BOALT – LEGAL PROFESSIONSIXTH & SEVENTH WEEKS – LOYALTY

OCTOBER 1 & 8, 2013

Outline Section IV(F)(6)

Pages 35-44; Appendix A

All Students Read

Online lectures (optional)

Lectures 6.1, 6.2, 6.3

Optional

Rules 1.7 – 1.12 Rules Supplement

All students read

Ex. 6.2 All Read; R-Z on call

Ex. 6.3 All Read; L-P on call

Ex. 6.4 This is a difficult question that will walk you through many of the rules and concepts. It’s a good exam review question. No cold calls on this one.

Ex. 6.5 All Read; H-K on call

Ex. 6.7, 6.8. 6.9 All Read; Students D-G ready to discuss

Ex. 6.9 All Read; A-C on call

Ex. 6.10 All Read; all ready to discuss

Read M.R. 1.7, 1.8, 1.9, 1.10, 1.11, 1.12.

Read CRPC 3-300; 3-310.

6. Frequently Asked Questions

(6.1): What is the lawyer’s duty of loyalty?

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A lawyer must put the interest of the client before any other interest. Quite often, this duty is analyzed in the context of “conflicts of interest.”

(6.2): What is a conflict of interest?

It’s any interest that might prevent you from fulfilling your fiduciary duties to the client. It’s any duty you might have to current clients, former clients, third persons, or to yourself, that might impede how you serve your client.

(6.3): What is the framework for analyzing the duty of loyalty and conflicts of interest?

The key Model Rules are 1.7 – 1.12. Case law may impose additional requirements.

The rules’ basic distinction is between a lawyer’s conflicts as to current clients and as to former clients. They are sometimes called “concurrent conflicts” and “successive conflicts.” In this course, your instructor will probably refer to them in class as the “current client rule” and the “former client rule.”

The rules also determine how one lawyer’s conflicts affect other lawyers in the same work setting (“imputation”), and how conflicts can be resolved (i.e., waivers). Finally, the rules about conflicts and imputation are modified when applied to judges and government lawyers.

The rules:

a. MR 1.7 is the general rule on concurrent conflicts of interest (i.e., current client conflicts).

b. MR 1.8 regulates specific types of conflicts between attorneys and clients.

c. MR 1.9 regulates conflicts with former clients.d. MR 1.10 determines when a lawyer’s disqualification is imputed to

other attorneys.e. MR 1.11 prevents a lawyer from utilizing governmental

employment for private gain.f. MR 1.12 governs former judges or arbitrators and third party

neutrals.

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(6.4): What is the duty of loyalty owed to current clients?

MR 1.7 defines two types of concurrent conflicts: (1) acting “directly adverse” to a current client; and (2) situations where the representation of a client will be “materially limited” by the lawyer’s duties to others. Those two definitions are found at MR 1.7(a)(1) and (a)(2), and are fleshed out in the Comments. You should be able to articulate, with examples, what “directly adverse” means and what constitutes a “material limitation.”

The “current client rule” is a rule of sweeping breadth. It’s often said that the broadest conflict of interest rules of any profession are the ones that govern US lawyers. Adversity to a current client is a conflict even if the adverse matter is completely unrelated to what the firm does for that client. Suppose you represent Acme regarding trademarks and Bravo, another one of your current clients, asks you to negotiate a real estate lease adverse to Acme. That’s a conflict of interest.

While MR 1.7 creates two broad categories of conflicts, MR 1.8 is a laundry list of specific conflicts. (How do you think that such a complicated rule arose over time?) You might be amazed at what’s in MR 1.8, so read it carefully and ask yourself why it was necessary to enact each subparagraph.

(6.5): How can conflicts be resolved, if at all?

Usually, the presence of a conflict is resolved by not commencing the problematic ACR, by terminating the problematic ACRs, or by obtaining consent from each affected client. (If you have made an appearance in a litigation, you probably also need the court’s approval to withdraw.)

Sometimes the lawyer will decide not to proceed with the problematic ACR. Suppose that Alpha, Inc. is your firm’s largest client and a potential new client asks you to negotiate a contract across from Alpha. Even though a waiver might be obtained, you might not even want to consider that representation.

You might terminate the problematic relationship. Suppose that you represent a criminal defendant and a few months into the case you realize that the best strategy is to point the finger at another person—who happens to be a current client in another matter. You might declare a conflict and terminate the relationship. (When we cover the rule on withdrawals and termination of the ACR (1.16), you will see that conflicts might require termination.)

You might consider whether to obtain a waiver. MR 1.7 and 1.8 each contain their own provisions about whether, and how, conflicts can be waived. Some

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conflicts can’t be waived under any circumstances and others can be waived only when it is “reasonable” to do so.

When they can be waived, the usual formula is to disclose the risks and alternatives (MR 1.0(e)), and then obtain “informed consent, confirmed in writing” (let’s refer to it by the acronym ICCW)—which is the basic form of conflict waiver under the Model Rules.1 ICCW can be accomplished by either (1) a written consent from the affected client(s) or (2) oral consents from the affected client(s) and prompt written confirmation from the lawyer to the affected clients.

In some cases, the MR will require different forms of consent than ICCW. For example, the consent required by MR 1.8(a) requires the use of very specific words and there are three rules (1.5(c), 1.8(a), 1.8(g)) that require a writing signed by the client (WSC). There is a short cheat sheet at Appendix A to this reading.

Later, we’ll consider the special case of the “advance waiver,” which is one of the contested, “hot button” issues in legal ethics.

In the context of motions to disqualify lawyers, courts might consider equitable defenses to an asserted conflict. That is, the lawyer opposing a motion to disqualify might argue, “whether or not it’s a conflict, the moving party either never had the right to assert the conflict or lost that right by committing inequitable conflict.”

(6.6): What about “advanced waivers”? How do they work?

This is one of the most contested issues in legal ethics. Recall the breadth of the current client rule. Taking on any new client, especially a large client, can prevent the firm from taking on a wide variety of new work in the future. For that reason, many large firms ask new clients to agree in advance that the firm can be adverse to the new client on any matter unrelated to what the firm does for the new client. That’s an “advanced waiver” that would exempt the law firm from the normal application of the current client rule.

