CURRENT CLIENT AND DIRECT ADVERSITY
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A law
firm based in Chicago represents a corporate client (Client A) in one matter, a
property tax appeal in San Diego, being handled by a partner in the firm's San
Diego office. While that matter is pending, another client (Client B) asks
a partner in the firm's Chicago office to bring a billion-dollar breach of
contract suit against Client A. The alleged breach of contract has nothing
whatsoever to do with the property tax matter in San Diego, and the corporate
personnel involved are in different divisions and different cities. Can
the law firm take on the breach of contract matter?
In all
states, except Texas (and, perhaps Ohio), the firm would need Client A's consent. Otherwise,
the law firm is being asked to take on a matter directly adverse to a current
client, which violates Model Rule 1.7(a)(1). This is also the rule in Canada, R. v.
Neil, [2002] 3 S.C.R. 631 (Can.); Toyota Credit Canada Inc. v. Phantom Ind. Inc.,
2007 CanLII 23030 (Ont. Super. Ct. June 19, 2007) (following Neil). This is also the rule in states
still using a version of DR 5-105(A) of the older Model Code, Cinema 5, Ltd.
v. Cinerama, Inc., 528 F.2d 1384 (2d Cir. 1976); Universal Studios, Inc.
v. Reimerdes, 98 F. Supp. 2d 449 (S.D.N.Y. 2000). See also Restatement
§ 128(2). Comment [6] to ABA Model Rule 1.7 makes it explicit.
The
Texas exception. Texas is the only state having a version of Model
Rule 1.7 that permits a lawyer to be directly adverse to a current client on
a matter unrelated to the representation. See Texas Rule
1.06(b)(1). The Fifth Circuit has specifically rejected the Texas rule, In Re Dresser Industries,
Inc., 972 F.2d 540 (5th Cir. 1992). In In re Southwestern
Bell Yellow Pages, Inc., 141 S.W.3d 229 (Tex. App. 2004), the court applied the Texas rule and said no disqualification; however,
the court also found that the lawyer in question had not gained information in
the other matter to assist the lawyer in this matter.
Possible
Ohio exception. Pioneer-Standard
Electronics Inc. v. Cap Gemini America Inc., No. 1:01 CV 2185 (N.D. Ohio
2002).
In this case the court allowed a law firm to defend a case even though the
plaintiff was a client of its German office on a completely unrelated
matter. The court noted that Ohio's version of DR 5-105(B) dropped the
phrase, "or if it would be likely to
involve him in representing differing interests," from the ABA Model Code
version. We are not aware of any other Ohio court - state or
federal - making that distinction.
"No
Harm, No Foul." On occasion a court will allow a law firm to remain in a case where it was
technically being adverse to a current client. Such a case is Elonex I.P.
Holdings, Ltd. v. Apple Computer, Inc., 142 F. Supp. 2d 579
(D. Del. 2001) (although, also showing of a consent). More usually, this is
where one
representation had ended, was nearly "dead," was severely winding
down, or was recently dead. See,
for example, Bayshore Ford Truck Sales, Inc.
v. Ford Motor Co., 380 F.3d 1331 (11th Cir. 2004) (had
conflict for brief time, then dropped one of the clients); Cliff
Sales Co. v. Amer. Steamship Co., 2007 U.S. Dist. LEXIS 74342 (N.D. Ohio
Oct. 4, 2007) (overlapping conflict lasted only two months with no harm to
client); LifeNet,
Inc. v. Musculoskeletal Transplant Foundation, 2007 U.S. Dist. LEXIS 29058
(E.D. Va. April 19, 2007) (one of the lawyers left the firm); Pfizer, Inc. v. Stryker
Corp., 256 F. Supp. 2d 224 (S.D.N.Y.
2003) (firm briefly
represented the other side in two product liability cases, but then withdrew); End of Road Trust v. Terex Corp.,
2002 U.S. Dist. LEXIS 2586 (D. Del. 2002);
SWS Financial Fund A v. Salomon Bros., Inc., 790 F. Supp. 1392
(N.D. Ill. 1992); Kaminski Bros., Inc. v. Detroit Diesel
Allison, Div. of Gen. Motors Corp., 638 F. Supp. 414 (M.D. Pa. 1985)
(also a "hot potato" situation); Develop Don’t Destroy Brooklyn v. Empire State Development Corp.,
816 N.Y.S.2d 424 (N.Y. App. 2006); In Prudential Ins. Co. of
America v. Anodyne, Inc., 365 F. Supp. 2d 1232 (S.D. Fla. 2005), the court denied a
motion to withdraw even though the moving law firm discovered that it was
representing the other side on unrelated matters.
