue representing Big Health on employment matters. The local hospital’s employee benefits programs, contracts, and policies will likely affect the terms of the deal, and might warrant adjustments to Big Health’s employment practices. In that case, the firm will have to evaluate whether it would even be possible for it to continue advising Big Health on employment issues while the acquisition goes on and, if so, whether there might be limitations on its representation to which Big Health must consent. That kind of conflict is harder to sufficiently anticipate. Therefore, the mitigation strategy may be to anticipate that an unresolvable conflict may exist and to obtain Big Health’s agreement that if an unresolvable conflict arises, the firm may withdraw from representing Big Health and continue to represent its target local hospital client.
Of course, Big Health is not the only client that must consent to this representation. The firm’s local hospital clients are also entitled to loyalty and confidentiality from their lawyers. A target local hospital client may be legitimately concerned that the law firm’s desire to keep Big Health as a client could put the local hospital’s confidential information at risk or that the law firm might pull punches during negotiations or lose objectivity when counseling the local hospital on the terms of the deal. The law firm will of course tell itself and the client that it will competently and vigorously represent the local hospital in the acquisition, notwithstanding its interest in maintaining Big Health as a client. But there may be other material limitations that will need to be disclosed—the law firm may have material knowledge about Big Health that may be relevant to the local hospital’s interest in being acquired that the law firm cannot disclose or even use in the negotiation (unless Big Health has consented). And maybe the lawyer handling the deal for the local hospital is a major shareholder in Big Health and believes the value of her shares will increase significantly if the deal goes through. Or maybe the law firm represents another local hospital that, for whatever reason, does not want the deal to go through.
It may or may not be possible for the firm to obtain its local hospital clients’ consent to representing Big Health in the face of these material limitation conflicts. But to avoid a potential flood of conflicts later, it would be better to try to figure that out at the time the firm takes on Big Health and, if possible, obtain targeted advance consents.
Second, imagine a firm that participates in the creation of a joint venture—a potential hail storm of conflicts. The law firm has represented Mary, a successful entrepreneur, for a decade. Mary comes to the firm with a new business opportunity—a joint venture to roast high-end coffee and distribute it in self-branded shops, as well as other retail outlets and online. Mary contributes 80 percent of the joint venture’s start-up capital, while her partner Joe contributes 20 percent, plus sweat equity and his substantial experience in coffee roasting and retailing. Mary wants the law firm to represent her in the formation of the joint venture as a limited liability company and then, once it is formed, to represent the joint venture going forward in all aspects of its business—intellectual property, real estate, employment, franchising, etc. Joe and Mary will both be members of the joint venture, and Joe will be its manager.
From a conflicts perspective, there are many issues that should be addressed up front. The firm will represent the interests of the primary financial member of the joint venture (Mary) in the drafting and negotiation of the joint venture operating agreement. And once the joint venture is created, the firm will take direction from Joe (the minority financial interest) when representing the joint venture in business matters. Meanwhile, the firm will also represent Mary in unrelated matters. What happens if Mary and Joe have a falling out over the business? What if either of them purports to be acting in the interest of the joint venture adverse to the other? What if there is a dispute over the meaning of a term of the joint venture agreement that the law firm drafted?
These questions present issues about who the firm’s client is, both prior to and after the formation, as well as the scope of the representation, and they raise potential direct adversity and material limitation conflicts. These issues can and should be anticipated and addressed in an engagement letter in which the law firm obtains the informed consent of Mary and Joe—both individually and on behalf of the to-be-formed entity—to the firm’s representation of Mary in the formation of the joint venture and otherwise and to its representation of the joint venture.
A simple first step is to make clear that once the joint venture is formed, the firm’s representation of Mary in connection with that formation terminates and the joint venture becomes the client. By itself, this step will not eliminate all conflicts because Mary remains a client on unrelated matters. But at least it will eliminate confusion about whom the firm represents in connection with joint venture matters. Another way to eliminate issues is to carve out of the scope of the representation of the joint venture matters directly adverse to Mary or matters in which the firm’s representation of Mary might place a material limitation on its representation of the joint venture. The parties might also agree that the firm may represent Mary in matters directly adverse to the joint venture and the joint venture will obtain separate counsel for those matters.
