Deep down, every practicing attorney knows that the most crucial step in taking on a new client isn’t the initial contact, or the wining and dining, or even signing the representation agreement. It’s the conflicts check. But all too often, lawyers treat the conflicts check as almost an afterthought, even though doing so can have disastrous consequences, including loss of clients, ethics sanctions and malpractice claims.
Avoiding conflicts in representing various clients always has been an ethical imperative for lawyers. But, as with so many other aspects of law practice, it’s not as simple a matter as it once was.
In the precomputer age, a lawyer talked with colleagues and checked typed or even handwritten lists of clients to make sure new matters would not create conflicts—either with current or former clients of the firm, or with the interests of the firm itself or individual attorneys there.
For some smaller law practices whose clients tend to be individuals and smaller businesses, such “stone age” tools as handwritten lists are still effective, says Anthony E. Davis of Hinshaw & Culbertson. He is a partner in the risk management and law of lawyering practice group in the New York City office of the Chicago-based firm. For most firms today, however, client lists have become larger and more complex, especially as corporations become larger and more intertwined.
As a result, computerized databases have become central to the process of checking for conflicts. But not even computerized databases make the conflicts-check process foolproof, say Davis and other experts. Especially for larger firms with complex client lists, checking for conflicts should be a multistep process coordinated by a central staff with special expertise.
“Creating appropriate and workable systems to identify and manage conflicts of interest before they hit them in the face remains the single biggest issue for most law firms,” Davis says.
Lawrence J. Fox, a Philadelphia lawyer active in the ethics field, cautions: “One, don’t rely on your memory. And two, don’t rely on your database, because your memory is faulty and your database can’t possibly be complete.”
Other recommended steps include a daily e mail alerting all lawyers at the firm about new matters coming in, say Fox and other experts. Moreover, a firm should rely on an in house specialist, rather than the attorney bringing in a new matter, to determine whether a conflict exists and how it should be handled.
As the legal climate becomes more complex, the stakes are rising for law firms that run into conflicts problems.
Experts say plenty of law firms, large and small, aren’t following recommended best practices for conflicts checks, but that would be cold comfort to the firm that finds itself in the maelstrom from a conflict that could have been avoided or appropriately waived.
The consequences may encompass loss of clients, a damaged professional reputation, malpractice litigation, disciplinary action by state agencies and—in some rare cases—even criminal proceedings.
Cautionary tales abound. One such case a few years ago involved Davis Polk & Wardwell, a respected Manhattan law firm, recounts Fox. A past chair of the ABA Standing Committee on Ethics and Professional Responsibility, he also served on the Commission on Evaluation of the Rules of Professional Conduct (also known as the Ethics 2000 Commission).
Davis Polk filed a lawsuit for J.P. Morgan Chase & Co., one of the nation’s largest bank corporations and a major client. But the defendant in the suit was a subsidiary of another of the firm’s mega-clients, the Chubb Corp., a large insurance corporation.
Chubb was not pleased, notes Fox. Davis Polk was disqualified from participating in this case due to the conflict. Eventually, Chubb took its business to another firm. See J.P. Morgan Chase Bank ex rel. Mahonia Ltd. and Mahonia Natural Gas v. Liberty Mutual Insurance Co., 189 F. Supp. 2d 20 (S.D.N.Y. 2002).
In Fox’s view, the ramifications reached beyond the law firm and parties involved in the suit. “The whole thing was unbelievable,” he says of how the firm handled its conflicts issue. “They, to me, tarnished their reputation and hurt the rest of us, too.”
Fox says law firms would take conflicts more seriously if they were enforced as violations of legal ethics rules. “We would have a lot fewer law firms testing the limits of these rules if motions to disqualify weren’t seen more as badges of honor than as something people ought to be upset about. I think there’s a sense out there: ‘We’ll try it out, and if there’s a motion to disqualify, so what.’ ”
Conflicts problems also are a byproduct of the pressures being felt by both individual lawyers and firms in an increasingly competitive legal environment.
Even when there is no intentional wrongdoing, conflicts are sometimes shunted aside as a result of a hasty decision or ignorance of conflicts-check rules and procedures. All of these factors can be magnified when already busy lawyers feel pressure to produce work and clients.
Fox sees other forces at work as well. He decries “a desire to expand business and push the limits on the rules of professional conduct” that leads to the view, on the part of some attorneys, that “people shouldn’t give any more loyalty to their clients than they’re absolutely, positively required to.”