The court relied heavily on SWS, above as well as what is now §
11.21 of Hazard & Hodes. In Gen-Cor, LLC v. Buckeye Corrugated, Inc.,
111 F. Supp. 2d 1049 (S.D. Ind. 2000), the court found a current client conflict by virtue
of a parent-subsidiary relationship, but rejected disqualification because the
client would not be prejudiced by the conflict. In Atofina
Chemicals, Inc. v. Jci Jones Chemicals, Inc., 2002 U.S. Dist. LEXIS 13970 (E.D. Pa. July 10,
2002), the court held that because one of the representations was surely going
to end, in any event, and to avoid prejudice to the client of the firm with the
conflict, the court denied the motion. A variation on "no harm, no
foul" is Stanton v. Northside Marina at Sesuit Harbor, Inc.,
2005 U.S. Dist. LEXIS 17942 (D. Mass. Aug. 18, 2005). It was not a
disqualification case. An aggrieved litigant attempted to have a summary
judgment hearing stayed because of a conflict. The court denied the stay
because the litigant was not prejudiced by the conflict. In Hempstead
Video, Inc. v. Village of Valley Stream, 409
F.3d 127 (2d Cir. 2005), the court held that a law firm could be adverse
to the current client of an of counsel where the firm could show that the of
counsel has been screened from the firm's matter. In Board of Regents of the Univ. of Neb. v. BASF Corp., 2006 U.S. Dist. LEXIS 58255 (D. Neb. Aug. 17, 2006),
the court allowed a law firm to oppose a party, even though the law firm was
representing that party in another case, not related to this case. There
is too much to the case to repeat here, but if you want to be adverse to a
current client, you should read it. In Doctor
John's, Inc. v. City of Sioux City, 2007 U.S. Dist. LEXIS 90 (N.D. Ia. Jan.
2, 2007), the court gave a law firm a pass even though for a short period of
time it had a current-client conflict. In Abubakar v.
County of Solano, 2008 U.S. Dist. LEXIS 12173 (E.D. Cal. Feb. 4, 2008),
lawyer interviewed opponents in one case while defending employer in another
case; no disqualification. In Great
American Ins. Co. v. General Contractors & Construction Mgm’t, Inc.,
2008 U.S. Dist. LEXIS 37015 (S.D. Fla. May 6, 2008), the court allowed a law
firm to be adverse to a current client.
Watch
out, though. In the
following cases the law firm was suing a client in one case and representing it
in another, but the conflict lasted for just a few months.
Nevertheless, the court held the law firm should be disqualified in the
surviving matter even though the other matter had ended: Rembrandt
Technologies, LP v. Comcast Corp., 2007 U.S. Dist. LEXIS 9027 (E.D. Tex.
Feb. 8, 2007); Florida Ins. Guar. Ass’n., Inc. v. Carey Canada, 749 F. Supp. 255
(S.D. Fla. 1990); State Farm Mut. Auto.
Ins. Co. v. Federal Ins. Co., 86 Cal. Rptr. 2d 20 (Cal. App. 1999); and Kelly,
Remmel & Zimmerman v. Walsh, 2007 Me. Super. LEXIS 71 (Me. Super. Ct.
April 13, 2007).
Similar cases where the court could have said "no harm no foul" but
didn't are Snapping Shoals Electric Membership Corp. v. RLI Ins. Corp., 2006
U.S. Dist. LEXIS 45226 (N.D. Ga. July 5, 2006); Anderson v. Nassau County Dept. of Corrections, 376 F. Supp. 2d 294 (E.D.N.Y. 2005); and Atlantic Pacific Home Loans, Inc. v. Superior Court, 2006 Cal. App.
Unpub. LEXIS 11228 (Cal. App. Dec. 13, 2006).
Odd Sequence.
In Friskit, Inc. v. RealNetworks, Inc.,
2007 U.S. Dist. LEXIS 51774 (N.D. Cal. July 5, 2007), the court denied a motion
to disqualify where the movant was the second of the two clients to have
retained law firm.
In Starwood Hotels & Resorts Worldwide, Inc. v. Aoki Corp., 768
N.Y.S.2d 9 (N.Y. App. 2003), a law firm, because of a
merger, wound up on both sides of a case for several months. A lawyer for
one side left the firm, and the court allowed her and her new firm to keep the
client. While she was with the former firm, the lawyers for each side were
in different cities and had little contact. In a similar scenario the
court in Laucella v. Ireland San Filippo, LLP, 2006 Cal. App.
Unpub. LEXIS 359 (Cal. App. Jan. 13, 2006) disqualified the law firm.
Combustion
Engineering Caribe, Inc. v. George P.