The point is that if a conflict issue can be anticipated and specifically consented to in advance, it should be. Otherwise, the law firm may end up representing neither party and could even find itself on the wrong end of a malpractice claim.
When lawyers think about conflicts, they typically think about the direct adversity and (to a lesser extent) material limitation issues addressed in Rules 1.7, 1.9, and 1.18. And they probably also think about other rules that address particular applications of Rules 1.7 and 1.9, or variations thereof. For example, Rule 1.10 governs the “imputation” of one lawyer’s conflicts to other lawyers in the firm. Rules 1.11 and 1.12 address conflicts that arise when lawyers move between the public and private sectors or when they serve as mediators or judges. And Rule 1.13 acknowledges the limitations that Rule 1.7 may place on a lawyer’s ability to simultaneously represent an organization and some of its constituents (e.g., officers, directors, employees) in a matter.
Buried amid these rules is Rule 1.8, which defines a potpourri—or “wintery mix”—of 10 other conflicts issues that are often forgotten but can and should also be anticipated and addressed in advance. A few examples of conflicts addressed under Rule 1.8 are entering a business transaction with a client (unless it is fair, certain disclosures are made, and the client gives informed consent); soliciting from the client or preparing an instrument giving the lawyer a substantial gift from the client (unless the client is related to the lawyer); providing financial assistance to the client in connection with litigation (except for advancing court costs in certain circumstances); accepting compensation from one client for representing another absent informed consent and other limitations; acquiring a proprietary interest in a cause of action or subject matter of litigation, except for liens on fees and contingency fees; and having sex with a client, unless the sexual relationship started before the representation.
While Rule 1.8 enumerates a distinct list of conflicts, there are common threads that run between it and Rules 1.7, 1.9, and 1.18. First, most of the Rule 1.8 conflicts are at least partially grounded in material limitation concerns. Second, in many cases, the bars posed by these conflicts can be lifted by obtaining “informed consent” from the client. And obtaining consent that is truly “informed” may be at least as challenging for a Rule 1.8 conflict as for direct adversity and material limitation conflicts.
That said, the risks associated with Rule 1.8 conflicts are different from, and more avoidable than, those associated with direct adversity and material limitation conflicts. Most of them are not thrust upon the lawyer the way direct adversity and material limitation conflicts are. Business transactions, exploitation of a client’s story, and sex with a client are opportunities that can be declined without turning down the representation. The primary risks of these conflicts are discipline rather than disqualification from a matter, although there are scenarios in which such conflicts could give rise to disqualification or a malpractice claim. And Rule 1.8 conflicts are comparatively easier to anticipate and, where not strictly forbidden, easier to address in advance simply by following the requirements of the rules.
While anticipating direct adversity and material limitation conflicts can sometimes feel like navigating a dense fog, Rule 1.8 conflicts present no such challenges. The rules are more specific, the prohibitions are clear, and the opportunities to mitigate a risk, or take advantage of an opportunity, are set forth in the rule itself. The primary challenge of Rule 1.8 conflicts may be remembering that they exist.
So far, this article has approached anticipating and addressing potential conflicts from the law firm perspective. And in my experience, many law firms traditionally treated conflict resolution as a largely internal administrative matter. When a conflict arose, the question was whether Partner A would agree to Partner B representing a client adverse to Partner A’s client or prospective client. If Partner A was OK with the representation, then consent (often not “informed”) would be sought and obtained. There was little for the client to consider, and consent was assumed. At least this was true with transactional conflicts. Lawyers find litigation conflicts a bit more discomfiting.
For larger and more sophisticated clients, that paradigm no longer holds. Clients are taking more control over conflict resolution—sometimes in surprising ways. Some clients scrutinize advance waivers in engagement letters more carefully, while others put forth their own conflicts policies, sometimes placing law firms on the defensive. These developments create challenges for some of the strategies discussed in the first part of this article.