The kinds of pressures that might prompt a lawyer to ignore an obvious conflict are pervasive in the legal profession, contends Georgetown University law professor Milton C. Regan Jr. in his 2004 book, Eat What You Kill: The Fall of a Wall Street Lawyer. Regan’s book recounts the story of John Gellene, a bankruptcy attorney rising through the partnership ranks at Milbank, Tweed, Hadley & McCloy, a prominent New York City firm.
Gellene’s downfall came when he represented both the debtor and a creditor in a Chapter 11 bankruptcy while telling the judge that he was not doing so. In 1998, the Harvard Law School graduate was sentenced to 15 months in federal prison and fined $15,000 for two counts of knowingly and fraudulently making a false material statement in a bankruptcy case, as well as one count of using a document while under oath, knowing that it contained a false material declaration. He was also disbarred in both New York and New Jersey.
Gellene contended at trial that he used bad judgment but never acted with fraudulent intent. His conviction and sentence were upheld in 1999 by the Chicago based 7th U.S. Circuit Court of Appeals in United States v. Gellene, 182 F.3d 578.
Another source of difficulty for lawyers is navigating the complexities of the legal ethics rules that apply to conflicts.
Concerns about conflicts are reflected in the number and range of queries received by ETHICSearch, a service of the ABA Center for Professional Responsibility that provides advisory information to practitioners about their ethics questions. ETHICSearch fields about 200 conflicts inquiries monthly on topics including multiple representations, a lawyer’s own interest in a case, former clients, representing organizations, imputed disqualification of other lawyers at a firm, successive government employment, acquiring a financial interest in litigation, offering financial assistance to a client, propriety of other transactions with a client, payment for legal services, and sexual relations with a client.
Two of the more perplexing ethics issues regarding conflicts—prospective waivers and screening—were among the matters that received attention from the Ethics 2000 Commission in its comprehensive review of the ABA Model Rules of Professional Conduct. (The Model Rules serve as the basis for most state ethics codes governing lawyers.)
The commission’s proposed revisions to the Model Rules were considered by the ABA’s policy-making House of Delegates during successive sessions in August 2001 and February 2002.
The revisions adopted by the House did not materially change the substance of the Model Rules regarding conflicts, except to add the requirement that a client’s informed consent to a waiver be confirmed in writing, says Charlotte K. Stretch, a lawyer in the Center for Professional Responsibility who served as counsel to the Ethics 2000 Commission. The commission’s goal was to provide clearer guidance to lawyers on how to recognize and resolve conflicts.
Conflicts issues are addressed primarily in Model Rules 1.7 through 1.12.
As revised, Model Rule 1.7 states that a concurrent conflict of interest exists if the representation of one client is directly adverse to another client; or there is a “significant risk” that a lawyer’s representation of one client would be materially limited by the lawyer’s responsibilities to another client, a former client, a third person or a personal interest of the lawyer.
Revised Model Rule 1.7 contains more specific language that clarifies when a lawyer may not seek a client’s waiver and when a lawyer may represent a client even if there is a concurrent conflict of interest.
Conflict and Consent
The commission also added comment language to Rule 1.7 that discusses specific conflicts issues that were not addressed in the earlier version. Notably, the revised comment includes a paragraph that discusses considerations lawyers should take into account to determine when it might be appropriate to seek a client’s consent to waive future conflicts.
“The effectiveness of such waivers is generally determined by the extent to which the client reasonably understands the material risks that the waiver entails,” states the paragraph that was added to the Rule 1.7 commentary. “If the consent is general and open ended, then the consent ordinarily will be ineffective, because it is not reasonably likely that the client will have understood the material risks involved. On the other hand, if the client is an experienced user of the legal services involved and is reasonably informed regarding the risk that a conflict may arise, such consent is more likely to be effective,” especially if the client is represented by other counsel regarding the consent. The effect of the revisions to Model Rule 1.7 has been a matter of some discussion. Ethics 2000 Commission members have maintained that revised Rule 1.7 is more specific about what lawyers may do regarding conflicts, but that it does not allow lawyers to do anything more than they already were allowed to do under the previous version of the rule.
In May 2005, however, the Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 05-436, concluding that revised Rule 1.7 “permits informed consent to a wider range of future conflicts than would have been possible under the Model Rules prior to their amendment.”
The committee withdrew an opinion issued in 1993 in which it expressed a “guarded view” of such arrangements out of concerns that a client might not be truly informed about potential conflicts.