Reintjes Co., Inc., 298
F. Supp. 2d 215 (D.P.R. 2003). This is a suit involving a
troubled construction project. The
relevant entities in question are three subcontractors, Sub1, Sub2, and Sub3.
Sub1 hired Sub2, and Sub2 hired Sub3.
When things went badly, Sub1 sued Sub2 (this case).
Sub3 is not a party in this case. When
it came time for Sub1 to depose two employees of Sub3 (the non-party), one of
Sub2’s lawyers, Duane Fox, announced that he would be representing not only
Sub2 at the depositions, he would also be representing Sub3 and the two
deponents, for purposes of the depositions.
After the depositions Sub1 moved to disqualify Fox from representing
Sub2, because it was a conflict to represent both Sub2 and Sub3.
Sub2 first raised Sub1’s standing to make the motion.
The court admitted that standing was an issue and noted authorities going
both ways. Then, without expressly
ruling on standing, the court went on to rule on the merits and denied the
motion. The court acknowledged that
there were disputes between Sub2 and Sub3, although, again, Sub3 had not been
brought into the case. But, the
court felt that as to the issues in this case, and as to discovery in this case,
Sub2 and Sub3 had common interests. It
was also important that Fox’s limited role in temporarily representing Sub3 in
certain discovery activities diminished any chance that Sub3 would be prejudiced
with respect to its dispute with Sub2.
In Sperr
v. Gordon L. Seaman, Inc., 727 N.Y.S.2d 456 (N.Y. App. June 18, 2001), a law firm defended Hicksville Cinemas in two
personal injury actions, which have been settled. While those cases were
pending, the law firm, in a third personal injury case involving the same
property, filed a third-party action against Hicksville Cinemas on behalf of
the defendant. The court affirmed the trial court's order disqualifying
the law firm in the pending, third case. The court said in part:
This case involves a law firm which, even if for a relatively
brief time, represented a client in one personal injury case while
simultaneously opposing relief sought by that same client in a separate
personal injury case involving the same premises. Thus, there is a more
serious risk of an appearance of impropriety than in the case of a lawyer who
later adopts a position which is adverse to that of a former client in a
substantially related matter (see, Code of Professional Responsibility DR
5-108 [22 NYCRR 1200.27] . . . .
Possessing
Confidences of Non-Clients.
Law Firm represents the underwriter in an IPO.
Law Firm must conduct due diligence of the issuer, although Law Firm does
not represent the issuer. Can Law
Firm be directly adverse to the issuer if the new matter is somehow related to
the information gathered in the earlier due diligence?
Yes,
according to HF Mgm’t. Services LLC v. Pistone, 818 N.Y.S.2d 40 (N.Y. App. 2006).
However, other New York cases hold that
possessing confidences, validly obtained, of a non-client can prevent a law firm
from being adverse to the non-client. Blue
Planet Software, Inc. v. Games Int’l., 331 F. Supp. 2d 273 (S.D.N.Y.
2004); Felix v. Balkin, 49 F. Supp. 2d 260 (S.D.N.Y. 1999); Marshall
v. State of N.Y. Div. of State Police, 952 F. Supp. 103 (N.D.N.Y. 1997); and
Greene v. Greene, 418 N.Y.S.2d 379
(N.Y. 1979). This appears to be the
rule nationally, as evidenced by the following cases: Glueck v. Jonathan
Logan, Inc., 653 F.2d 746 (2d Cir. 1981); Trone
v. Smith, 621 F.2d 994 (9th Cir.
1980); Westinghouse Electric Co. v. Kerr-McGee Corp.,
580 F.2d 1311 (7th Cir.), cert. denied,
439 U.S. 955 (1978); Coburn v. DaimlerChrysler Services N.A. L.L.C.,
289 F. Supp. 2d 960 (N.D. Ill. 2003); Berry v. Saline Mem. Hosp.,
907 S.W.2d 736 (Ark. 1995); The
Oaks Mgm’t Corp. v. Superior Court, 145 Cal. App. 4th 453 (Cal. App. 2006) (no disqualification; distinguished Raley, cited just
below; court seemed influenced by fact that the non-client had produced more
current information in this case);
Englert v. Sierra Foothills Pub. Util. Dist., 2006 Cal. App. Unpub.