The basic problem is this: waivers require informed consent, and the most that the firm can say is that it wants to be adverse to the new client in certain categories of legal work in the future. By definition, the firm can’t specify exactly what matters those will be. Is disclosure by category sufficient under the ethics rules? Twenty years ago, the answer was almost surely “no.” In ten years, the answer may well be

1 Although you don’t have to memorize these provisions, you will find the ICCW formula in MR’s 1.7(b) (current client waivers); 1.9(a) & (b) (former client waivers); 1.10(c) (x-ref to 1.7); 1.11(a) (government lawyers); 1.11(d)(2)(i) (government lawyers); 1.18(d)(1) (adversity to prospective client); 3.7[6] (lawyer as adverse witness to client).

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“yes.” The answer today is that the courts are struggling with that question. Comment [22] to MR 1.7 suggests that they are enforceable in many situations.

From the clients’ point of view, the widespread practice of seeking advance waivers can destroy a client’s sense of trust even at the outset of the ACR. From the firm’s point of view, advance waivers are necessary to protect the interests of existing clients and to protect the firm’s ability to take on the new business that leads to growth.

(6.7): How do conflicts work with entity clients that have affiliates?

When analyzing conflicts of interest, we once again need to ask who the client is. The answer is often obvious. If a natural person hires us, we owe a duty to that current client. If the client is an organization, the client is the entity itself and not the people working at the entity. (MR 1.13) But how should we treat corporate affiliates? If you represent Parent Corp., may you undertake a representation adverse to Subsidiary Corp.? What about two corporations that are wholly owned subsidiaries of the same corporate parent?

There are at least three ways to analyze this issue. One is to say that you must always treat the affiliates as if they were one entity. To my knowledge, that approach has been urged by critics but is not the law anywhere. Another approach is to say that if the two entities are legally distinct—which would always be the case for separately incorporated subsidiaries—then you can be adverse to a current client’s affiliates. One case from California takes that approach. Brooklyn Navy Yard Cogeneration Partners v. Superior Court, 60 Cal.App.4th 248 (1998). A third approach is take a case by case approach, looking at all the facts and circumstances, and then “collapsing” the corporate affiliates into one entity when fairness demands it or when being adverse to the client’s affiliate offends the client’s reasonable expectations of loyalty. That’s the approach taken by a new Second Circuit case, (GSI v. BabyCenter LLC) and by Morrison Knudson Corporation v. Hancock, Rothert & Bunshoft, 1998 Cal. App. Lexis 1091 (1999).

Let’s consider two examples of the third approach. Suppose you represent Parent, Inc., on some matters and propose to represent Alpha, Inc., against Bravo, Inc. As it turns out, Parent owns 25% of the shares of Bravo. Is undertaking the matter a violation of the current client rule? Suppose further that the matters for which you represent Parent have not given you access to any confidences that would be useful in the proposed matter adverse to Bravo. Under a facts and circumstance approach, a court may rule that the matter is not a violation of the ethics rules. Of course, it might be a poor business decision! And it might be something that

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discredits you in the eyes of Parent or in the eyes of decent people. But it may not be an ethics violation. On the other hand, the recent case, GSI v. BabyCenter LLC, found that that fact pattern created a conflict of interest. Obviously, there remains uncertainty in the law on this point.

As a counter-example, suppose that Parent owns 100% of Bravo, the general counsel of Parent serves as the general counsel of Bravo, and there is some overlap in what you do for Parent and the matter on which you’d be adverse to Bravo. A court applying the “facts and circumstances” approach might decide that the proposed representation is a violation of the current client rule.

Now let’s apply the current client rule in the context of partnerships. Generally, the courts will look at the extent and nature of the contacts between the attorney and the partners to determine if the partners and the partnership should be treated as a single entity for purposes of applying the conflicts rules. So, there is even more uncertainty applying conflicts rules to the representation of partnerships than to corporations.

In practice, many lawyers eliminate the uncertainty by reaching a written agreement with the client as to which corporate affiliates are clients. Law firms might include a “one client” clause in the fee agreement, attempting to define just one corporation as the client and excluding the possibility that the firm represents any individual employees or officers of the corporation or any corporate affiliates. Sophisticated clients may ask the lawyer to agree to terms and conditions that define all affiliates as clients or that provide that all affiliates will be treated as if they were clients for purposes of the conflict of interest rules.

(6.8): What is the duty owed to former clients?

We discussed this briefly during our discussion of the attorney-client relationship lifecycle. The basic duty a lawyer owes a former client is tied to the duty of confidentiality; a lawyer can take on representations materially adverse to former clients unless it would breach the continuing duty of confidentiality. To understand how this issue plays out, we need to read each subparagraph of MR 1.9.

MR 1.9(a) applies when the lawyer formerly represented a client in a matter. Suppose that Lisa Lawyer formerly represented Acme and now wishes to undertake a representation adverse to Acme. It’s a conflict of interest if the new matter adverse to Acme is the “same or substantially related to” the matter she handled for Acme. (MR 1.9(a)) If the adverse matter is the “same or substantially related,” then the

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court presumes that the lawyer would necessarily make use of the former client’s confidences. So it’s a conflict of interest.

MR 1.9(b) deals with another situation—one where the lawyer didn’t represent the former client. Suppose that Lawyer works at Able & Baker while that firm represented Echo, Inc., but Lawyer didn’t work on that matter. Lawyer moved laterally to the firm of Charlie & Delta and proposes to work on a matter adverse to Echo. Because Lawyer didn’t represent Echo, 1.9(a) doesn’t govern. But the other subparagraphs do. Under 1.9(b), it would be a conflict of interest for Lawyer if she had acquired material confidences from Echo. That is, it’s a conflict if Lawyer learned Echo confidences that could be useful in the matter adverse to Echo. Lawyer could have learned those confidences from chatter in the hallways of Able & Baker, or during lunchtime presentations, or whatever, even if she didn’t represent Echo.

MR 1.9(c), a sort of “catch-all” provision, goes one final step further in protecting the confidences of former clients. It provides that the confidences cannot be used to the detriment of the former client or revealed to anyone without permission.

