Ethics: Identifying Conflicts Of Interest
Every new attorney-client engagement must begin with a conflict check. In this process, the law firm endeavors to discover whether it has ever represented any of the parties involved in the matter prior to the potential client. An ineffective conflict check can lead to disqualification after months (or years) of time and effort invested in the client’s matter, not to mention fee disputes and complaints to the State Bar.
While conflict checking is critically important to the lawyer’s decision to accept an engagement, it can be cumbersome and time-consuming at the expense of billable time. In turn, lawyers sometimes rubber-stamp conflict checks as long as there are no obvious issues. This can be a costly mistake. The kinds of conflicts that lead to disqualification and State Bar complaints are rarely obvious at the outset, but arise due to inadequate conflict checking procedures, failure to recognize potential conflicts, or failure to renew conflicts assessments throughout the representation.
What is an attorney looking for in performing a conflict check?
First, to truly identify if there is a conflict, prior to engaging with the client, the lawyer must obtain enough information to identify all parties with an interest in the outcome of the matter. For example, if the parties to the matter are corporations and LLCs, the lawyer needs to run not only the entity names through its database, but also identify the key officers, directors, managers, shareholders, or members of the entities if feasible, as well as parents and subsidiaries. If the matter involves multi-party litigation, the lawyer must run the names of co-plaintiffs or co-defendants as well as those on the other side of the matter.
Second, it is critically important to identify and define exactly who the client is, and who the client is not. Will the lawyer have one client, or joint clients? Is a third party paying the lawyer’s fees, potentially leading the third party to believe they are part of the attorney-client relationship? Is the lawyer representing joint clients (a husband and wife, a parent and child, a partnership and its partners, co-defendants with the same defense, or a joint venture, for example) who have interests that are aligned now, but may become adverse during the course of the representation?
Moreover, the client is not always the person with whom the lawyer will communicate. When representing a business entity, for example, the lawyer must “conform his or her representation to the concept that the client is the organization itself, acting through its duly authorized directors, officers, employees, members, shareholders, or other constituents overseeing the particular engagement.” (Rules of Professional Conduct, Rule 1.13.) In other words, the entity is the client—not its principals, officers, directors, members, managers, or shareholders—but the entity can only communicate with the lawyer through one or more individuals. This communication does not automatically create an attorney-client relationship between the lawyer and the individual. The scope of the representation needs to be carefully circumscribed in the engagement agreement. Further, the lawyer must thoroughly discuss with the client and its authorized representative the exact nature of the attorney-client relationship to avoid inadvertently creating an implied attorney-client relationship.
The question of the identity of the client can be particularly complicated when the potential client is a small business, a closely-held corporation, a family-owned business, a partnership, or a joint venture. These types of entities often do not draw a sharp distinction between the entity and its owners, and may be confused by the idea that the lawyer for the entity does not represent the individual owners. Nevertheless, it is critical that the lawyer explain and maintain the distinction, because business partners, family members, and joint venturers often find themselves adverse to one another in the very matter in which the lawyer is representing the entity, or in subsequent matters.
After determining the identity of the client, the lawyer needs to determine if there is an actual or potential conflict in taking on the representation of the client. Conflicts of interest can exist between current clients or between a new client and a former clients. Additionally, a lawyer must determine whether he or she has a conflict with the client.
If there is an actual conflict, the lawyer needs to determine whether the conflict is waivable or non-waivable. The Rules of Professional Conduct provide ample guidance about when a conflict exists, when the conflict requires informed written consent to proceed, and when a conflict requires withdrawal.
Identifying Current Client Conflicts (Rule 1.7)
Current client conflicts analysis involves asking if representing one client puts the lawyer in a position directly adverse to an existing client in the same matter or a separate matter. Obviously, a lawyer cannot represent one client against another in litigation. But direct adversity can be more nuanced than simply being on opposite sides of a case. This type of conflict can arise in a variety of circumstances, including representing two separate clients who are both looking to acquire the same company; representing a plaintiff in a bad faith action against an insurance carrier for whom the lawyer performs coverage work; or representing an employer and its employee in a negligence claim if the employer intends to claim the employee was acting outside the scope of his employment.
The duties of loyalty and confidentiality are at the forefront of the current client conflict issue. Separate from direct adversity, Rule 1.7(b) addresses circumstances where “there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with another client, a former client or a third person, or by the lawyer’s own interests.” This could include a representation in which the lawyer has a financial stake in the opposing party or a business relationship with the client, thus creating a risk the lawyer will not be able to fully advocate for the client. A Rule 1.7(b) conflict might occur where the lawyer gave advice in an underlying matter and that advice is called into question in the current representation. Such material limitations on the lawyer’s responsibilities can also arise when the lawyer has a personal or romantic relationship with a party involved in the matter.
In other words, analyzing direct adversity is not enough; the lawyer must also analyze whether the new representation will cause the lawyer to have divided loyalty. If so, informed written consent is required to proceed with the representation, along with compliance with subsections (c) and (d) of Rule 1.7.
Identifying Former Client Conflicts (Rule 1.9)
A lawyer also cannot take on representation of a new client whose interests are materially adverse to a former client in the same matter or in a substantially related matter without informed written consent.
The lawyer’s duties of loyalty and confidentiality survive the termination of the lawyer-client relationship, albeit in a limited way. Comment [1] to Rule 1.9 notes, “[a]fter termination of a lawyer-client relationship, the lawyer owes two duties to a former client. The lawyer may not (i) do anything that will injuriously affect the former client in any matter in which the lawyer represented the former client, or (ii) at any time use against the former client knowledge or information acquired by virtue of the previous relationship.”
This issue becomes especially complicated when lawyers change firms, and find themselves at a firm representing a client against a former client of the lawyer’s old firm. Because conflicts attached to one lawyer are imputed to the firm, this is an issue requiring careful disclosure and informed written consent. Any time a lawyer gains confidential information about a client, the lawyer will be forever barred from taking on any representation which would require unauthorized use or disclosure of the confidential information.
What if a conflict arises mid-representation?
Conflicts can and do arise mid-representation. This can occur in a variety of ways. One common example is when one client takes a position adverse to another even though the clients’ positions were previously aligned. In jointly representing business entities and one or more individuals associated with the entity, a conflict can arise when the individual acts to further their own personal interests at the expense of the best interest of the organization. A conflict can arise when representing a partnership if one partner asks the lawyer representing the partnership not to share information with the other partner.
Mid-representation conflicts can also arise in the context of representing a company in defense of a lawsuit and also providing limited representation to one or more of its employees—for example, representing the employee in a deposition. The lawyer taking on this joint representation must be exceedingly careful to avoid a scenario where the employee-witness (new client) begins to testify adversely to the employer (existing client), which would put the lawyer in the position of having to cross-examine the employee to advance the interests of the employer. (See Yanez v. Plummer (2013) 221 Cal. App. 4th 180.)
In sum, conflicts can be identified by asking two key questions: (1) does a difference in interests exist between the new client and an existing or former client, the lawyer, or a third party, and (2) if such a difference in interests exists, will it foreclose courses of action that the lawyer should reasonably pursue or recommend on behalf of each client, or require the lawyer to disclose confidential information? If the answer to either question is yes, the lawyer must fully disclose the conflict, obtain informed written consent to the representation, and/or decline the representation if the conflict is not waivable.
