TO: ABA Ethics 2000 Commission
FROM: William J. Wernz, Ethics Partner and Trial Department Member,
Dorsey & Whitney LLP
DATE: May 17, 1999
RE: Comments on Ethics 2000 Commission Mission and
Draft Changes to Rules and Comments
I thank the members of the Commission both for the opportunity to present my views on possible amendments to the Model Rules of Professional Conduct, and for the Commission's prodigious efforts to consider all points of view and to improve the Rules of Professional Conduct.
Although the attached resume indicates my involvement with several professional organizations interested in attorney ethics, these comments are personal and not those of any organization. My background includes experience as chief discipline counsel in Minnesota for seven years, as a teacher of legal ethics in college, law school and CLE programs, as advisor and as advocate in professional ethical matters, and, for the last seven years, as ethics partner at a law firm which now has nearly 600 lawyers.
General Perspectives. The Commission's draft rule changes show progress over the current Rules of Professional Conduct, just as the Rules improved on the Code, and the Code on the Canons. The proposed changes to Rule 1.6, to 1.8(a) and to the portion of Rule 1.10(a) dealing with personal conflicts are both well-drafted and responsive to actual needs.
The Commission has also done well to retain the basic format of the Rules. The Commission has been prudent in centering its attention on a limited number of Rules and proposing Rule amendments, rather than proposing wholesale re-casting of the Rules. Notwithstanding this progress and these accomplishments, the draft Rules, and other less-developed Rule proposals to date create a general concern and two specific proposals which I believe are problematic.
The general concern is with the sheer bulk of the draft and proposed Rules and Comments. The Kutak Commission work modernized the Rules in part by streamlining them. The E2K Commission should consider both judicious pruning of current Rules and editing of some proposals, particularly the sometimes lengthy Comments.
One way of trimming the Rules and proposed new Rules and Comments would be to require a statement of need, particularly for additional regulations. A number of Rule drafts and proposals appear to emanate from a desire to expand regulations based on theoretical needs, rather than on empirical data arising out of ethics complaints, disciplines or case law in the broader law of lawyering. In 18 years of enforcing, advising and defending lawyer ethics matters I have seldom or never encountered several of the situations which are proposed for new regulations.
The specific proposals which I believe are problematic are twofold. The first problematic rule carries forward a provision, the "directly adverse" standard of Rule 1.7, whose application to non-litigation situations has been far from clear. Particularly in need of clarification are those situations in which the lawyer represents only one client, and another party to the transaction, with arguably adverse interests, is a client on another, unrelated matter.
The second problematic rule proposal is the portion of draft Rule 1.10(a) which expands imputation to situations where a lawyer "reasonably should know" of a conflict. This change would be, contrary to the Reporter's Explanation, a very important, and onerous, change from current standards. Let me discuss my general concern and specific concerns in turn.
Will the Rules and Comments Remain a General "Framework?" Anyone who grew up in certain religious traditions -- my own schooling included the Jesuits -- will be familiar with an approach to ethics which proscribes at length and in detail. A side-effect of a large body of regulations is that it tends to pre-empt the field: lawyers suppose, reasonably, that a vast body of rules must comprise all of professional ethics, rather than, as the Preamble puts its goal, to "simply provide a framework for the ethical practice of law." Similarly, when the Preamble says, "the Rules do not however exhaust the moral and ethical considerations that should inform a lawyer . . .." the busy lawyer may find herself exhausted with the Rules and Comments, before ever getting to the larger ethical considerations.
In an era where deregulation is a strong political impulse, the Commission should consider whether the overall weight of its proposals is justified. To take a general example, draft Rule 1.7 alone has 32 Comments. To take a specific example, draft Rule 1.8(i) would govern "a cohabitating / relationship closely approximating marriage," and requires three Comments for explanation. Two more Comments have been drafted regarding the "Client-Lawyer Sexual Relationship." These regulations find no justification in the incidence of ethics complaints or advisory opinions regarding lawyer sex, intra-professional or otherwise. Such complaints (at least in Minnesota) number a little more than one in a thousand, and their resolution typically does not turn on fine distinctions; five Comments and further refinements of the Rule are not needed.
One test for whether any new rule should be adopted is the test of need: if regulatory experience does not indicate a substantial need for regulation, then, at least presumptively, the Rule or Comment should not be adopted.