During its consideration of the Ethics 2000 recommendations, the House of Delegates soundly rejected a recommendation by the commission that Model Rule 1.10 be amended to permit a law firm to continue representing a client when a lawyer for an adverse party joins the firm as long as the firm “screens” the incoming lawyer from any participation in the matter and notifies the lawyer’s former client.
Stretch says the commission concluded that screening struck a balance between the interests of clients and the interests of firms in having some flexibility to make hires of attorneys. Eighteen states have adopted screening or are considering revisions of their ethics rules to allow it.
But screening also has staunch opponents, including Fox, an Ethics 2000 Commission member who nevertheless led the fight against it in the House of Delegates.
Fox also expresses disdain for prospective waivers despite their growing acceptance among both practitioners and ethics authorities. “In a lot of big firms, it’s done all the time,” he acknowledges, but “I think it’s evil, the end of our profession. I don’t think you should ever ask [clients] to waive something when you don’t know what it is.” But Davis of New York City says prospective waivers can be a valuable tool in sophisticated niche practices, such as the representation of investment banks, where a law firm may represent institutions on differing sides of many transactions.
As a practical matter, though, a client’s agreement to such an arrangement probably won’t meet the standards of informed consent unless the client is represented in the waiver by sophisticated legal counsel, Davis says. And that can lead to a big problem for law firms that permit their lawyers to seek such waivers indiscriminately. A firm that has obtained what it considers a valid waiver may forge ahead with a conflicting engagement, not realizing that the client’s consent may not pass legal or ethical muster. One of the problems with waivers generally, and especially when the client did not have the benefit of independent legal advice before signing the waiver, says Davis, is that if a malpractice case actually goes to trial, a jury may read the waiver very differently from the lawyers who drafted it. So even an apparently valid waiver under the ethics rules “doesn’t necessarily mean that a firm will avoid civil liability for its actions,” he says. Efforts of lawyers to find their way through the evolving ethics landscape will be made even more difficult as multijurisdictional practice becomes more common. That means lawyers must deal with different and sometimes conflicting ethics rules in various jurisdictions as they handle a single engagement.
New York, for instance, imposes record-keeping requirements on lawyers concerning conflicts that may be unique among the states, Davis says. Under Disciplinary Rule 5-105 of the New York Code of Professional Responsibility, a law firm is required to keep records of its prior matters, and failure to do so is a violation even when there is no conflict.
Moreover, Fox cautions lawyers to remember that professional conduct rules must be applied in the real world, where even the simplest procedures have a way of becoming complicated and fraught with professional dangers.
A young lawyer practicing solo, for instance, might recognize that the representation of a new client poses a potential—but waivable—conflict with an existing client. So far, so good. But if that young attorney decides to call the existing client to obtain written consent to the conflict, there could be a big problem, Fox points out, if the lawyer doesn’t first seek permission from the prospective client to disclose necessary confidential information to the existing client.
“Find out the nature of the matter, and then if you find that you have a real conflict, you have to first go to the client that called you to figure out all this and find out if you’re free to clear the conflict,” Fox says. “Because, remember, what that person told you is confidential.”
Possibly the biggest mistake lawyers make when it comes to sorting out conflicts issues is to assume that any lawyer can figure out how to do it, says Stephen Gillers. He is a law professor at New York University who chairs the Joint Committee on Lawyer Regulation in the ABA Center for Professional Responsibility.
Because of the complexities, conflicts law has become its own specialized field, Gillers says. “Lawyers think they know this stuff, that it comes with the territory of being a lawyer,” he states. “But it’s as much of a specialty as antitrust law or trusts and estates.” Even some obvious conflicts issues often trip up good practitioners, Gillers says.
“There are 50 ways to mess up—it really is true,” he says. “But most of those 50 ways are rare. I’d say 90 percent of the mess-ups are because of three or four major mistakes.” Common reasons for not catching conflicts, he says, include not doing any conflicts check in the first place, using incomplete computer databases, and not sufficiently scrutinizing parent subsidiary relationships among companies in a business. Even when a conflict is promptly recognized, Gillers says, a common mistake is failing to have a client sign an appropriate written consent form to waive the conflict.
Increasingly, big firms are addressing this issue by bringing in people like Anne E. Thar, a former general counsel for a major professional liability insurance company. She is the house expert on conflicts at Chicago’s Winston & Strawn. As conflicts partner, she oversees conflicts checks and opening all new matters for the firm. New matters are not accepted by the firm until Thar clears them for any conflicts issues and determines whether any waivers or other special documentation is necessary. She says she often fields from 10 to 15 calls a day from other lawyers at the firm about conflicts issues.
