June 15, 2016

Predicting the Future: Can You Ethically Obtain an Advance Waiver of Actual Conflicts of Interest?

Ellen A. Pansky

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We all know of lawyers who are so proficient at their craft, who are such artists in their specialties, and who have such an incredible track record that they are acknowledged to be superstars in their given area of practice. Perhaps Johnnie Cochran comes to mind. Where a client is convinced that such a lawyer is the absolute best person to represent the client, and that no other will suffice, should the duty of loyalty prevent the lawyer from accepting the client, even where the client provided informed and intentional agreement that the lawyer may later concurrently represent an adversary of the client in an unrelated case or matter? Are we to assume that no client has the mental and intellectual capacity to understand what it means to agree that a lawyer is authorized to accept as a client in an unrelated matter, a party who is adverse to the client? Assuming that most people in the Western world are educated, have access to extensive information relating to highly complex matters, and are familiar with entering into contracts for services, should the duty of loyalty be given priority over an agreement to provide legal services to a client, especially when conditioned upon that client’s agreement to forego objection and to authorize in advance, representation of a prospective conflicting interest arising from the lawyer’s future representation of a party adverse to the client? Should the answer be different if the adverse representation relates to a matter wholly unrelated to the initial representation?

At least until the Appellate Court issued its decision in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc.,1 which is currently pending on review before the California Supreme Court, it has mostly been accepted in California that a lawyer may ethically request that a client waive a future conflict of interest, even if the precise nature of the future conflict is yet unknown. On the other hand, the concept that a lawyer may take any position adverse to an existing client is, to many, an inimical concept. This is because we owe to our clients, in addition to the duty to maintain client confidences, an undivided duty of loyalty. The duty to be loyal to a client primarily applies to current clients, and, like other fiduciary duties, the duty of loyalty attaches once the attorney-client relationship commences. 2

The California Supreme Court has defined the duty of loyalty in very broad terms. In Flatt v. Superior Court,3 the Supreme Court held that a conflict is presented if a lawyer is simultaneously representing a client and the client’s adversary, even if the matters are completely unrelated: “A client who learns that his or her lawyer is also representing a litigation adversary, even with respect to a matter wholly unrelated to the one for which counsel was retained, cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship. All legal technicalities aside, few if any clients would be willing to suffer the prospect of their attorney continuing to represent them under such circumstances.”4 The Supreme Court also noted: “It is also an attorney’s duty to protect his [or her] client in every possible way, and it is a violation of [the duty of loyalty] for him [or her] to assume a position adverse or antagonistic to his [or her] client without the latter’s free and intelligent consent given after full knowledge of all the facts and circumstances. [Citation omitted.] By virtue of this rule an attorney is precluded from assuming any relation which would prevent him [or her] from devoting his [or her] entire energies to his [or her] client’s interests. Nor does it matter that the intention and motives of the attorney are honest.” 5 [Emphasis in original.]

In order to reconcile the duty of loyalty with the now widespread practice of obtaining advance waivers, the key is obtaining the client’s full, intelligent, informed and free consent. However, opinions vary as to what constitutes informed consent.

More than 20 years ago, the Sixth Appellate District of the California Court of Appeal issued Zador Corp. v. Kwan,6 which accepted that a lawyer is ethically permitted to obtain an advance waiver of a prospective conflict of interest, so long as the client provides informed written consent. In Zador, the lawyer agreed to document a transaction involving a longstanding client and a business partner who had not previously been represented by the lawyer,7 subject to a written consent that the lawyer would be authorized to represent the longstanding client against the new client if a conflict later arose between them. The idea is that the lawyer, in agreeing to concurrently represent both the pre-existing client and the new client, is accommodating the additional client(s) whose interests are sufficiently aligned when the representation commences, to permit concurrent representation for reasons of convenience and economy, among others.