In addition to resisting unnecessary new rules and comments, the Commission should consider a healthful pruning, such as that undertaken by the Kutak Commission and by various federal and Supreme Court cases. Most obviously, the Kutak Commission deleted the Canons and the Ethical Considerations. The profession is better off without the "appearance of impropriety" standard mixed up in attorney discipline. More particularly, the profession is better off (and the public is no less well-protected) by the deletion of former DR1-102(a)(6), which attempted to proscribe "any other conduct which reflects adversely on . . . fitness to practice law." Court cases have also pruned away old, often detailed, proscriptions regulating attorney speech in various ways. Let me suggest one opportunity for pruning, or at least clarification, which will remove burdens from lawyers without jeopardizing the public.
Rule 1.7, the "Directly Adverse" Standard and Certain Non-Litigation Matters. The draft Rule 1.7 is an improvement on its predecessors. There is, however, an important opportunity for pruning or clarification of current Rule 1.7(a). This Rule, which is in its main thrust is a good rule, has been interpreted, in certain non-litigation situations, to produce imaginary conflicts and unnecessary burdens,.
The specific issue is whether parties related as buyer and seller, lender and borrower, etc., should always be regarded as having genuine conflicts by reason of arguably having "directly adverse"interests. If so, then conflicts exist and waivers are always required even where, as to any one client, the adversity arises in a matter unrelated to the representation of that client. Let me draw three paradigms for this type of conflict and then discuss how they should appropriately be treated.
Paradigm I: Lawyer is asked to represent both seller S and buyer B in a negotiation with each other.
Paradigm II: Lawyer 1 in a law firm represents seller S in a transaction with buyer B. Firm lawyer 2 is asked concurrently to represent X in buying property from S, in a matter wholly unrelated to the S/B matter.
Paradigm III: Lawyer 3 in a firm represents Landlord L in a negotiation with tenant T, where T is represented by another law firm. Lawyer 3's partner is asked to represent T in a tax matter unrelated to the L/T representation.
In these paradigms, it may be argued that a lawyer in a firm is representing a client "directly adverse" to another client. If so, under Rule 1.7, in either its current form or in the E2K draft, there would be a per se conflict. However, Paradigm I should be treated differently than Paradigms II and III, because Paradigm I is more apt to cause genuine conflicts affecting the representation of clients.
In Paradigm I, there is considerable potential for real conflicts that is, situations where the legal representation would be materially limited or the client relationship would be adversely affected. Paradigm I has produced a substantial number of conflict complaints and breach of fiduciary duty claims.
In contrast, in Paradigms II and III, the incidence of real conflicts is very low. I do not recall a single ethics complaint in my 11 years of acting as discipline counsel, that was ever based on either paradigm. I do not believe Paradigms II and III have been the basis for any substantial number of civil actions.
Occasionally, in Paradigms II and III, there may be a real conflict. For example, in Paradigm III, if the representation of T is much larger than the representation of L, or if there is animosity between L and T, L may be concerned that the law firm's representation of T may compromise its representation of L. Such situations are best covered by Rule 1.7(b), that is by a weighing of all the circumstances, rather than by a per se rule.
Commentators on Paradigm I have taken a variety of positions regarding whether there is a per se conflict and, if so, whether it can be waived.. For example, Hazard and Koniak, The Law and Ethics of Lawyering (1990), at 586-7, apparently do not believe that Paradigm I creates a per se conflict: they find no conflict in "friendly negotiations" between buyer and seller, because the negotiations "do not seem directly adverse." E2K draft Comment 25, addressing "Non-Litigation Conflicts" generally, does not place such conflicts under the "directly adverse" standard, and indeed deletes the current Comment's reference to "adverse effect." The E2K Reporter's note to Comment 25 states, cryptically, that this modification is "designed to clarify the doctrine." Clarification requires a more direct statement on the matter. Restatement of the Law Governing Lawyers 202 Proposed Final Draft No. 1 (1996) apparently would find a conflict in Paradigm I, but would readily allow consent: Restatement Illustration 1 approves drafting a contract for two parties, with "informed consent." Similarly, Illustration 8 states, regarding parties to a divorce, "Informed consent can authorize Lawyer to represent both parties in the property settlement negotiations . . .." Disciplinary counsel may, however, take a stricter view: "Classic examples of conflicts not curable by consent include representation of both . . . buyer and seller in a real estate transaction." Marcia A. Johnson, "Conflict Admonitions 1995," 53 Bench & Bar of Minnesota 3 (March 1996) at 16. /
Unfortunately, commentators have scarcely addressed Paradigms II and III. Applied literally, the "directly adverse" standard would arguably find conflicts under Paradigms II and III wherever conflicts were found under Paradigm I. If buy-sell negotiations are "directly adverse," as between two clients in the matter, direct adversity also arguably exists whenever a lawyer is directly adverse to any client in such negotiations, even where the client relationship is unrelated to the negotiations. Put differently, because the "directly adverse" standard is arguably formal in nature; and because the standard applies in litigation regardless of whether the adversity to the client is in the same matter as the representation or some other; then, if "direct adversity" is inherent in all situations analogous to buyer/seller, the standard arguably applies even though the representation and adversity are with respect to different matters.