Is that all there is to the former client rule? No. There is also case law holding that a lawyer cannot attack his or prior work product, even if there is no adversity to a former client. This is a nebulous, poorly-defined aspect of the former client rule.

(6.9): What does “substantially related” mean?

The term of art “substantially related” needs some defining. In H.F. Ahmanson & Co. v. Soloman Brothers, Inc. (1991) 229 Cal.App.3d 1445, 280 Cal.Rptr. 61, the court held that there was no “substantial relationship” between a particular attorney’s prior representation of a party while at a previous law firm and his new firm’s representation adverse to that party. The court noted as follows:

A former client may seek to disqualify a former attorney from representing an adverse party by showing the former attorney actually possesses confidential information adverse to the former client. However, it is well settled actual possession of confidential information need not be proved in order to disqualify the former attorney. It is enough to show a “substantial relationship” between the former and the current representation. If the former client can establish the existence of a substantial relationship between representations, the court will conclusively presume the attorney

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possesses confidential information adverse to the former client.

The “substantial relationship” test was announced in T.C. & Theater Corp. v. Warner Brothers Pictures (S.D.N.Y. 1953) 113 F.Supp. 265, 268, in which that court stated “the former client need show no more than the matters embraced within the pending lawsuit wherein his former attorney appears on behalf of his adversary are substantially related to matters or cause of action wherein the attorney previously represented him, the former client.” The Ahmanson court noted that the substantial relationship test is sometimes unfair:

While most courts and commentators agree with prophylactic approach to disqualification established by T.C. & Theater Corp., they also recognize the drawbacks to this approach. It is over inclusive. It may impose a significant hardship on the current client. It may unfairly limit the employment opportunities of lawyers and, finally, it may stifle development of expertise in complex areas of law.

The Ahmanson court also noted that it is sometimes difficult to define “substantial relationship”:

Use of the word “relationship” implies a connection, but offers no guidance as to what is being connected: subject matters, facts or issues. (See T.C. & Theater Corp. v. Warner Brothers Pictures, supra, 113 F.Supp. at p. 268 (subject matter); Trone v. Smith (9th Cir. 1980) 621 F.2d 994, 998 (facts); Government of India v. Cook Indus (2nd Cir. 1978) 569 F.2d 737, 739-40 (issues); and see Global Van Lines, Inc. v. Superior Court, supra, 144 Cal.App.3d at pp. 486-89 (finding a substantial relationship between subject matter, issues and facts).

Hence “substantially related” is a term of art that permits the court to gauge, on a case-by-case basis, the real risk that the former client’s confidences will be used against the client.

There is a new legal theory that may expand the definition of “substantially related” and therefore reduce a lawyer’s ability to be adverse to former clients. Under the so-called “playbook theory” of former client conflicts, the former client can assert that even if there is no legal or factual overlap between the current

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adversity and the former ACR, the lawyer learned how the former client tends to handle legal matters, how it negotiates, and how it values legal claims.

(6.10): If you can sometimes be adverse to a former client, can you fire the client in order to be adverse to the client?

May a lawyer “fire” a current client for the purpose of undertaking a representation adverse to the “fired” client? She may not. Under the so-called “Hot Potato” doctrine, you may not terminate a client for the purpose of being immediately adverse to it. See, e.g., Truck Ins., Exchange v. Fireman’s Fund Ins. Co., 6 Cal.App.4th 1050 (19 )

But may you terminate your relationship with clients not because you have a lucrative piece of work against them but rather because you are rationalizing your client base for the long term? Can a law firm that represents auto accident victims decide in a generalized way that it cannot represent insurance companies anymore? The answer appears to be yes, so long as you don’t fire the client for the purpose of taking on a contemplated piece of business against the terminated client.

(6.11): What rules govern the imputation of conflicts?

In 2009, the ABA changed the rule that governs most imputation issues, so we will need to know the “old rule” and the “new rule.”

First, let’s get a handle on what “imputation is.” Strictly speaking, conflicts pertain to individual lawyers under the current client and former client rules. But once we identify any lawyer who has a conflict, that conflict might be “imputed” to other lawyers as well.

Second, let’s recognize that there are four different imputation rules: (1) rule 1.10(a) which governs when lawyers move from one private practice job to another private practice; (2) rule 1.11, which governs when lawyers worked as government-employed lawyers; (3) rule 1.12, which governs former third party neutrals, such as judges; and (4) rule 1.8(k), which governs the specific conflicts that arise under rule 1.8.

Now let’s turn to the specifics. We’ll start with the pre-2009 version of rule 1.10(a), which I’ll call the “old rule” on imputation. It applies when a private practice lawyer switches jobs. Under the old rule, the lateral lawyer carries with her all the former client conflicts she has amassed. Once she arrives at her new place of employment, all of those former client conflicts are imputed to all the lawyers at her new firm. Can you see why hiring a lateral lawyer raises all sorts of conflicts risks?

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It’s possible that the former clients will waive their rights and permit the lateral or the other lawyers at her new firm to be adverse to the former client. If so, then the rules require “informed consent, confirmed in writing,” or ICCW. But the former client may not consent, in which case the lateral’s former client conflicts are imputed to everyone at her new firm.

Although we will call this the “old rule” on imputation, the old rule is still the predominant approach in the United States today. Although the ABA amended its model rules, most states have retained the old rule. What about the “new rule”? As of 2009, the Model Rules provide that when a lawyer is prohibited from representing a client under 1.7 or 1.9, that prohibition is imputed to all the other lawyers in the firm, unless (i) the prohibition is based on a personal interest of the disqualified lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm (1.10(a)(1)); or (ii) the prohibition arises from a lawyer’s previous work at a former firm and the new firm properly screens the prohibited lawyer (1.10(a)(2)).

What’s an example of the first exception, which is found at 1.10(a)(1)? Suppose that a lawyer at a firm is intensely pro-choice and pro-Democrat, and is asked to undertake a highly politicized case seeking to overturn a state law passed by a Republican state legislature limiting reproductive choice. Under 1.7(a)(2), that’s a material limitation conflict. But because the conflict arises from personal considerations, if the other lawyers in the firm wouldn’t be limited in representing the client challenging the statute, the first lawyer’s conflict is not imputed to the other lawyers at the firm. Note, however, that these “personal conflicts” are unusual.