Kwan agreed in writing at the outset of representation to waive objection to “any adversity that may develop” between his interests and the interests of the Zador companies. Subsequently, the lawyer jointly representing Zador and Kwan identified a conflict, advised Kwan to seek separate, independent legal counsel, and also asked Kwan to reaffirm his consent to the lawyer’s continuing representation of Zador. The lawyer confirmed Kwan’s consent in writing to Kwan, but did not obtain a supplemental written consent from Kwan, after the actual conflict arose.

After litigation ensued between Zador and Kwan, the lawyer who had previously represented them jointly continued to represent the Zador parties, and eventually asserted claims in litigation against Kwan in favor of Zador. Kwan sought to disqualify the lawyer, asserting that the waiver was not specific and that he never agreed that the lawyer was permitted to sue Kwan on behalf of Zador. The Appellate Court rejected this assertion, finding that Kwan’s agreement not to seek to disqualify the lawyer based on “any adversity that may develop was sufficient to constitute informed consent. The decision refers with approval to California State Bar Formal Ethics Opinion 1989-115, which concluded: “In addition, the nature of the subsequent conflict of interest may range from simply representing two clients in entirely unrelated matters to actually representing both sides in the same dispute. While a court would doubtless preclude a lawyer from representing both sides simultaneously [fn. omitted], the Committee believes that in such situation, if the original waiver was informed, local counsel could withdraw from its representation of lead counsel’s client and continue to represent its own client even if otherwise confidential information would be used against lead counsel’s client.”

The Zador v. Kwan Court also concluded that:

  1. Where multiple clients have sought legal representation on a matter of joint or common interest, none of them may assert confidentiality against the other(s). Consequently, whether the lawyer is disqualified based on a future conflict of interest depends not upon the existence of a substantial relationship between the subject matters of the former and subsequent representation; rather, the determining factor is the scope of the client’s advance consent to a future conflict.
  2. In order for the waiver to be valid, it is not necessary that every conceivable adverse ramification of waiving the conflict be included in the written disclosure and consent agreement. Rather, the consent is enforceable if a reasonable client would understand that the lawyer is permitted to represent another client whose interests are adverse to the consenting client.
  3. Not every conflict of interest requires disqualification of the lawyer.
  4. No particular period of time is necessary to demonstrate informed consent: Mr. Kwan reviewed the conflict disclosure and consent in the lawyer’s office for 20 minutes, and then signed it. This was sufficient for the court to find that the consent was informed.
  5. Where a significant amount of time has passed before disqualification is sought (here, over three years), the court has discretion to reject disqualification based on a balancing of the interest of a party to be represented by counsel of choice, with the interest of protecting the integrity of the legal system.

Indeed, long before the Zador v. Kwan court upheld the enforceability of a general advance waiver of a prospective conflict, California courts grappled with the parameters of concurrent representation of multiple clients with conflicting interests. In Klemm v. Superior Court,8 a husband and wife decided to retain the same attorney in their marital dissolution matter, after coming to agreement on their own as to the terms of the dissolution, including spousal and child support. When the lawyer was retained, the husband and wife saw no conflicts between them.

A conflict was identified after the Family Support Division of the Fresno County District Attorney’s office issued a report recommending that the husband be ordered to pay child support, contrary to the agreement of the divorcing parties. As a result, the Court required confirmation that the parties were fully informed as to the potential conflict which arose by virtue of the recommendation of the third party County office. The parties then did confirm that they did not wish to impose the child support obligation recommended by the Family Support Division, and also agreed that there was no actual conflict between them. Upon appeal, the Appellate Court remanded the case to the Trial Court for further analysis as to whether the waiver of the conflict was truly informed.

Although Klemm is widely cited for the proposition that a lawyer is precluded from representing both parties in a litigation matter, and that the representation of opposing parties in litigation poses an unwaivable conflict, Klemm did not so hold. Rather, the appellate court affirmed that the determining factor is whether the consent is full and informed.9

The evaluation of the efficacy of an advance waiver was also considered in Visa U.S.A., Inc. v. First Data Corp.10 In that case, Visa brought claims for trademark infringement, dilution and breach of contract against First Data, after First Data launched a business initiative to allow it to bypass Visa’s regulations on the processing of Visa-related transactions.