LEXIS 2961 (Cal. App. April 11, 2006) (recognized that such information is
protected but held that the lawyer did not have the information; distinguished Raley,
which follows); William
H. Raley Co. v. Sup. Ct., 197 Cal. Rptr. 232 (1983) (partner served on
board; lawyer could not be adverse because of the information available to board
members);
Morrison Knudsen Corp.
v. Hancock, Rothert & Bunshoft, 81 Cal. Rptr. 2d 425 (Cal. App. 1999) (court
also found that the non-client subsidiary and the parent were one for conflicts
purposes);
Arkansas Valley State Bank v. Phillips,
2007 Okla. LEXIS 109 (Okla. Oct. 16, 2007)
(implied that lawyer would have been disqualified if he had actually received
confidences);
Nat. Med. Enterprises v. Godbey,
924 S.W.2d 123 (Tex. 1996);
In re Dalco, 186 S.W.3d 660 (Tex. App. 2006); and RWR Management, Inc. v. Citizens Realty Co., 135 P.3d 955 (Wash. App.
2006). Canada: see Miele
v. Humber River Reg. Hosp., 2007 CanLII 27757 (Ont. Super. Ct. July 13,
2007), leave to appeal to Divisional Court granted, 2007 CanLII 44820
(Super. Ct. of Ont. Oct. 25, 2007); and Stanley v. Advertising Directory Solutions Inc.,
2007 BCSC 1125 (CanLII) (S. Ct. of Brit. Col. July 26, 2007).
See Restatement § 121, illus. 10. The
“joint defense” cases are in this mold. To
see how, go to “Co-Counsel/Joint Defense
Agreements” in this site.
A law firm in this position should consider setting up a screen around
the confidential information and the lawyers and staff who were privy to it.
A helpful authority suggesting that entire law firms need not be
disqualified is Restatement
§132
cmt. g(ii). It says that where
there is not an attorney-client relationship, the law of agency applies, and
that law does not impute the knowledge of agents to others.
Other helpful authorities are Restatement
§ 15 and Model Rule 1.18. Those
provisions relate to information gathered from “prospective clients.”
They provide that the lawyer is to keep the information confidential and
not use it to the prospective client’s disadvantage.
It is important to note that both provisions provide that a screen will
prevent other lawyers in the firm from being disqualified.
Thus, one could argue that a law firm obtaining non-client information
while doing due diligence could also use a screen.
There appears to be no logical difference between the two situations.
To see other “prospective client” cases, go to “Initial
Interview/Hearing too Much,” in this site.
Similar Facts and Same Result as in HF Mgm't, Above. Strasbourger
Person Tulcin Wolff Inc. v. Wiz Tech., Inc., 82 Cal. Rptr. 2d 326 (Cal. App. 1999) (another
underwriter-issuer case where the court ruled found no conflict)
.
Case Involving Confidences of Non-Client, but Court Unclear Whose Interests
Were Important. Shire Laboratories Inc. v. Nostrum Pharmaceuticals, Inc., 2006 U.S.
Dist. LEXIS 51043 (D.N.J. July 25, 2006).
Secondment of Firm
Lawyer Need not Create Conflict. N.Y. City Op. 2007-2 (undated).
What Is a "Current" Client?
When is a client a
"current" client, as opposed to a "former" client?
That is discussed at the section entitled "Former Client - the Substantial
Relationship Test." To go there, click here.
What Is Direct Adversity?
Suing a current client is
direct adversity. What about negotiating a major contract for one client
when the opposite party to the contract is a current client of the firm on
unrelated matters? That is probably direct adversity, but there are few
cases or opinions on the subject. See the section of this publication
entitled, "Commercial Negotiations."
What about suing a
non-client where the outcome will have an adverse economic impact on another
client who is not a party to the law suit. For example, can a law firm sue
a person who is a guarantor on a note held by a current client where the maker
of the note is in financial difficulty? There are few cases that address
that issue. ABA Op. 95-390 (1995) contains an excellent discussion of
direct adversity in the corporate family context. Also, see the section of
this publication, entitled, "Corporate
Families." ABA Op. 95-390 cites a case that is very similar to
the guarantor situation, North Star Hotels Corp. v. Mid-City Hotel Associates,
118 F.R.D. 109 (D. Minn. 1987).
The Standing
Committee on Ethics and Professional Responsibility of the American Bar
Association has provided valuable insight into what is “direct adversity” in
two opinions.
Formal Opinion 05-434, dated December 8, 2004, deals with a testator who asks a
lawyer to draft a new will, the effect of which is to disinherit the
testator’s son. The problem is
the son is a client of the lawyer on matters unrelated to the testator’s
estate. The court held that
drafting the will is not direct adversity to the son, and the lawyer does not
need the son’s consent to do the will. The
Committee does point out scenarios under which the lawyer may not be able to do
the will, which we will not elaborate on here.
Anyone who has this situation should read Opinion 05-434. Formal
Opinion 05-435, also dated December 8, 2004, deals with a lawyer who represents
an insurance company as a named party in litigation.
Now, in an unrelated matter, another client ("Client A") asks
the lawyer to file a lawsuit against Defendant B.