The second exception, at 1.10(a)(2), provides that when a lawyer moves laterally from one private practice setting to another, she remains burdened by her former client conflicts but if the new firm acts promptly and appropriately, it can prevent imputation of the lateral’s former client conflicts to others at the new firm. The new firm must give notice to the affected former client, must build an adequate screen, and must continue statements of compliance with the screen. See 1.10(a)(2) for details.

We’ve now covered the basic rule on imputation of conflict, but you must remember that screening has long been an option to prevent imputation of conflicts when the lawyer was a government lawyer (rule 1.11) or a third party neutral (1.12). For details on how to build the screen, read those rules.

Finally, let’s look at the imputation rules for the 1.8 conflicts. Rule 1.8 (k) says that all the 1.8 conflicts are imputed to others at the firm—except for arising under 1.8(j), which regulates sexual relations with clients.

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(6.12): Does 1.10 cover any other fact patterns?

Yes, 1.10(b) deals with an unusual situation involving a departing lawyer and the old firm’s ability to be adverse to the departed lawyer’s clients. If the departed lawyer’s client is no longer a client at the old firm and if no lawyer left at the firm has confidences of the departed lawyer’s former client, then the old firm can undertake adverse matters to that former client. See rule 1.10(b) for details.

6.1 Example: Walking through the Rules

a) Give an example of a violation of MR 1.7(a)(1). (For example: “While at the firm of Able & Baker, a lawyer named Mary [did this or that] . . . .”

b) Give an example of a violation of MR 1.7(a)(2).

c) Give an example, with a simple diagram, of a violation of MR 1.9(a).

d) Give an example, with a simple diagram, of a violation of MR 1.9(b).

e) Give an example, with a simple diagram, of a violation of MR 1.9(c).

f) Give an example of an application of MR 1.10(a).

g) Give an example, with a simple diagram, of a non-violation of MR1.10(b).

6.2 Example: MR 1.7 Current Client Basics

a) Acme asks you to sue Baker on a trademark dispute. Your firm represents Baker in real estate matters. What do the rules say?

b) Acme asks you to sue Baker, Inc. The CEO of Baker is your sister-in-law. What do the rules say?

c) Acme wants corporate advice. Its main competitor, Baker, is your current client. What do the rules say?

d) Acme asks you to negotiate a contract against Baker, which is also a current client. Baker agrees to waive the conflict. What are your options for getting the waiver executed?

6.3: Example: MR 1.8 Transactions/Conflicts Basics

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(A) Lawyer will work for the client and in lieu of fees will take stock in the company. What subparagraph applies?

(B) Someone other than the client will pay the legal fees? Is that permitted? Under what circumstances? (Note that this issue is also discussed at MR 1.7[13] and 5.4(c).)

(C) What rule governs sexual relationships with clients? Is this rule necessary? Is it wise?

6.4 Example: A&A and B&B (Former Exam Question)

On March 6, 2000, Dan DePartino left his job at Baker & Baker (B&B) and left the law entirely. While at B&B, DePartino represented Acme on tax issues related to Acme’s product shipments from the US to its various distributors and dealers abroad. DePartino never shared his clients or let other attorneys work on his matters. B&B never represented Acme again.

On September 23, 2000, Wynona Whyte, a litigation partner at Able & Able (A&A) married Bill Barker, a litigation partner at B&B.

At 4:45 P.M., on November 21, 2001, the day before Thanksgiving, Whyte told Ann Associate (of A&A) to find and print out the basic dealer termination statutes for France, England, Austria, Spain, and Turkey. Associate, desiring to finish the project and travel home for the holiday, was perturbed at the last-minute request— and noted to herself, with some irony, that the five countries’ initials spelled “FEAST.” Associate, who at first didn’t know the client’s name, was told, “bill the time to Whyte’s holding account, so she can transfer the time to the correct Acme matter.” Whyte transferred the time to account 8765-000 (“Acme-General”), but then “wrote off” the time without billing it. Associate never met the client, saw its documents, or billed Acme again, and never was told that Acme was reorganizing its worldwide dealer network, which could require contract terminations or renegotiations.

On December 6, 2001, unbeknownst to Associate, the statutes she’d printed were appended to a substantive legal memorandum about the reorganization that Whyte and other A&A attorneys sent to Acme and billed to 8765-318 (“Acme-Dealer Reorganization”).

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On January 1, 2002, Associate left A&A and joined B&B’s ten-attorney litigation group.

On February 4, 2002, Acme gave written notice of contract termination to its Spanish dealer, Madrid Dealers (Madrid), asserting that Madrid had breached the contract.

On March 4, 2002, B&B was hired by Madrid, who suspected (but couldn’t yet prove) that the allegation of breach was a pretext—that Acme simply wanted to revamp its distribution system.

On March 8, 2002, Patricia Park, a B&B corporate partner, faxed Acme a letter, seeking the name of Acme’s lawyers and threatening litigation unless Madrid was promptly reinstated. Park also emailed Barker, asking him to find an associate to assist Barker in handling any possible litigation between Madrid and Acme.

On March 11, 2002, A&A filed a declaratory judgment suit, signed by Whyte, on behalf of Acme against Madrid, seeking a declaration that Madrid had breached the contract. A&A internally designated that matter as 8765-609 (“Madrid Dealers v. Acme”).

* * * * *

The ABA Model Rules apply. Spot, identify, and briefly analyze conflict of interest issues raised by this fact pattern.

6.5 Example: Not Much of a Conflict (Former Exam Question)

In November 2001, Pat Devlin passed the bar examination and began as an associate at Able & Baker (A&B), a large general practice firm. In December 2001, Devlin spent an evening with fellow A&B associates volunteering pro bono advice at the help desk at the Essex County Legal Services Project.

Devlin’s only interaction that evening was with Eduard Reback, a janitor with debt problems arising from his wife’s medical care and his purchase of bedroom furniture for his toddler twins. The credit agency threatened Eduard with wage garnishment unless his $3,500 debt was paid. Eduard was unfocused and angry. Devlin spent ninety minutes sorting out Eduard’s finances and plotting a strategy: offer the credit agency $2,500 (most of Eduard’s savings), and propose a payment plan. Eduard agreed and left. He never returned to the clinic.