Visa was represented by Heller Ehrman in the action. Heller had already commenced representation of First Data in an unrelated patent infringement action, which was pending at the time the Visa lawsuit was filed. At the time it began representation of First Data, Heller disclosed its long-standing relationship with Visa to First Data, and obtained a conflict waiver that would allow Heller to represent Visa in any future disputes that might arise between First Data and Visa. Both Visa and First Data agreed to the dual representation.

After filing suit against Visa, First Data attempted to disqualify Heller, claiming that when it signed the waiver letter, it had not been adequately informed that the actual conflict between Visa and First Data arose, and Visa also claimed Heller had access to confidential information that might be used against First Data.

Looking to Zador v. Kwan, the court affirmed there is no ethical requirement that counsel must outline every conceivable possibility of potential conflicts in order to fully disclose that potential future conflicts may arise, and the court also noted that there is no case law requiring a second disclosure and consent agreement for an advance waiver to be valid. The court upheld the advance waiver, determining that Heller made a “full and reasonable disclosure” regarding Heller’s ongoing representation of Visa. In denying the motion for disqualification, the court also set forth terms by which an advance waiver could be evaluated on a case by case basis, and held that an ethical wall constructed by Heller was sufficient to rebut the presumption of shared information.

In Pringle v. La Chapelle,11 the District of the California Appellate Court upheld an attorney’s fee award after the client, La Chapelle, alleged that a conflict of interest warranted fee disgorgement. La Chapelle had executed two fee agreements, each of which contained conflict disclosure and waiver language, hiring a law firm to defend against harassment claims being brought against him individually and against his corporation, as well as against another individual. La Chapelle executed the second agreement on behalf of himself and the corporation, and later argued that such an arrangement constituted the representation of multiple parties with conflicting interests, a violation which in turn warranted disgorgement of fees. The court found that disclosures in the fee agreement to the effect that an actual conflict had arisen between joint clients and advising the clients of the right to seek independent legal counsel was sufficient to constitute informed written consent in compliance with California’s conflict of interest rule, and that a violation of the Rules of Professional Conduct does “not automatically preclude an attorney from obtaining fees.”12

More recently, in Western Sugar Coop. v. Archer-Daniels-Midland Co.,13 which arose from claims brought by the sugar industry based on alleged false advertising in the marketing of high-fructose corn syrup, Squire Sanders filed an action in 2011 on behalf of plaintiffs. Tate & Lyle, one of the defendants, had been a longtime client of Patton Boggs in a wide range of matters since 1998.

In 2014, Patton Boggs and Squire Sanders combined to form Squire Patton Boggs (“SPB”). During the merger, Tate & Lyle had been mistakenly left off a list of Patton Boggs’ clients created for the conflict check, and the conflict had not been identified. As a result, the new firm of SPB concurrently represented plaintiff in the Western Sugar Corp. litigation, and also represented Tate & Lyle, a defendant in that same ligation, albeit in unrelated matters. Thereafter, Tate & Lyle brought the conflict to SPB’s attention, in response to which, SPB asserted that, as a practical matter, a de facto ethical wall existed since the two firms’ computer systems had not been integrated and they still maintained two separate offices. Tate & Lyle did not agree to waive the conflict, and SPB withdrew from its representation.

After Tate & Lyle raised the conflict, SPB wrote to another defendant and long-time client of Patton Boggs, Ingredion, asking it to waive the conflict caused by SPG’s representation of the plaintiffs in the sugar litigation. Ingredion refused; thereafter Tate & Lyle and Ingredion each moved to disqualify SPB from representing the sugar plaintiffs.