The problem is that Defendant B is insured by a policy issued by the
lawyer’s insurance company client. The
Committee opined that without more, pursuing the lawsuit against Defendant B is
not direct adversity to the insurance company.
As was the case in Opinion 05-434, the Committee discusses scenarios
under which filing the suit may not be permissible.
GATX/Airlog Co. v.
Evergreen Int'l. Airlines, Inc., 8 F. Supp. 2d 1182 (N.D. Cal. 1998)
furnishes another twist on direct adversity. The owner of several 747
passenger airplanes sued a company that allegedly did faulty work in converting
them to freight airplanes. The defendant's law firm also represented a
major bank on a variety of matters. Well into the 747 litigation, the
parties realized that the bank was an owner of one of the airplanes that had
been converted, although the bank had not yet filed its own suit. The bank
moved to intervene in the original suit to have the law firm disqualified.
The court granted the motion, saying it should have been clear early on that the
law firm's actions were adverse to its bank client - even though the bank had
not yet filed an action. The law firm's status later became moot, and the
Ninth Circuit ordered the disqualification order vacated, at 192 F.3d 1304 (9th
Cir. 1999).
In Harvey E.
Morse, P.A. v. Clark, 890 So. 2d 496 (Fla. App. 2004),
the court held that the law firm representing a trust, which was trying to
deplete a decedent’s estate in favor of the trust, was directly adverse to the
heirs of the estate. Because one of
the heirs (actually, an assignee of several heirs) was a current client of the
firm on unrelated matters, the court held the firm had a direct adversity
conflict.
What About
Referring other Party to Lawyer. D.C. Op. 326 (Dec. 2004).
The D.C. Bar Ethics Committee opined that a lawyer with a conflict may
refer the non-client to another lawyer. The
Committee relied principally upon D.C.’s version of Model Rule 4.3. Compare
Flatt v. Superior Court, 885 P.2d 950 (Cal. 1994), in which the court
held that a lawyer did not have a duty to advise a declined client about the
statute of limitations if doing so would disadvantage an existing client.
"Potential"
vs. "Actual" Conflicts. In most contexts and in most
jurisdictions lawyers are disqualified for having "actual" rather than
"potential" conflicts. See, for example Shaffer v. Farm
Fresh, Inc., 966 F.2d 142 (4th Cir. 1992); Guillen v. City of Chicago,
956 F. Supp. 1416 (N.D. Ill. 1997); Chapman Engineers, Inc. v. Natural Gas
Sales Co, 766 F. Supp. 949 (D. Kan. 1991); In re Possession &
Control of Commissioner of Banks, 764 N.E.2d 66 (Ill. App.
2001); and Bottoms v. Stapleton, 706 N.W.2d 411 (Ia. 2005). However, California Rule 3-310(C)(1) says a lawyer
may not represent interests that "potentially" conflict, without
consents. In Glahn & Hirschfield v. Taylor, 2004 Cal. App.
Unpub. LEXIS 3249 (Cal. App. April 7, 2004), the court described how California
courts define "potential" (a situation that is "reasonably
likely" to lead to an actual conflict). Another case discussing these
distinctions is Maali v. Abtahi, 2008 Cal. App. Unpub. LEXIS 454 (Cal.
App. Jan. 16, 2008). "Potential conflict" is also used in bankruptcy
cases. To read about those go to "Bankruptcy"
at this site. The distinction is also made in the criminal cases. To
read about them, go to "Criminal Practice."
E.D.N.Y. Attempt to Distinguish "Actual" vs. "Potential" Conflict.
Norton v. Town of Islip, 2006 U.S. Dist. LEXIS 60459 (E.D.N.Y. Aug.
23, 2006)
Oregon's "Actual" Conflict vs. "Likely" Conflict Rule.
In re Lawrence, 98 P.3d 366 (Ore. 2004).
Patent
Opinions. Va. Op. No.
1774 (Feb. 13, 2003). This may be a first. A law firm is asked by
client A to render a validity opinion on a patent owned by B. B is a
patent client of the firm, but on other types of products. The Virginia
committee opined that to render the opinion is direct adversity under Va. Rule
1.7(a), and that the firm can only do so with the consent of A and B. More
recently, a court made a similar holding regarding a non-infringement
opinion, Andrew Corp. v. Beverly Mfg. Co., 415 F. Supp. 2d 919 (N.D. Ill. 2006). That is the first court opinion
so holding, of which we are aware.
Bond Lawyer
Conflicts. Iowa Op. 06-03 (November 6, 2006).