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In January 2003, Devlin left A&B and joined Domestic Violence Advocates (DVA). Four months later, Devlin and the DVA Supervising Attorney, Shawna Nixon, jointly staffed the intake desk. Joy Reback entered, along with her lifelong friend, Anita Wesley. Joy, visibly pregnant and with a black eye, was in a hurry. She had to pick up her twins from day care. Wesley told Joy to slow down. “It took me six months to finally drag you here,” said Wesley, “so don’t rush.”

Joy began by saying, “Anita says that you keep your clients’ confidences confidential. If my husband knows I came here, he’ll hit me again.”

“You’re not our client yet,” said Nixon. “If we do agree on that, we’ll put it in writing. But even though you’re not yet a client, the law says that this conversation—and even the fact that you’re talking to us—must remain completely confidential.”

Joy relaxed. She said that the abuse was cyclical: he would hit her and then apologize and treat her well. “It’s only when he’s stressed out,” Joy said, “He’s not really bad.”

“Yes,” Wesley interjected, “there are cycles, but it’s getting steadily worse. You need a protective order, and a divorce, and the court will have to handle the financial issues.”

“Maybe,” said Joy, “but let’s start with some basics. I have two secrets my husband can never know. First, he’s not the father of this baby,” she said, patting her stomach. “Second, because I’m probably heading toward divorce and need a nest egg, I’ve been having my employer pay half my salary in cash, off the books. Anita is holding $5,800 for me.” Looking at her watch, Joy said that she needed to pick up the twins. “I trust you, so I’ll be back next week,” she said, and headed out the door.

Wesley lingered briefly behind and said to Nixon and Devlin, “I’ll make sure she returns. DVA helped me three years ago. I’ll guide her every step down the path.”

Devlin asked Wesley, “what’s the name of Joy’s husband, and where does he work?”

“It’s ‘Eduard,’ with a ‘u.’ He’s a janitor at the Wilton Chemical plant,” said Wesley, who then left.

Devlin told Nixon, “My memory is really fuzzy, but I may have represented Eduard Reback about a year ago. Some guy—it might have been him—came to a legal services clinic where I volunteered. I don’t recall the issue. But, knowing that clinic, it wasn’t a criminal matter. Probably it was a wages dispute with his employer, or credit problems, or something like that.”

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Nixon said, “I say that’s no conflict, or a thin one at best. We’ll wall you off. Or, if you want to stay involved, you can prepare the case and other attorneys will sign pleadings and make court appearances. But we won’t alert Eduard that she’s meeting with lawyers—and we won’t turn her away either. She can’t afford legal fees, and we’re the only free DV advocates in the county. We don’t abandon women in need; we protect them. You saw her stomach and her black eye. Besides, this isn’t that difficult of an ethical dilemma. If you can’t stand some heat, you can’t do domestic violence work.”

Be prepared to analyze the above fact pattern in class for a potential conflicts issue.

Example 6.6

Sandy’s Business Reincorporates

You receive this voicemail from a partner at your law firm:

“Hey, I have a quick project for you. For several years we’ve been representing Sandy Ryerston, who started a small business providing payroll services to small businesses in the county. Sandy’s been pretty successful. A lot of banks have recommended the business and Sandy’s about to bring in two partners, reincorporate, and expand. It’s not a lot of work but if the business continues to grow it could become a major client. Anyway, Sandy and the two new partners—Pat and Terry—will be coming in to sign some paperwork for the reincorporation. Sandy will still own most of the shares but won’t have sole control over the Board. If any of the three leave the company, they’ll get bought out cheaply, so that capital stays in the company.

“Can you take a few minutes to think about the conflicts issues? Who should be the client? Do we need consents? Should we even raise the issue or just let it be? Maybe there’ no use driving a wedge between new partners, I suppose. Give it some thought. I’ll be back tomorrow and we can discuss it.”

6.7: Example: Sandy’s Business Grows

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You receive this voicemail from a partner at your law firm:

“I hope you’re available for a new project. Sandy’s business continues to grow. They’re going to take out a loan from the local bank to fund some expansion. Pretty straight forward stuff, really. It’ll probably be Midwest Bank. They’re great to work with. We’ve probably done a dozen transactions with them over the last few years. One of our former partners, Mary Bobinski, is the General Counsel there. And our new partner, Bobby Herndon, represents the bank on a lot of trust matters.”

“Anyway, I’ll be in tomorrow and I suppose we should discuss whether there are any conflicts issues.” Be prepared to have this conversation with the partner.

6.8: Example: Sandy’s Business Gets Bought Out

You receive this voicemail from a partner at your law firm:

“Great news about Sandy’s business, Ryerston Payroll Services Inc., huh? It’s being acquired by Payroll Data, Inc., for about $15 million. Actually the price isn’t quite final, but it’ll be in that neighborhood. Sandy, Pat, and Terry just emailed me the term sheet that they worked up with the buyer. Pat and Terry will get bought out completely. Good for them. Pat’s going to retire and Terry’s going back into nurturing start-ups. Sandy would like to wind down too and spend more time with the grandkids. But the buyer wants Sandy to stick around for a few years, for obvious reasons. Sandy’s built the reputation and keeps the clients happy. The longer that Sandy sticks around after the acquisition, the more the buyer will pay. Sandy will get paid out more than Pat and Terry, but will have to stick around at the buyer for some time before being fully paid out. The buyer and Sandy haven’t yet done a term sheet on Sandy’s employment agreement.

“We’ll represent the target. Ryerston Payroll Services, Inc., in the acquisition and will probably represent Sandy on the side agreement for employment with the buyer.

“Also, remember that the target will make factual representations and warranties to the buyer and will fund an escrow of around $1 million. If the target wasn’t all it was promised to be, the buyer can make a claim on the escrowed funds. If the buyer does make a claim, we’d be the natural choice to represent the shareholders of the target in negotiations.

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“Anyway, give some thoughts to the conflicts issues if you will. I’ll be in tomorrow and would be interested in your thoughts on the conflicts.” Be prepared to have this conversation with the partner.