The biggest issue for law firms, however, is not actual conflicts but perceived conflicts, Thar says. Because juries often see issues differently than lawyers, a representation that a lawyer might view as perfectly ethical could result in a winning malpractice case for a disgruntled client. For that reason, she says, “a lot of what law firms do is prophylactic work, to avoid even the hint of a conflict, going beyond what the ethics rules would require.”
Winston & Strawn, for instance, sends out a lot of “I’m not your lawyer” letters to other parties in joint litigation and to individuals peripherally involved in transactional matters, Thar says, as well as letters notifying clients of potential conflicts. Such letters essentially explain, “We don’t believe it’s a conflict, but out of an abundance of caution we’re letting you know,” she says. While not required by ethics rules, these documents “are highly recommended in this environment, to stop any potential misunderstanding.” Davis adds that lawyers often fail to recognize the importance of engagement letters. Although few states have legal ethics rules that require lawyers to write engagement letters to clients, “It’s the first line of defense for managing conflicts,” he says. One reason, according to Davis, is that the physical act of writing a letter that defines the scope of the representation encourages lawyers to think carefully about who is and who is not a client, and to identify conflicts issues at the outset.
Second, Davis says, if conflicts issues are identified at, or before, the start of representation, lawyers are more likely to address them by including the appropriate disclosure and waiver language, either in the primary engagement letter or related letters. Explaining potential conflicts at the outset helps reduce, or even eliminate, later misunderstandings that might lead to ethics complaints or malpractice claims by clients.
Some conflicts are tricky even for seasoned ethics counsel to address appropriately, experts say. One example is multiple representations, due to their size and complexity. Working together with lawyers for other parties in what is known as a joint defense group in mass tort litigation, for instance, can help companies coordinate their efforts and thus settle a case economically. But the practice also can trigger ethics issues and can make ongoing litigation much more difficult if the defendants start fighting with each other. A key issue at the outset is to identify all the parent and subsidiary companies related to each corporate client so any conflicts issues can be sorted out.
“There are some situations where it just isn’t a good idea” to participate in a joint defense, such as “when somebody is a principal target and somebody else is just along for the ride,” says Mark P. Fitzsimmons, a Washington, D.C., lawyer. “The person along for the ride shouldn’t share counsel with the principal target.”
(Fitzsimmons and Theresa Allyn Queen recently wrote an article, titled “Love Among Porcupines: Maintaining Healthy Relationships With Co-Counsel in the Prickly Context of Complex Toxic Tort Litigation Through Joint Defense and Joint Counsel Relationships,” which was presented in January at a program sponsored by ALI-ABA.) Law firms also need to be aware that joint defense agreements can be especially problematic when it comes to lateral hires, says Patrick M. Ryan, a San Francisco litigator who works on complex cases.
As part of the firm’s conflicts check procedure, Ryan says, lateral attorney hires should be asked whether they have ever worked on matters in which a joint defense agreement was in place.
If so, the law firm must get the names of the parties to the agreement and check the agreement itself to see what conflicts-waiver provisions, if any, it contains. Parties to the agreement should be included in the firm’s usual conflicts-check database and should be cleared against the firm’s matters.
Since some joint defense agreements in complex litigation include a dozen or more defendants, this obviously represents a significant amount of work—and a significant amount of ethics and malpractice exposure if joint defense information is not included in the firm’s conflicts checks.
An ideal conflicts-check system is fully computerized, with a client- or matter-intake form that is filled out online, Davis says.
It is then submitted to a central office in the firm responsible for client and matter intake oversight and management, where the information is checked for actual conflicts and “business issues” of concern to the firm.
For example, take a law firm that has a significant practice representing banks. A representation that might not at first glance appear to be problematic—say, a plaintiff in a small case against a bank—could be of concern even if the law firm does not currently represent that particular bank.
The firm may wish to decline the litigation in order to maintain its attractiveness as potential counsel to banks that have not yet come in the door. The law firm might also decline the representation in order to avoid the possibility that law would develop in the case that would be regarded as generally harmful to its bank clients.
Ultimately, though, there may not be a perfect conflicts-check system that can account for all the possible circumstances that might arise and the uncertainty of the rules that apply to them.
“Conflicts are not necessarily harmful to the clients or the lawyer,” Stretch says. “The key is recognizing when it’s appropriate to seek a waiver. Lawyers have to make tough decisions. There is no bright line.”
Martha Neil, a lawyer, is a legal affairs writer for the ABA Journal.
Martha Neil, a lawyer, is a legal affairs writer for the ABA Journal.