In response to the disqualification motion, SPB argued that Tate & Lyle had consented to a general advanced waiver in 1998 when it first retained Patton Boggs and signed a retainer agreement which provided: “It is possible that some of our current or future clients will have disputes with you during the time we are representing you. We therefore also ask each of our clients to agree that we may continue to represent or may undertake in the future to represent existing or new clients in any matter that is not substantially related to our work for you, even if the interest of such clients in those unrelated matters are directly adverse to yours . . . .” . Although it acknowledged that informed consent to advance conflict waivers will be upheld, the Western Sugar court ruled that the Patton Boggs advance waiver failed to identify potential adverse clients or the nature of any potential conflicts covered by the waiver, and concluded that “it was difficult to imagine that in 1998, Patton Boggs contemplated potential conflicts that could surface 16 years later . . .” The Court also found that SPB’s withdrawal from representation of Tate & Lyle did not cure the conflict, concluding that SPB’s concurrent representation of the sugar plaintiffs and Ingredion required disqualification because the matters were substantially related and there was insufficient evidence to rebut the presumption that confidential information had been received by SPB that could be used adversely to Ingredion. Western Sugar adopted a seven part test to be used to determine the enforceability of an advance conflict waiver.14

With these cases as a backdrop, we turn to the Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. case, which is now being reviewed by the California Supreme Court. In 2010, Sheppard Mullin began to represent J-M Manufacturing, a manufacturer of PVC pipe, in a qui tam action which alleged that J-M knowingly sold pipes that regularly failed to meet tensile-strength requirements. Sheppard Mullin represented J-M for a period of 16 months, including engaging in extensive investigation, discovery and litigation. In its retainer agreement executed by J-M, Sheppard Mullin included a conflict of interest disclosure and waiver which provided that Sheppard Mullin’s representation of J-M was “on the condition that [it] may represent another client in a matter in which [it did] not represent [J-M], even if the interests of the other client are adverse to [J-M]” so long as “the other matter is not substantially related to [Sheppard Mullin’s] representation of [J-M]” and the firm had “not obtained confidential information of [J-M] material to representation of the other client.”

Additionally, J-M expressly agreed in writing to waive Sheppard Mullin’s “obligation of loyalty [to J-M] so long as [Sheppard Mullin] maintain[ed] confidentiality…” J-M’s General Counsel spent two hours discussing the terms of the retainer agreement with the Sheppard Mullin partner on the matter, took four days to consider the proposed agreement with J-M’s CEO, and then made handwritten edits to the proposed agreement, including edits to the paragraph immediately preceding the conflict waiver paragraph. No edits whatsoever were proposed to the waiver of conflicts paragraph.

Sheppard Mullin had previously done work for a municipality, South Tahoe Public Utility District, one of the multiple intervenors in the qui tam action. The 2006 agreement signed by South Tahoe before that representation commenced included a broad advance conflict waiver similar to the one contained in the agreement signed by J-M. When Sheppard Mullin commenced representation of J-M, it did not advise J-M that one of its labor and employment partners had previously represented South Tahoe.

A few months after the firm’s representation of J-M commenced, a separate office of Sheppard Mullin undertook to represent South Tahoe, in a matter totally unrelated to the qui tam action in which J-M and South Tahoe were adverse parties. Once South Tahoe realized that Sheppard Mullin represented J-M in the qui tam action, it raised the conflict, and brought a disqualification motion against Sheppard Mullin, which the qui tam Court granted, finding the advance waiver to be ineffective to constitute informed consent to the subsequent conflict.

After Sheppard Mullin was disqualified, J-M took the position that it was not required to pay any outstanding fees to Sheppard Mullin, and that Sheppard Mullin should disgorge all fees previously paid. Sheppard pursued J-M in arbitration. In arbitration, the arbitrators awarded Sheppard Mullin its unpaid fees, finding that the conflict was not serious enough to warrant disgorgement. The trial court confirmed the award, which J-M then appealed.