6.9: Example: Image Technical v. Eastman Kodak2

IMAGE TECHNICAL SERVICES, INC., v. EASTMAN KODAK COMPANY

820 F. Supp. 1212 (N.D. Cal 1993)

Defendant Eastman Kodak Company ("Kodak") brings a motion to disqualify plaintiffs' counsel, the Coudert Brothers Law Firm ("Coudert"). Upon consideration of the briefs and arguments of the parties, and good cause appearing therefrom, Kodak's motion to disqualify the Coudert firm is GRANTED.

FACTS AND BACKGROUND

The Coudert firm has provided legal services to Eastman Chemical, one of Kodak's three major operating divisions, for the last six years. These services have covered a vast array of legal matters, including competition law questions, joint ventures, contract issues, tax issues, and questions concerning environmental law. Coudert performed this work out of the Washington, D.C., New York, Paris, Brussels, Hong Kong and Singapore offices. For purposes of this motion, it is undisputed that the work performed by Coudert for Eastman Chemicals did not involve issues directly relevant to this litigation.3

The facts and procedural background of this litigation have been amply recorded in the orders issued by this court, as well as the decisions of the Ninth Circuit Court of Appeals4 and the United States Supreme Court.5

2 Note: the underlying case involved Image Technical Services and ten other independent service organizations (“ISOs”) that service Kodak photocopiers and micrographic equipment. The ISOs sued the Eastman Kodak Co. (“Kodak”) for violations of the Sherman Act. The ISOs alleged that Kodak used its monopoly in the market for Kodak photocopier and micrographic parts to create a second monopoly in the equipment service markets.3 Coudert also represented a separately incorporated independent French subsidiary of Kodak, Kodak Pathe. For purposes of this opinion, the court deems Coudert’s representation of Pathe irrelevant. See, State Bar of California Standing Committee on Professional Responsibility and Conduct, Formal opinion No. 1989-113 (Parent and subsidiary corporations are separate entities, therefore, representation of a wholly owned subsidiary, let alone a separately incorporated subsidiary, does not create a conflict of interest.)4 903 F.2d 612 (9th Cir. 1990).5 112 S. Ct. 2072 (1992).

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For purposes of the present motion, it is sufficient to note that in 1991, Kodak appealed to the United States Supreme Court a judgment of the Ninth Circuit reversing and remanding the order of Judge William Schwarzer dismissing plaintiffs' federal antitrust claims. Coudert was asked by James Hennefer, counsel for the ISOs, to participate in the briefing before the Supreme Court. The ISOs primary contact with the Coudert firm was Douglas Rosenthal. A conflicts check performed by Coudert disclosed that the firm had an ongoing relationship with Eastman Chemical and Kodak Pathe. The work for Eastman Chemical was performed primarily by Coudert's Hong Kong office. Mr. Rosenthal asked Owen Nee, the managing partner of Coudert's Hong Kong Office, to disclose the conflict to the Eastman Chemical representatives, and obtain their consent to Coudert's representation of the ISOs.

Mr. Nee planned to discuss the conflict during a separately arranged meeting on other business with Barry Falin, Director of Business Development for the Filter Products Organization of Eastman Chemicals, and Michael Chung, Manager of the Filter Products Organization. In preparation for that meeting, Mr. Nee discussed with Mr. Rosenthal what information was to be given to the Eastman Chemical business representatives. Mr. Rosenthal telefaxed Mr. Nee on July 13, 1991 as follows:

I have seen your fax of today and have spoken both to Ken Katz and Steve Hudspeth. I am authorized by both of them to affirm we trust your judgment about what to say, in passing, about our involvement in the Kodak Supreme Court case, when you meet with officials of Kodak Chemical dealing with China this Monday.

As a small modification to your proposed statement, might I suggest the following:

Our San Francisco office is going to participate in a brief contrary to the interests of the Kodak Corporation in the Supreme Court Appeal; and after review of the matter we have determined that the China representation is sufficiently distant that the actions of the San Francisco office do not constitute a conflict of interest. (emphasis added)6

After the meeting took place on July 23, 1991, Mr. Nee wrote Mr. Rosenthal and Mr. Hudspeth informing them that he "explained the matter in the form [they] sent to [him] by [their] telefax on July 12, 1991." Neither the documents

6 Coudert’s San Francisco office participated in two amicus briefs to the Supreme Court. Coudert’s Washington, D.C. office “participated” in the brief for respondents on the merits before the Supreme Court.

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submitted in opposition to Kodak's motion, nor the declaration of Mr. Nee, reflect that Coudert advised Falin and Chung of the nature of the conflict, the potential exposure to Kodak, or even that Kodak was a party to the Supreme Court action. Mr. Nee's telefax goes on to state that Messrs. Falin and Chung approved of Coudert's representation of the ISOs. Neither Messrs. Falin and Chung recall any such conversations. Mr. Chung testified specifically that even if he had been so informed, he did not recall Mr. Nee disclosing that Coudert would represent the ISOs at the district court level, or explaining the potential exposure Kodak faced in this action.

On September 20, 1991, Kodak was served with Respondent's Brief in the U.S. Supreme Court appeal. The brief identified Coudert as co-counsel for the ISOs. There is some dispute about when Coudert disclosed to Kodak that it would participate in the district court trial on remand. However, the parties agree that on July 30, 1992, Gordon Spivack of Coudert's New York office informed Gary Vangraafeiland, Senior Vice President and General Counsel of Eastman Kodak, that Coudert would participate in the preparation and trial of the ISO case in this court. Coudert filed a formal notice of appearance in this court on October 9, 1992.

DISCUSSION

A. Applicable Rules of Conduct

[ ] As this court must apply California Rules of Professional Responsibility, including California case law, this court will apply the rules in effect at the time Coudert states that it obtained consent.

B. Written Consent

At the time Coudert was invited to participate in the brief before the Supreme Court in 1991, Coudert was actively representing Eastman Chemicals in a variety of international matters. Therefore, Coudert's representation of the ISOs conflicted with the interests of its existing client, Kodak. In 1991, Rule 3-310(B) provided that "[a] member shall not concurrently represent clients whose interests conflict, except with their informed written consent . . . ." Coudert admits that it failed to obtain written consent from Kodak before representing the ISOs.