In my experience, the advance waiver is the term in a law firm engagement letter most likely to draw an objection—maybe even more so than four-figure hourly billing rates. Putting aside the question of whether broad advance waivers are effective, many clients will not agree to them. I once participated in a panel discussion on ethical issues for in-house counsel, and one general counsel in the audience fumed that she found advance waivers “offensive.” I suspect she is not alone. Some clients refuse to give even narrow advance waivers that, in my view, satisfy the “informed consent” requirement. Particularly in larger, more bureaucratic organizations, junior in-house counsel may not see the benefit in asking for exceptions to company policy, even if the request is reasonable. Other clients may be unwilling to give up any control over the waiver process.
More interesting is the way clients have taken the initiative on conflicts in their outside counsel guidelines. The conflicts provisions in such guidelines run the gamut. Some are simple regurgitations of law firms’ obligations under the rules of professional conduct, i.e., law firms must identify conflicts and seek consent from the client before proceeding with any conflicted representation. Others warn law firms that this client will not give advance waivers and will rarely give a waiver under any circumstance.
Other guidelines go even further, admonishing firms that the client demands complete loyalty from its law firms and expects to be notified even of “conflicts” that may not qualify as true ethical conflicts under applicable rules of professional conduct. Often, this means that the client does not want the law firm representing competitors or taking positions that may be adverse to the client’s “business interests.” In some cases, such restrictions may line up with the law firm’s expectations and be easy to administer. My firm regularly represents auto manufacturers in their relationships with their dealers. Because of the nature and breadth of our work for manufacturers, we likely would never represent a dealer, even one for a car company that we do not represent, in any type of matter. But in many cases, a law firm will have no knowledge of all the client’s business interests or the issues it may be litigating, and it would be difficult or impossible to identify such issues in a conflicts check. And even if the firm could identify such a “conflict,” it probably could not comply with Client A’s demand for notice of the firm’s work for Client B unless Client B were to consent.
Fortunately, I have found that when in-house counsel are alerted to the practical and ethical problems with such expansive “conflicts” rules, they have often been willing to narrow them. But I have also found that policies establishing broad loyalty requirements and a baseline presumption against consent (advance or otherwise) disincentivize in-house counsel from negotiating through conflicts issues in advance. Greasing the wheels for outside counsel to get a waiver may not be worth the administrative hassle or expenditure of political capital. I would like to see outside counsel guidelines that acknowledge the benefits of identifying and trying to resolve complex conflicts issues in advance, and encourage working with outside counsel to establish reasonable and clear rules of the road that will govern the relationship into the future.
There are other ways in which clients have taken the initiative in the conflicts process that on their face seem helpful but present their own challenges to firms. Some clients have developed their own conflict waiver forms and insist that those forms be used. In some ways, such client forms make life easier on law firms. But often they fall short on “informed consent” while imposing additional requirements for consent beyond those imposed by the Model Rules. Among the common requirements are that ethical screens be established and that the waiver letter sent to the other client include terms not required by the Model Rules. The latter can create an awkward situation when Client A has already received and signed the firm’s standard form before the firm receives Client B’s form.
Other clients have outside counsel guidelines that identify certain types of transactions that the client does not regard as presenting a “conflict,” even though they do. Presumably, the client has determined that it will almost always give consent to adverse representation in these matters, and so it is not worth the administrative burden of granting consent in each case. These advance waivers do reduce the administrative burden of conflict resolution. But just as outside counsel guidelines that start from a presumption that no consent will be granted create a culture that discourages flexibility, check-the-box advance consents may create a conflicts bureaucracy that is equally discouraging of thoughtfully considering and addressing conflicts issues. Moreover, just because one client declares that a direct adversity conflict is not really a conflict does not make it so, and informed consent will still be needed from the other client.
Conflicts are inevitable, but with a little forethought, they can be managed in a way that reduces the firm’s risk of disqualification, malpractice claims, and ethics complaints. Advance waivers have a bad reputation, but narrow and well-crafted waivers can provide informed consent for future representation. Indeed, such consents may benefit both the law firm and the client by setting the ground rules for resolving a tricky situation before it becomes a problem. But at a time when some clients are seizing the initiative on conflicts and becoming increasingly resistant to advance waivers, the burden is on firms to educate their clients on the benefits of working through these issues in advance. Admittedly, that’s a bit harder than planning for bad weather, but worth the effort.
