CONFLICTS OF INTEREST – Beware These Special Dangers
Conflicts of interest are a perpetual irritant in the practice of law, whether it be in the large firm or solo practice environment, or anywhere in between. By far, the most frequent outcome of a conflict is disqualification in a litigation. That, however, is not all that can result. Conflicts can also lead to disciplinary actions, civil malpractice liability, fee forfeitures and even criminal prosecutions. While conflicts may arise in myriad forms, the below highlights areas of special significance, with a particular eye on recent developments, as well as some implications for law firm management.
• Bankruptcy representations. The federal bankruptcy laws and rules as applied by bankruptcy judges and federal district judges are unforgiving about disclosure. Whenever a law firm seeks to be debtor’s counsel in a Chapter 11 proceeding, or counsel to the unsecured creditors’ committee, the application papers must contain a thorough discussion of all the firm’s relationships to all the parties involved or potentially involved. In addition, the firm needs to update these filings periodically as the relationships change.
• Lateral screenings. Here is the situation: Firm A brings in a lateral lawyer from Firm B while Firm A is opposing Firm B in a matter—which raises the danger that the lateral will cause Firm A to be disqualified in that matter. Approximately half of the states and a number of federal courts, by rule or decision, allow firms to screen laterals under some circumstances, without the consent of Firm B’s client, thereby avoiding disqualification. In addition, the ABA recently amended Model Rule 1.10 to allow for such screens, although to date, no state has adopted the rule as amended. Although large firms will be aware of these developments, smaller firms and solo practitioners also need to be aware of the disqualification potential of lateral hires and what the rules are in relevant jurisdictions. Non-lawyers changing firms, such as assistants and paralegals, can raise similar issues.
• “Of counsel ” and similar arangements. Arrangements between law firms and lawyers who are not with the firm full-time (most typically “of counsels”) can be more problematic than beneficial. One example: The firm may be found to have a conflict when it takes on a matter adverse to the of counsel’s client. Another example: The of counsel commits malpractice and the of counsel’s client sues the law firm, claiming that he thought the firm stood behind the of counsel’s work. Management needs to consider how to safeguard against the trouble these types of arrangements can present.
• The underlying work problem. Consider this scenario: Lawyer Jones handles a transaction for Client Smith. A year later the parties to the contract disagree on who owes whom what. Client Smith returns to Lawyer Jones, who agrees to handle the litigation and loses. The second-guessing about why Lawyer Jones lost includes that she made the wrong arguments (to protect herself), that she should have been a witness (or, that her partner was a witness), and that she mishandled settlement negotiations. In many such cases, the client will sue the lawyer for malpractice, principally for having a conflict of interest. Unfortunately, malpractice insurance companies find these cases impossible to defend and settle them. An answer for the firm: Prior to taking on the dispute, get someone objective to evaluate whether this is a risk. This may also involve making disclosures to the client about the conflict potential.
• The “hot potato” doctrine. The situation: Lawyer Martin is representing Client Williams in a $10,000 collection case. Another client comes to Lawyer Martin and wants him to sue Client Williams in a very large matter that is completely unrelated to the collection case. The lawyer cannot take the case because he has a conflict and knows that Client Williams will not waive the conflict. What if he withdraws from the collection matter in order to take on the larger matter? That strategy will not work. All courts considering this issue have, in the new, larger matter, disqualified the lawyer who dropped the original client like a “hot potato.”
Increasingly, to avoid situations raised by the “hot potato” doctrine, law firms are asking clients to sign advance waivers providing that the law firm may take on yet-unknown unrelated matters against the client, even while the matter for the client is ongoing. Caution, however: This will work only if the waiving client is sophisticated, and even then, the court might not enforce the waiver.
It should go without saying that firms of every size need to stay abreast of these and similar conflicts issues for the safekeeping of their practices.