Resolution of this issue is of vital importance to the profession, because the issue arises more frequently than any other conflict issue at least, if transactions still outnumber lawsuits. I believe that the matter can be resolved without affecting the public's interest, by identifying the situations in which true conflicts are likely to arise (viz. in litigation; and in representation of more than one client in certain non-litigation matters) and treating them differently than situations in which true conflicts are unlikely (e.g. negotiations in which the adverse party is the law firm's client in an unrelated matter).
Clarifying application of the "directly adverse" standard would also be beneficial in other unrelated subject matter conflict situations. Confusion often arises in transactions involving multiple parties over which of them are "directly adverse." In complex financial transactions there are often numerous parties playing different roles. The standard commentaries do not clarify direct adversity in such situations.
I recommend the following draft amendment to Rule 1.7 as one way of implementing clarifications to the "directly adverse" standard described above.
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a conflict of interest. A conflict of interest exists if
(1) in a litigation matter, the lawyer represents one client directly adverse to another client, whether or not the lawyer also represents the other client in the litigation matter;
(2) a lawyer represents more than one client in a non-litigation matter and the interests of the clients represented in the matter are directly adverse;
(3) in a non-litigation matter the lawyer represents only one client but another party to the matter is also the lawyer's client in another matter and there is significant risk that the lawyer's professional relationship with one or both clients will be adversely affected by the representation;
(4) there is significant risk that the representation of one or more clients will be materially limited by the lawyer's duties to another client or to a former client or by the lawyer's own interests or duties to a third person.
Let me conclude this portion of my comments by explaining why the proposal above would not hamper public protection. Before the Kutak Commission proposals, the "directly adverse" standard was not found explicitly in the ethics rules. Under the Code of Professional Responsibility, DR 5-105(A) created a general standard, much like the current Rule 1.7(b) test for factors which may "materially limit" a representation. ABA Informal Op. 1495 interpreted DR 5-105(A) to preclude litigation against a current client, but did not address non-litigation conflict issues. The "directly adverse" standard arose through disqualification motions brought in litigation, but the codification of that standard in Rule 1.7(a) was not clear regarding non-litigation situations. In short, case law, ethics opinions and the rules themselves have not discerned a need to create per se formal, conflicts in non-litigation situations.
Clarifying that the "directly adverse" standard does not apply to certain non-litigation situations would also reasonably lessen the burden of written conflict disclosures and consents which the draft rules propose. Comment 11 justifies the requirements of a writing due to "the seriousness of the decision the client is being asked to make . . .." This justification would obviously not apply where, for example, the law firm represents a bank on a loan and concurrently negotiates in a different city with different bank personnel on an unrelated subject.
In summary, Rule 1.7 should not continue to leave open for debate whether there is a per se conflict in situations where a law firm is on the other side of negotiations with a party which the firm represents in unrelated matters. There is no justification in public policy, incidence of complaints or otherwise for applying the "directly adverse" test across the board in such situations. First applied in disqualification matters in litigation, the "directly adverse" test made good sense. The "directly adverse " standard also make good sense in certain multiple representation situations, where, for example, a lawyer undertakes to represent buyer and seller, lender and borrower, licensor and licensee, etc. The "directly adverse" standard also sometimes makes sense in non-litigation, unrelated subject matter transactions. However, there are also numerous such situations where the "directly adverse" standard does not make sense. The possible application of that standard to all such situations has produced needless burdens and confusions.
Rule 1.10(a) and "Knowingly" versus "Reasonably Should Have Known." I believe that this proposed change to the standard by which conflicts are imputed in a law firm is very significant and very unwise, for several reasons.
First, the "should have known" standard conflicts with the general philosophy of the Rules, to provide for discipline of knowing violations, not for negligent infractions. A word search on "knowingly" and the like thus produces 28 instances in the Rules and none for "should have known" violations.