This opinion softens Iowa’s position on conflicts for municipal
bond lawyers. It provides that a law firm may represent an issuer when it
is already representing the underwriter in other, unrelated, transactions,
provided waivers are obtained, and the parties signing the waivers are
sophisticated. Earlier Iowa Op.
95-20 (February 22, 1996), would have prevented such a waiver and would have
barred a law firm from representing an issuer where the firm represents the
underwriter currently, or had represented the underwriter in the past.
Banks/Trust
Departments. May a lawyer doing lending work for a bank oppose the
bank it its capacity as a fiduciary? There is little judicial
guidance. For a full discussion of this, go to "Banks/Trust
Departments" by clicking here.
Zero Sum Games.
May a law firm assist one client in seeking a broadcast license in competition
with another client? May a law firm assist one client in collecting a
debt, where another client is also a creditor of the same debtor, and the amount
of money available is not enough to satisfy both. We discuss these issues and provides cases and opinions on them at a section entitled
"Zero Sum Games." To go there, click here.
"Nominal"
Clients. In the following cases the court held that the lawyer's
representation of one of the clients was only nominal, so the lawyer could be
adverse to that "client:" Commercial Union Ins. Co v. Marco Int'l.
Corp., 75 F. Supp. 2d 108 (S.D.N.Y. 1999); Guzewicz v. Eberle, 953 F.
Supp. 108 (E.D.Pa. 1997); and In re Dooley, 599 N.W.2d 619 (N.D. 1999).
In American Special Risk Ins. Co. v. Delta America Re Ins. Co., 634 F.
Supp. 112 (S.D.N.Y. 1986), the court allowed a law firm to stay in a matter
using the “nominal client” rubric; however, the law firm was doing real work
for the client, and the client was “nominal” in the matter where the law
firm was adverse to it.
"Vicarious
Clients." Atrotos Shipping Co., S.A. v. The Swedish Club, 2002
U.S. Dist. LEXIS 9018 (S.D.N.Y. May 20, 2002). A ship owner is suing its
"Freight, Demurrage, and Defense" insurance carrier, The Swedish Club
("TSC"). TSC usually appoints law firms to represent ship
owners, all correspondence is between the law firm and TSC, and TSC pays the law
firm's fees. The law firm for the plaintiff is also representing TSC in
other shipping losses. TSC moved to disqualify the law firm in this case,
because of these other matters. The law firm responded that it was really
representing the insured in the other cases and that TSC was merely a
"vicarious" client. The court disagreed and disqualified the law
firm.
Third-Party Actions. Richmond American Homes of Northern California, Inc.
v. Air Design, Inc., 2002 Cal. App. Unpub. LEXIS 6948 (Cal. App. July 25,
2002).
A sued B.
B filed a third-party action against C.
C moved to disqualify A’s lawyer because that lawyer had previously
represented C on substantially related matters.
A claimed that A was not suing C, so there was no adversity.
The Appellate Court disagreed noting that third-party defendants can
defend against a third-party complaint by attempting to prove the defendant had
no liability to the plaintiff.
The court held that is being directly adverse to the former client.
(While this is not a current client conflict, the same analysis regarding
third-party complaints should apply to current clients.) Another
third-party action in which the court held that a lawyer could not represent
both the plaintiff and the third-party defendants is Pressman-Gutman
Co., Inc. v. First Union National Bank, 459 F.3d 383 (E.D.
Pa. 2004). The court disqualified the law firm from representing
the third-party defendants. And, upon reconsideration, the court
ordered the law firm out of the case entirely, Pressman-Gutman
Co., Inc. v. First Union National Bank, 2004 U.S. Dist. LEXIS 23991 (E.D.
Pa. Nov. 30, 2004). The Third Circuit denied mandamus at Pressman-Gutman
Co., Inc. v. First Nat. Bank, 459 F.3d
383 (3d Cir. 2006)
. In In re Methyl Tertiary Butyl Ether Products
Liab. Lit., 438 F. Supp. 2d 305 (S.D.N.Y. 2006), a law
firm started out representing plaintiffs and a third-party defendant.
When challenged, it withdrew from representing the latter. In Liberty Mut. Fire Ins. Co. v. Ravannack, 2006 U.S. Dist. LEXIS 50252
(E.D. La. July 21, 2006), the court allowed a lawyer to represent both a
plaintiff and a third-party defendant (with a waiver) without discussing the
conflict and the ability of the parties to understand it. Same, in Hall
Dickler Kent Goldstein & Wood, LLP v. McCormick, 930
N.Y.S.2d 195 (N.Y. App. 2007)
.
Attempt to Apply
"Substantial Relationship" Test to Current Client Situation.
And, Much More. Reed v. Hoosier Health Systems, Inc., 825
N.E.2d 408 (Ind. App. 2005).