C. Informed Consent

Since Coudert failed to obtain written consent as required under former California Rule 3-310(B), Coudert failed to obtain consent. Even if written consent was not required, the court finds that Coudert failed to obtain "informed consent" under Unified Sewerage Agency, Etc. v. Jelco Inc., 646 F.2d 1339 (9th Cir. 1981). Plaintiffs argue that under Jelco this court is bound by a federal

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standard for disqualification motions. The court does not apply the federal standard for the reasons stated in this opinion but finds that the consent obtained here would be insufficient to meet Coudert's burden under the federal standard. Plaintiffs offer the declaration of Mr. Nee, in which he states that during a July 1992 meeting with Barry Falin and Michael Chung, businessmen who were managers at Eastman Chemical in Hong Kong, he disclosed to Eastman Chemical the representation of the ISOs. Coudert's own characterization of the disclosures fails to meet the requirements announced in Jelco. Jelco, as in this case, involved an issue of representation adverse to a present client. In reviewing the obligations of counsel as to present clients, the Ninth Circuit stressed that "representation adverse to a present client must be measured not so much as against the similarities in litigation, as against the duty of undivided loyalty which an attorney owes to each of his clients." Jelco, 646 F.2d at 1345.

The Jelco court held that to avoid disqualification under Disciplinary Rule DR5-105(B) of the Code of Professional Responsibility of the State of Oregon, an attorney must satisfy DR5-105(C)'s two conditions: "First, each client must consent to the multiple representation after full disclosure of the risks. Second, it must be 'obvious' that the attorney can adequately represent the interests of each client." As to the consent prong of this analysis, the court cited In re Boivin, 271 Ore. 419, 533 P.2d 171 (1975), as the leading Oregon case on the meaning of "consent" in Cannon 5 of the disciplinary rules of the State Bar of Oregon. In Boivin, the court stated that consent must be informed consent, made after full disclosure of all material facts:

To satisfy the requirement of full disclosure by a lawyer before undertaking to represent two conflicting interests, it is not sufficient that both parties be informed of the fact that the lawyer is undertaking to represent both of them, but he must explain to them the nature of the conflict of interest in such detail so that they can understand the reasons why it may be desirable for each to have independent counsel, with undivided loyalty to the interests of each of them.

Boivin, 533 P.2d at 174 (emphasis added).

Plaintiffs argue that the consent obtained from Mr. Falin was informed and, moreover, that Kodak's decision to continue to employ Coudert, even after the current motion was filed, is indicative of Kodak's consent. The court disagrees. As stated above, there is a dispute about Mr. Falin's consent. Moreover, such consent is not informed consent. By Coudert's own admission, Messrs. Falin and Chung were told only that the San Francisco office of Coudert was going to participate in a brief before the Supreme Court adverse to Kodak's interests. Coudert did not explain how the representation would be adverse to Kodak's interest, nor did Coudert inform Kodak of the fact that Coudert's New York and

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San Francisco offices were actually going to appear on the brief before the Supreme Court. In fact, the July 13, 1991 telefax and Mr. Nee's declaration do not state that Mr. Nee told Messrs. Falin and Chung that Kodak was a party to the action before the Supreme Court, the nature of the underlying action, or the potential exposure to Kodak, should the ISOs prevail.7

In Jelco, the court found that counsel had twice alerted Jelco's counsel to the potential conflict and asked whether Jelco wished to continue counsel's retainer. On two separate occasions after full disclosure of the conflicts, and discussions with its own attorneys, Jelco consented to the representation. In contrast, the disclosure made by Coudert in this matter cannot be construed as "informed."

The form, content and nature of the disclosure to Messrs. Falin and Chung was deficient under the standards for informed consent. Under both the California and ABA Rules of Professional conduct, Coudert owes its client, Kodak, the highest level of undivided loyalty. Coudert's duties to disclose any representation adverse to the interests of Kodak cannot be fulfilled by mentioning "in passing" participation in a brief contrary to the interests of the client without stating the details of why the interests are contrary. The exposure Kodak faces in this action is substantial. Coudert's failure to fully disclose that exposure, as well as the extent of its participation in this action, falls short of the "undivided loyalty" it owes to its client. The details are essential to informed consent so that the client can weigh and measure the nature of the contrary interests and give informed consent based upon knowledge of material facts.

D. Waiver

"Where the party opposing the motion can demonstrate prima facie evidence of unreasonable delay in bringing the motion causing prejudice to the present client, disqualification should not be ordered." Western Continental Co. v. Natural Gas Corp., 212 Cal. App. 3d 752, 763, 261 Cal. Rptr. 100 (1989). Plaintiffs argue that Kodak waived its right to object to its representation of the ISOs by failing to object in a timely fashion. Coudert's name appeared on Respondent's Brief before the Supreme Court, which was served on September 20, 1991. Accordingly, plaintiffs' argument that Kodak had notice of the adverse representation well before the instant motion is without merit. In order to successfully claim laches as a defense to this motion, plaintiffs must establish (a) Kodak long ago had notice of the adverse representation, (b) Kodak intentionally delayed moving for Coudert's disqualification, (c) plaintiffs are severely burdened by the delay, and (d) the extreme and intentional delay allowed Kodak to obtain a tactical advantage. See Western Continental, 212 Cal. App. 3d 752 at 763-764, 261 Cal. Rptr. 100.

7 See Florida Ins. Guar. Ass'n, Inc. v. Carey Canada, 749 F. Supp. 255 (S.D. Fla. 1990), in which that court, in granting a motion to disqualify counsel, found "most gravely, [the fact that] the . . . 'consultation' did not disclose the magnitude of the adverse interests at issue. . . ." Id. at 259.

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In this day of multinational corporations and law firms, it is possible that a corporation would not be aware of the law firms representing its overseas divisions. Moreover, while Coudert is charged with the responsibility of performing conflict checks upon taking on a new client, Kodak as the client is under no such obligation. Absent some showing that Kodak was aware of Coudert's dual representation prior to September 1992, the court will make no finding of waiver based on the appearance of the Coudert firm on a brief before the Supreme Court.