Second, Rule 5.1, which governs partners' responsibilities for a firm's systems and practices, requires only a "reasonable assurance that all lawyers in the firm conform to the rules of professional conduct." For conflicts systems, Rule 5.1 would require databases of current clients and adversaries, former clients and the like; and a set of principles for file-opening and other decisions. Rule 5.1 does not require a system which also operates without negligent mistakes by lawyers.
Third, the exposure created by the "should have known" standard would be vast. Consider the following examples.
- Lawyer 1 receives a corporate client's "Outside Counsel Guidelines," which states that all corporate affiliates are to be regarded as one for conflicts purposes. Lawyer 1 duly enters 400 affiliates into the firm's database. A year later the representation continues, but Lawyer 1 has not entered the corporation's five new affiliates in the database. This is just the sort of mistake lawyers regularly make. Lawyer 1's partner commences suit against a new affiliate. The corporation demands the law firm withdraw from the suit and it does. Under current Rule 1.10(a) there would be no violation; under draft Rule 1.10(a) there would be a violation.
- Lawyer 1 represents Dayton Hudson Corporation. Lawyer 2 sues Target, which lawyer 2 believes to be an affiliate of DHC, but Target is in fact an operating division. Under ABA Formal Opinion 95-390 there is a conflict. Should Lawyer 2 be disciplined for failure to have checked public filings or for not knowing the distinction drawn by Opinion 95-390?
- Lawyer 3 does not check all adverse party witnesses in the firm's database. One of them ("C") is a client on matters unrelated to the trial. Lawyer 3 cross-examines C, without objection from C. ABA Formal Opinion 92-367 finds a conflict in this circumstance. (Here I should add that I have for several years asked lawyers in CLE audiences to indicate whether they check witness lists for potential conflicts; not one lawyer has ever raised a hand.)
- Client Jan Doe mentions to Lawyer 1 that she is soon to become Jane Roe. Lawyer 1 does not change the firm's database. Lawyer 1's partner Lawyer 2 sues Jane Roe. Should there be discipline? Does draft Rule 1.10(a) appear to make Lawyer 2, who is innocent, subject to discipline?
- Lawyer 1 takes a position on legal issue A in litigation in federal district court in Pennsylvania. Lawyer 2, Lawyer 1's partner in a busy litigation firm, is unaware of Lawyer 1's actions, and takes the opposite position in another federal district court in another state, in litigation in which issue A arose after the litigation was well underway. There is a substantial risk that one of the cases will produce a precedent which is likely to materially undercut the position of one of the clients. Lawyers 1 and 2 diligently checked for party conflicts, but Lawyer 2 did not attempt to check issue conflicts as they arose. Under ABA Formal Opinion 93-377, a conflict has come to exist. Draft Rule 1.10(a) would appear to create a rule violation for Lawyer 2.
The Reporter's Explanation for the "should know" standard is that law firm conflict review procedures are ubiquitous, and they "would not be required if only actual knowledge created the basis for imputation." The logic of this explanation is not apparent. These procedures are "required" for loss prevention purposes, which have a negligence standard; these procedures are also required, in general, to comport with Rule 5.1. The "requirement" of reasonable general conflict procedures does not by itself justify an additional requirement that each and every action and omission by individual lawyers in a firm must meet a negligence standard for discipline.
The proposed change to a "should have known" standard is also an example of a proposal unsupported by empirical evidence. There is no public outcry, or even awareness, regarding inadequacy of today's standard for conflicts imputation. Discipline authorities are not reporting that they are unable to discipline lawyers deserving of discipline because of an inadequate standard.
The new "should have known standard" would be particularly onerous because of the proliferation of conflicts identified by the ABA Committee on Ethics and Professional Responsibility and other sources. Many of the recent ABA Committee opinions have added to the situations in which conflicts are found. Few attorneys are aware of these opinions, let alone conversant with them. Even among lawyers who represent and advise lawyers on professional matters, knowledge of the opinions is very uneven. When an increasing number of conflicted situations is multiplied by the increasing size of law firms, and further multiplied by a stricter imputation standard, the exposure of lawyers to discipline for imputed conflicts will increase exponentially.
The Reporter's assertion that the amendment would not entail a "substantive change in . . . the rule in practice" is not accurate. Every law firm makes mistakes regarding its conflict data and applications of data. Presently, the ethics issues are (a) whether the law firm will adopt reasonably good conflicts systems; and (b) whether, when a conflict mistake is made, and the firm is confronted with a demand for withdrawal, it will do the right thing. Draft Rule 1.10(a) would add to these discipline for mere mistakes.