The lawyers representing the plaintiff in this corporate dispute are in a
law firm that represents the defendants in medical malpractice suits.
The trial court granted the defendants’ motion to disqualify
plaintiff’s lawyers, and in this opinion the appellate court affirmed.
The plaintiff bravely attempted to get the court to apply the
“substantially related” test even though the conflict is a current one under
Indiana’s version of Model Rule 1.7(a)(1).
The court did not buy that one. The
law firm also offered to withdraw from the malpractice cases.
The court did not buy that one either, citing the “hot potato” cases.
Last, the plaintiff tried to argue that defendants weren’t really
clients of the firm in the malpractice cases because of the nature of their
relationship to their malpractice carrier.
This argument was based upon the fact that the insurance company
appointed defendants’ law firm and had complete control of the defense, and
only the insurance company had exposure. That
argument also failed.
Strother v. 3464920 Canada Inc., 2007 SCC 24 (Can). Lawyer did tax shelter work
for Client No. 1 for several years and through 1997. The law changed in 1997, and Lawyer advised Client No. 1 that
it could do no further tax shelter deals of the sort it had been doing.
Lawyer’s law firm (“Law Firm”) continued to do other work for
Client No. 1 through 1998 and into 1999. In
early 1998 Lawyer began representing Client No. 2, and, through a loophole in
Canadian tax law, Lawyer did a number of tax shelter deals for Client No. 2,
similar to those Lawyer had done for Client No. 1.
Further, Lawyer had an agreement that Client No. 2 would share its
profits with Lawyer. When Client
No. 1 learned of Lawyer‘s work for Client No. 2, it sued Lawyer and Law Firm
for breach of fiduciary duty for failure to advise Client No. 1 of the loophole
opportunities. The key issue was
whether Lawyer had an obligation in 1998 to advise Client No. 1 of the loophole.
As of 1998 Law Firm had no written engagement letter with Client No. 1.
The B.C. trial court held that Lawyer and Law Firm had no duty to advise
Client No. 1 of the loophole. The
B.C. Court of Appeal disagreed and reversed.
In this opinion the Supreme Court of Canada, in a 5-4 opinion affirmed
the Court of Appeal on the issue of liability of Lawyer.
The Supreme Court ruled that Law Firm had no liability for breach of
fiduciary liability but might be vicariously liable under the Canadian
Partnership Act. According to press
accounts the Supreme Court’s ruling on damages reduced Lawyer’s exposure
from upwards of $40 million to about $1 million.
S.C. Op. 05-14
(2005). Lawyer may not represent mortgagor in foreclosure proceeding when
the mortgagee is a client in other foreclosure proceedings without a waiver from
the mortgagee.
Odd California
Case. Cal West Nurseries, Inc. v. Superior Court, 29 Cal. Rptr. 3d 170 (Cal. App. 2005).
Where Lawyer's Two Current Clients Are Adverse in Proceeding, in which the
Lawyer Is not Involved, Lawyer Does not Have a Current Client Conflict.
Fremont Indem. Co. v. Fremont Gen. Corp.,
49 Cal. Rptr. 3d 82 (Cal. App. 2006).
Patent Matter. Enzo Biochem, Inc. v. Applera Corp., 468
F. Supp. 2d 359 (D. Conn. 2007)
. In
this case Enzo has sued Applera for patent infringement.
In another case Enzo has sued Amersham for infringement of the same
patents. Amersham is a subsidiary
of GE. Law Firm represents Enzo in
this case (the Applera case). Another
firm represents Enzo in the Amersham case. Law Firm represents GE in other intellectual property
matters. For that reason GE
intervened in this case to move to disqualify Law Firm.
In this opinion the court denied the motion. There was some evidence that Law Firm communicated with the
law firm representing Enzo in the Amersham case in order to present
consistent claims construction positions. However,
Law Firm has committed not to participate in any appeals of the claims
construction rulings. The court
added:
[W]hile the
construction of Enzo's patents applicable to the infringement claims brought
against two separate accused infringers, Amersham and Applera, implicates
pretrial Markman overlap, the trials of how those constructions apply to the
respective accused products or conduct are wholly separate. GE has not claimed
that any of its witnesses in Amersham will be cross-examined by [Law Firm] in
Applera, as contemplated as demonstrating direct adversity under Rule 1.7(a)(1).
Lawyer for Personal Representative Is not Lawyer for the Estate or Beneficiaries. In re Estate of Buoni, 2006 Cal. App. Unpub. LEXIS 9368 (Cal. App.
Oct. 20, 2006) (one lawyer allowed to represent the person who was
administrator and creditor of estate); In re Est. of Deigh, 2006 Wash. App. LEXIS 2160 (Wash. App. Oct. 2,
2006).
