Testimony of Professor Thomas D. Morgan
Before the ABA Ethics 2000 Commission
San Diego, February 15, 2001
Re Proposed Rule 1.7, Comment [7]
Thank you for the opportunity to comment on Rule 1.7, Comment [7] of your proposed draft. My testimony on this issue is my own and not offered on behalf of an ABA section or other organization. Further, it is offered with awe and respect for the excellent work the Commission has done. I believe, however, that proposed Comment [7] to Rule 1.7 is not supported by legal authority, not wise as a matter of policy, not capable of being limited to the terms you have specified, and impractical when combined with the other changes you have proposed to Rule 1.7.
Proposed Rule 1.7, Comment [7] is completely new and provides:
[7] Although directly adverse conflicts arise most frequently in litigation, they also arise in transactional matters. For example, if a lawyer is asked to represent a seller in negotiations with a buyer represented by the lawyer, not in the same transaction but in another, unrelated matter, the lawyer could not undertake the representation without the informed consent of each client.
It may be helpful to state at the outset three matters that I believe are not in dispute:
1. If a lawyer opposes a current client of the lawyer's firm in litigation, even in litigation of an unrelated matter, the representation is "directly adverse" within the meaning of Rule 1.7. As some of you may know, I have written an article saying that should not be the invariable rule even in litigation, but my comments here are not a backdoor way of making that argument. That sense of what is "directly adverse" is supported by many cases, and I take it as a given.
2. "Material limitation" conflicts clearly can be presented by non-litigated matters and lawyers would be wise to conduct a conflicts check and evaluate the risk of any possible material limitation raised by negotiation or other non-litigation representation involving another law firm client. If there is a "significant risk" of such a material limitation, the conflict at minimum would require informed consent, confirmed in writing.
3. The Commission does not intend that Rule 1.7 change current law.
The fundamental question presented by Comment [7], then, is whether the fact that conflicts in non-litigation situations can arise means that they always arise. I submit that the answer must be no, both as a matter or principle and as a matter of practicality. At the meeting where you confirmed your intention to propose Comment [7], Larry Fox made the argument that loyalty is no less important in transactional work than in litigation. No one can disagree with that abstract statement about loyalty, but the bald assertions of Comment [7] simply do not follow.
You can see the problem with Comment [7] by reading it again. The first sentence says "[directly adverse conflicts] also arise in transactional matters"? Does that mean they always arise in such matters? That they might arise? If the former, the sentence flatly misstates the law. That may surprise some lawyers, but we reviewed the law quite carefully in preparing the Restatement and confirmed that the cases simply are not there to make anything like such a statement. If you mean the latter, then you will confuse readers by leaving completely undefined the conditions that would justify finding any conflict, much less a "directly adverse" conflict.
While acknowledging the paucity of authority, Restatement 121, Comment b suggests, for example, that the "directly adverse" characterization might apply when a negotiation is "contentious * * * involving allegations of bad faith" or risks "a large proportion of the lawyer's other client's net worth". Even those categories are fuzzy, but at least they tend to cabin the direct adversity concept much better than you have proposed in Comment [7].
Look then at the second sentence you have proposed. What is the reader to understand you to mean by "represent a seller in negotiations"? Suppose your seller client asks you to read a draft of the sales contract and to propose new language for transmission to the buyer? Is it only face-to-face negotiation that is prohibited? Does it matter whether the buyer knows "its" lawyer is giving advice behind the scenes? Is it relevant whether the proposed language is to clarify a point on which the parties likely would agree rather than to try to benefit one side over the other?
Those are not frivolous questions. They suggest that when you go beyond the category of litigation, what lawyers do is unbelievably varied and the Comment [7] you have proposed does not recognize any of that subtlety. If the ethical concern is that the buyer should not have "its" lawyer shouting at it across a table, you would get one answer to the conflicts question. If the concern is that the seller would not get candid advice from a lawyer who wished not to offend the buyer, the answer might be different. Yet another answer might flow from a concern that the lawyer not use knowledge of the buyer's negotiating habits against the buyer.
Once again, my point is not that representation in negotiation could never be a conflict; it is that your example is simultaneously too simple and too ambiguous to capture what is going to represent a real life range of circumstances. As you have proposed Comment [7], you have effectively said that every situation in which a lawyer represents a client in any matter in which a different client of the firm may have a different point of view necessarily involves a conflict of interest. That cannot be true without virtually making the entire class of possible "material limitation" conflicts into per se "directly adverse" conflicts.
Nor does it seem you have focused on the practical consequences of proposed Comment [7]. One of the Commission's important proposals for treatment of conflicts in Rule 1.7 is the requirement of "informed consent, confirmed in writing" from each "affected client". Some observers see any such requirement as an undue burden, of course, but it will be incalculably more so if Comment [7] remains in Rule 1.7.
Suppose your seller's lawyer (not heretofore involved in the negotiation) is asked to call the buyer's lawyer and propose language that might move the deal forward. No matter what the significance of the issue or the lack of hostility of the dealings, under proposed Rule 1.7, Comment [7], before even proposing the suggested language the lawyer must have a thorough discussion both with the seller and with the buyer's lawyer about what you have defined as a "directly adverse" conflict. Then, the lawyer must write confirming letters to each client and presumably bill one or both of the clients for those efforts.
I do not make this point facetiously. The Commission has justifiably increased the duty to consult about and confirm in writing the resolution of genuine conflicts. The corollary of that, however, should be great caution about extending the definition of what constitutes a conflict. If you fail to exercise such caution (indeed when you make per se conflicts as completely open-ended as you do in Comment [7]) you run the risk of making your proposals of what one must do about conflicts absurdly bureaucratic and outlandishly expensive.
Furthermore, to the extent that some lawyers in some cases will forget, be busy, or otherwise not get waivers (a virtual certainty in every firm from time to time where so much work is done over the phone or internet) your language will set firms up for claims for breach of fiduciary duty in which a court would virtually have to enter summary judgment for the plaintiff. Such claims, of course, could result in fee forfeiture even where the client got objectively excellent representation because the comprehensiveness of your description of the conflict would make it impossible even to raise a defense that the risk of adverse effect was de minimis.
Indeed, a plaintiff who could show one instance of such"disloyalty" might seek discovery of all the firm's time records for its work on behalf of all its other clients to determine in how many other situations evidence of such a breach of fiduciary duty could be found. The effects of such a worst case scenario would obviously be devastating to the expectations of confidentiality of all the law firm's other clients and make the theoretical effects on loyalty suggested by your Comment [7] pale by comparison. And, I repeat, the reason this scenario is possible is that there is almost no bound on the reach of proposed Comment [7].
My proposals are in the alternative. I would prefer that you delete proposed Comment [7] from Rule 1.7. That would leave only Comment [6] under the "Directly Adverse" label.
Alternatively, at the very least, Comment [7] should be cabined as it is in the Restatement, i.e., limited to negotiations that are "contentious * * * involving allegations of bad faith" or that risk "a large proportion of the lawyer's other client's net worth". Those statements would at least have the Restatement to support them, suggest a need for significant potential harm before the per se rule kicks in, and be more consistent with your goal of not making changes in description of the law alter the law itself.
I appreciate the opportunity to offer these suggestions about Rule 1.7, Comment [7], and I will be happy to respond to any questions you many have.