The Appellate Court overturned the trial court’s order in favor of Sheppard Mullin, concluding that the representation violated California’s disciplinary rule, and that the breach of loyalty set forth in Rule 3-310 was a violation of public policy. The appellate court further concluded that the advance waiver included in J-M’s retainer agreement did not constitute informed written consent, and that the firm’s violation of California’s Rule 3-310 disqualified the firm from receiving any attorney fees.15 The Appellate Court implicitly assumed that a second, supplemental disclosure and a new waiver were required once Sheppard Mullin decided it wished to represent South Tahoe in a new matter and found inadequate the initial advance waiver, which stated: “[Sheppard Mullin] may currently or in the future represent one or more other clients (including current, former, and future clients) in matters involving [J-M];” that Sheppard was permitted to engage in conflicting representations “provided the other matter is not substantially related to our representation of [J-M] and in the course of representing [J-M] we have not obtained confidential information of [J-M] material to representation of the other client;” and that “[b]y consenting to this arrangement, [J-M] is waiving our obligation of loyalty to it so long as we maintain confidentiality and adhere to the foregoing limitations.”16 The Appellate Court referred to this as a “boilerplate waiver.” And the appellate court ruled that not only did Sheppard Mullin forfeit its claim to unpaid fees, it also had to disgorge previously paid fees, and it also remanded to the trial court for a determination whether Sheppard Mullin would be required to disgorge fees that had been earned before the conflict arose.

The Sheppard appellate court found that the waiver failed to meet the requirements for informed consent because the advance waiver did not identify specifically South Tahoe as a potential adverse party. In other words, the appellate court concluded that, unless a law firm has identified the prospective adverse party specifically by name, and unless it has described the specific matter in which the firm is wishing to represent the other client, it is not possible to obtain informed consent to waive a prospective conflict.

The conclusion of the appellate court in Sheppard Mullin v. J-M rejects the fundamental concept that a client can ever provide a valid advance consent to a prospective conflict in a yet unknown, inchoate legal matter. In practice, how can a law firm ever obtain informed consent if the consent is invalid unless the conflict disclosure specifically identifies the yet-unknown specific future adverse party and the precise nature of the future conflicting case or matter? And, is it fair and just that, once the client has unequivocally and formally confirmed a decision to hire the “Johnny Cochran” specialist in the area of the client’s legal dispute, regardless whether that lawyer will also represent an adverse party to the client in connection with a completely unrelated matter, and where the lawyer agrees to maintain strict confidentiality, the client can later revoke that consent and vitiate the fee agreement in its entirety? In order for this conclusion to stand, there must be a dilution of the general precepts that: a client will be bound by an agreement to consent that a lawyer may represent a future client with “any adversity” to the pre-existing client; that not every possible future conflict need be disclosed in order for an advance waiver to be binding; that a second, supplemental disclosure and consent is not a per se prerequisite for each and every effective waiver of conflict; and no advance waiver can ever be enforced unless the lawyer knows at the time that the consent to the future conflict is sought, the precise nature of the future conflict.

Whether the California Supreme Court will agree with the arbitrator and trial court in Sheppard Mullin v. J-M, or whether it will uphold the appellate court’s reversal of the lower Court’s ruling in favor of Sheppard Mullin, the practical effects of modern legal practice will continue to pose conflict of interest conundrums for the legal profession. Given the consolidation of major law firms, the prevalence of mergers and acquisitions in industry, the emergence of areas of specialization in legal practice, and the tension between client desire to be represented by a particular attorney of the client’s choice and the attorney’s duty to treat every current client with undivided loyalty, we should be asking whether it is realistic anymore to elevate the duty of loyalty above contractual relations between clients and lawyers.

Particularly where the client is a sophisticated consumer of legal services, such as an established organizational entity with in-house or independent legal counsel, and where there is a writing that the client executed after having had sufficient time to obtain independent legal counsel and the opportunity to negotiate the terms of the agreement, the client should be held to that agreement.

Endnotes

1. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 244 Cal. App. 4th 590 (2016).