E. Policy Considerations

Plaintiffs argue that an order disqualifying Coudert would violate policy. This argument ignores the long- standing rule in both California and Ninth Circuit cases prohibiting attorneys from accepting employment adverse to a current client without the client's informed consent. In light of this court's ruling that Coudert failed to secure Kodak's informed consent to the adverse representation, the policy issues triggered by this motion tip decidedly toward Kodak. The court and the legal profession have a strong interest in insuring that counsel fulfill the highest duty of loyalty to clients. While plaintiffs' argument that multinational clients (such as Kodak) will often consult international law firms (such as Coudert) on discreet legal issues is well taken, plaintiffs have cited to no California or Ninth Circuit authority creating an exception to the rules about representation adverse to an existing client because of these factors.

Whether a matter is international, multinational or domestic, the standard of conduct for explanation of material facts underlying a potential conflict of interest is the same. The duty to the client of undivided loyalty and necessity of informed client consent to adverse representation applies internationally no matter how difficult the communication hurdles. Law is a profession of service premised upon representation of the client with the highest duty of loyalty and the deepest regard for the trust of the client. Therefore, policy requires the disqualification of Coudert.

Example 6.10: McKesson and Duane Morris

Read the advance conflict waiver letter below.

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Now read about the judge’s initial ruling.

IN A CASE reflecting problems that can occur when huge law firms represent huge clients, a Fulton County judge has ruled that legal giant Duane Morris violated conflict-of-interest rules by representing subsidiaries of McKesson Corp. in Pennsylvania and then working for a couple against an unrelated McKesson subsidiary in Atlanta.

Judge Thelma Wyatt Cummings Moore of Fulton County Superior Court on Wednesday disqualified Duane Morris from the Georgia proceedings. She wrote that she was not persuaded by the firm’s efforts to “explain away the apparent conflict of interest” by relying on an engagement letter between Duane Morris and two other McKesson subsidiaries in the Pennsylvania case.

The Duane Morris letter said, “Given the scope of our business and the scope of our client representations … it is possible that some of our clients or future clients will have matters adverse to McKesson.” In such cases, according to the letter, the company agreed to “waive any actual or potential conflict of interest as long as those other engagements are not substantially related to our services to McKesson.”

While contract law might allow for such a cross-representation, Georgia ethics rules do not, Moore ruled, finding the Duane Morris waiver “inadequate and thus invalid.”

Duane Morris’ general counsel, Michael J. Silverman, expressed disappointment with the ruling.

“We believe that the firm’s conduct was appropriate and ethical. Our engagement letter, reviewed and approved by McKesson’s outside counsel, expressly provided that our clients were to be only [the two McKesson subsidiaries in the Pennsylvania matter], and not any other McKesson affiliates or related companies,” he said.

“We are disappointed that the court did not address this central point and feel that the result is at odds with the law in Georgia as well as the law in other jurisdictions.”

Silverman, who is based in Chicago, said the firm was considering an appeal.

“We’re very pleased, and we think the judge made the right decision,” said Joseph Manning of Morris Manning and Martin, which represented McKesson in the case, which spurred accusations of “extortion” in court filings and occasionally acrimonious assertions in a hearing last week.

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The trouble stemmed from a bankruptcy case in Harrisburg, Pa. In May, two creditors, McKesson Automation Solutions and McKesson Medication Management, hired attorneys from Duane Morris’ Philadelphia office.

Two months later, lawyers Sean R. Smith and John C. Herman of Duane Morris’ Atlanta office agreed to represent Nan and Alex Smith (no relation to Sean), in an action against one of McKesson’s subsidiaries, McKesson Information Solutions. At issue was an intellectual property dispute stemming from McKesson Information’s purchase of a company which had bought out the couple years earlier.

When McKesson learned that Duane Morris was engaged by their opponents in the Atlanta case, they demanded that the firm withdraw, citing a conflict of interest.

In a written response, Duane Morris’s Smith refused, citing the firm’s engagement letter from Pennsylvania that waived conflicts in cases not substantially related to those two companies’ business.

Smith wrote that the company involved in the Georgia case is a different entity in separate litigation in a separate state, and that his firm’s involvement was not a conflict. Further, he said, should McKesson insist upon its position, his firm would withdraw from the Pennsylvania case.

McKesson sued, demanding that Duane Morris drop the Georgia case, claiming that the firm’s threat to withdraw from its Pennsylvania case amounted to “extortion” and “a gross violation of the duty of loyalty.”

During a hearing last week, Georgia State University law professor Clark D. Cunningham testified on behalf of McKesson that the waiver was impermissibly broad under Georgia legal rules, which are more stringent than those of many other states and the model rules of the American Bar Association.

In turn, Duane Morris produced its own expert, Steven C. Krane of New York’s Proskauer Rose and chairman of the ABA’s Ethics and Professional Responsibility Committee. He testified that Georgia rules had no bearing because the engagement letter was signed in Pennsylvania. He added that large, multi-pronged companies such as McKesson could not reasonably expect law firms to look upon a contract with one entity as an engagement with the whole corporate family.

In her 13-page opinion, Moore noted both viewpoints but came down squarely on the side of McKesson.

The legal ethics codes in both Pennsylvania and Georgia, she wrote, “indicate that a lawyer cannot represent a client if the representation involves a current conflict of interest and that a lawyer may represent such a client only after each affected

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client gives informed consent.” McKesson Information Solutions v. Duane Morris, No 2006CV121110.

Manning, the McKesson’s lawyer, said, “This is something these large multi-jurisdictional firms will have to take into consideration from now on.” He said that his own 165-lawyer firm, while small compared to 600-plus-lawyer Duane Morris, has a multi-state practice and “would never use such a waiver. We have a very intense conflict of interest policy here.”

Ironically, he noted, the Pennsylvania case settled on Thursday. Duane Morris’ Smith and Herman were unavailable. Krane could not be reached, but Cunningham said he was not surprised by the ruling.

“I think it’s legally sound and very thoroughly explained,” he said. “I also think it’s of significance to lawyers nationally as well as in Georgia. … They were, in my opinion, making an argument that is completely outside the mainstream of American law.”

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Now read my views on this issue.

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