Secondment. N.Y. City Op. 2007-2 (undated). Here is the
Committee's digest:
A law firm may second a lawyer to a host organization without subjecting the
law firm to the imputation of conflicts under DR 5-105(D) if, during the
secondment, the lawyer does not remain “associated” with the firm. The
seconded lawyer will not remain associated with the firm if any ongoing
relationship between them is narrowly limited, and if the lawyer is securely
and effectively screened from the confidences and secrets of the firm’s
clients. Both during the secondment and afterward, the seconded lawyer and his
or her employer should be mindful of the lawyer’s former-client conflicts
under DR 5-108.
Representing Client and Having Simultaneous Fee Dispute.
L.A. County Op. 521 (2007). This
opinion discusses the extent to which a lawyer may continue to represent a
client in the face of a disagreement over fees.
Threats by Client to Sue for Malpractice Grounds for Withdrawal. Moore
v. United States, 2008 U.S. Dist. LEXIS 34741 (E.D. Cal. April 28, 2008).
Plaintiffs in this case threatened to sue their law firm for
malpractice. In this opinion the court ruled that the threat created a
conflict of interest and ruled that the law firm’s motion to withdraw should
be granted.
Commercial Development Co. v. Abitibi-Consolidated Inc., 2007 U.S. Dist.
LEXIS 86147 (W.D. Wash. Nov. 15, 2007). This
is a suit for specific performance of a real estate sales contract, among
other things. A realtor
(“Realtor“), affiliated with the real estate agency (“Agency”)
representing the seller, successfully moved to intervene to defend her
conduct, which appeared to be put in issue by the plaintiffs.
Realtor then moved to disqualify the plaintiffs’ law firm (“Law
Firm”) because Law Firm represents Realtor and has represented Realtor on
matters substantially related to this matter.
In this opinion the court granted the motion. The court plowed no new ground, here, and the analysis was
very fact-intensive. Law Firm’s
relationship with Realtor came about through Law Firm’s representation of
Agency, for which Realtor was an independent contractor.
Realtor paid a portion of Law Firm’s fees pursuant to her contract
with Agency. A partner at Law
Firm (“Lawyer”) had counseled with Realtor on issues similar to those in
this case.
If You "Have to Ask," Rule 1.7(a)(2) Is Almost Certainly Involved -
A Comparison with Rule 1.7(a)(1)
Rule 1.7(a)(2) may be involved
where there is no direct adversity against a current client. It applies if
the representation of a client "may be materially limited" by the
lawyer's responsibility to someone else or by the lawyer's own interests.
If the answer is "maybe," then the lawyer must be satisfied that
"the representation will not be adversely affected," (1.7[b][1]) and
the client consents (1.7[b][4]).
Take the guarantor
situation mentioned above. Notwithstanding the North Star case,
which the drafters of ABA Op. 95-390 believe
stretches the meaning of direct adversity under Rule 1.7(a)(1), an analysis of Rule
1.7(a)(2) would still be required. That is, would the lawyer's loyalty to the
payee of the note cause the lawyer to do less than a perfect job in going after,
and possibly bankrupting, the guarantor. Stated another way, if you are
concerned about whether 1.7(a)(1) applies, and you decide that it does not, you are
almost certainly going to have to go through the 1.7(a)(2) analysis.
Mother Can Be Son's Lawyer
with Son's Waiver. Douglass v. Valteau, 2005 U.S. Dist. 11993 (E.D. La. June 9, 2005).
Malpractice
Plaintiffs' Model Rule 1.7(a)(2) Argument not Successful. Spears v. Overbey, 2006 U.S. App. LEXIS 5426 (6th
Cir. March 2, 2006).
Lawyer argues that his client and not lawyer liable for sanctions, making lawyer
subject to further sanctions.
Wade v. Soo Line R.R. Corp., 500 F.3d 559 (7th
Cir. 2007).
Restatement.
See §§ 121, 125, and 128.
Treatise.
Hazard & Hodes §§ 11.2-11.5.
Law Reviews.
David Hricik, How
Things Snowball: the Ethical Responsibilities and Liability Risks Arising
from Representing a Single Client in Multiple Patent-Related Representations,
18 Geo. J. Legal Ethics 421 (2005)
;
Thomas D. Morgan, Suing a Current Client, 9 Geo. J.
Legal Ethics 1157
(1996).
Other Current Client Cases
Donaldson
v. City of Walterboro Police Dept., 2008 U.S. Dist. LEXIS 26801 (D.S.C.
March 31, 2008). The court applied Rule 1.7 as written and disqualified
law firm.
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