2. Although courts sometimes apply the term “duty of loyalty” to the former client relationship, it is also recognized that duties to former clients rest primarily on the duty to continue to maintain client confidences and secrets as such, and to avoid accepting representation of another client whose interests share a substantially similar relationship with the former client’s interests, or where the representation of the subsequent client will allow the lawyer to use the former client’s confidential information against the former client. Conversely, lawyers are ethically permitted to accept representation that is adverse to a former client in other situations, such as suing a former client for unpaid fees, and accepting representation adverse to a former client where the subject matter of the new representation is not substantially related to the former representation and no confidences of the former client are material to the subject matter of the subsequent representation.

3. Flatt v. Superior Court, 9 Cal. 4th 275, 285-289 (1994).

4. Id. at 285.

5. Id. at 289.

6. Zador Corp. v. Kwan, 31 Cal. App. 4th 1285 (1995).

7. In the ALI Restatement (Third) of the Law Governing Lawyers, Comment (i) to Section 132, the term “accommodation client” is used to describe the new client whom the lawyer agrees to jointly represent together with the pre-existing client. Legal ethicists disagree whether any client can be treated with a diminished level of care, and see the term “accommodation” as connoting a second class. Nonetheless it has utility for purposes of discussion.

8. Klemm v. Superior Court, 75 Cal. App. 3d 893 (1977).

9. Id. at 902. The conflict of interest was strictly potential and not present. The parties had settled their differences by agreement. There was no point of difference to be litigated. The position of each inter se was totally consistent throughout the proceedings.

***

It is ordered that a peremptory writ of mandate issue directing the trial court to reconsider Bailey’s motion to be allowed to represent both husband and wife, that the court determine if the consent given by each was knowing and informed after a full disclosure by the attorney, and to decide the motion in accordance with the principles set forth in this opinion.

10. Visa U.S.A., Inc. v. First Data Corp., 241 F. Supp. 2d 1100, 1104 (N.D. Cal. 2003).

11. Pringle v. La Chapelle, 73 Cal. App. 4th 1000, 1005-1006 (1999).

12. Id.

13. Western Sugar Coop. v. Archer-Daniels-Midland Co., 98 F. Supp. 3d 1074 (C.D. Cal. 2015).

14. Id. at 1106. Because the waiver must be informed, a second waiver may be required if the original waiver insufficiently disclosed the nature of a subsequent conflict. Concat LP v. Unilever, PLC, 350 F. Supp. 2d 796, 820 (N.D. Cal. 2004). But an advanced waiver of potential conflicts need not specify the exact nature of the future conflict. Visa, 241 F. Supp. 2d at 1105. California law does not require that every possible consequence of a conflict be disclosed for consent to be valid; the inquiry is “whether the waiver was fully informed.” Id. Whether full disclosure was made and the client made an informed waiver is a fact-specific inquiry that considers the following factors: (1) the breadth of the waiver; (2) the temporal scope of the waiver (whether it waived a current conflict or whether it was intended to waive all conflicts in the future); (3) the quality of the conflicts discussion between the attorney and the client; (4) the specificity of the waiver; (5) the nature of the actual conflict (whether the attorney sought to represent both sides in the same dispute or in unrelated disputes); (6) the sophistication of the client; and (7) the interests of justice (citations omitted).

15. The appellate court noted that there was an unsettled question whether Sheppard Mullin was entitled to the fees incurred in the weeks before the firm undertook to represent South Tahoe in the new, unrelated matter, and remanded the case to the trial court for that determination.

16. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 198 Cal. Rptr. 3d 253, 258 (2016).

Ellen A. Pansky

Ellen A. Pansky is a founding partner of the Southern California law firm Pansky Markle Ham LLP. She specializes in the defense of attorneys and bar applicants in regulatory and licensure proceedings, represents defendants and plaintiffs in legal malpractice proceedings, serves as an expert witness in legal ethics, and advises lawyers in legal ethics and risk management.