CONFLICTS OF INTEREST IN LABOR AND EMPLOYMENT LAW

Transcription

1 CONFLICTS OF INTEREST IN LABOR AND EMPLOYMENT LAW Dayna Underhill Hinshaw & Culbertson LLP This is an updated and revised version of materials previously prepared by Peter Jarvis, Allison Rhodes and Dayna Underhill.

2 TABLE OF CONTENTS I. INTRODUCTION... 1 II. THE BASIC CONFLICTS RULES... 1 A. The Risks Posed by Conflicts: Attorneys as Fiduciaries The Risk of Discipline The Risk of Disqualification The Risk of Actions for Damages The Risk of Disgorgement of Fees... 2 B. Current-Client Conflicts Simultaneous Adverse Relationships Are Generally Prohibited The Prohibition Generally Applies to the Entire Firm The Hot-Potato Rule and Thrust-Upon Conflicts Some Current-Client Conflicts Cannot Be Waived Intermediation Is Not a Free Pass Corporate Families... 7 C. The Former-Client Conflicts Rules Former Clients Have More Limited Powers Matter-Specific Conflicts Information-Specific Conflicts The Firm Unit Rule Applies to Former-Client Conflicts Conclusion: Former Clients Are Not Without Potential Recourse... 9 D. Personal or Business Conflicts Doing Business with Clients Lawyers on Client Boards Other Personal Conflicts E. A Conflicts Rules Postscript Fiduciary Duties May Go Beyond Ethical Obligations Be Careful About Disciplinary Threats Conflicts in Corporate Investigations Circumstances Change III. ETHICAL SCREENS AND WALLS IV. COMPONENTS OF EFFECTIVE CONFLICTS WAIVERS V. DEFINING INFORMED CONSENT Document Consent Contemporaneously Get the Client s Waiver in Writing If It s Important, Spell It Out Clearly Identify the Consent Sought Clearly Identify Why the Client Should Care When Applicable, Discuss Joint Defense Privilege Issues Obtain Consent From All Necessary Parties or Persons VI. CONCLUSION Page i- Conflicts of Interest in Labor and Employment Law

3 I. INTRODUCTION Conflicts of interest are the single most common practical and ethical problem in the practice of labor and employment law. What are the basic conflicts-of-interest rules? The purpose of this paper is to provide some background information and some rules of the road for this evolving but essential corner of legal practice. Although there is no one right or wrong answer for all lawyers in all circumstances, there are better or less well-informed decisions. This paper contains citations to the American Bar Association Model Rules of Professional Conduct ( ABA Model Rules ), to the Restatement (Third) of the Law Governing Lawyers (2000) ( Restatement ), and to selected cases and ethics opinions. No attempt is made to provide a detailed look at the conflicts rules of all jurisdictions. II. THE BASIC CONFLICTS RULES A. The Risks Posed by Conflicts: Attorneys as Fiduciaries The relationship between client and attorney is a fiduciary relationship, and the duty of loyalty is at the heart of that relationship. Lawyers generally owe their clients a duty of undivided loyalty. Restatement 121 cmt. b. To borrow from another time and another context, this duty requires more of lawyers than the morals of the marketplace. Meinhard v. Salmon, 248 N.Y. 458, 464, 163 N.E. 548 (1928) (Cardozo, J.). The principal purpose of formal conflict-of-interest rules such as the RPCs is to codify those aspects of the duty of loyalty, the violation of which can lead to attorney discipline. Despite the fact that discipline often seems remote to many lawyers, failure to properly manage a conflict of interest can result in a variety of other very unpleasant consequences. 1. The Risk of Discipline Every American jurisdiction has black-letter conflicts rules. Although the rules or their interpretation can and do vary from one jurisdiction to the next, lawyers are regularly disciplined for conflicts violations when a particular jurisdiction s rules have been violated. 2. The Risk of Disqualification Motions to disqualify lawyers and law firms on conflicts grounds from cases that they, and their clients in those cases, would very much like them to handle are an everyday occurrence. See, e.g., Farris v. Fireman s Fund Ins. Co., 119 Cal. App. 4th 671, 14 Cal. Rptr. 3d 618 (2004); Cal Pak Delivery, Inc. v. United Parcel Service, 52 Cal. App. 4th 1, 60 Cal. Rptr. 2d 207 (1997); Edwards v. Gould Paper Corp. Long Term Disability Plan, 352 F. Supp. 2d 376 (EDNY 2005). The point here is not when such motions should be granted or whether such motions are favored or disfavored. The point is that a motion for disqualification can be expensive, time-consuming and embarrassing and can lead to the lawyer s or law firm s permanent loss of that client. A motion to disqualify is but one of the potential negative consequences of inadequate, inaccurate or incomplete conflicts analysis. Of course, and as always seems to be the case, a conflict Page 1- Conflicts of Interest in Labor and Employment Law

4 generated in the transaction department of a firm can result in disqualification from a lucrative matter in the litigation department. 3. The Risk of Actions for Damages Lawyers who violate the duty of undivided loyalty in other words, lawyers who represent a client without an adequate conflicts waiver or under circumstances in which a conflict could not be waived frequently get sued and frequently lose. In fact, traditional legal malpractice in the form of bad legal advice need not be shown. It can be sufficient for the plaintiff-dissatisfied client to prove a breach of the duty of loyalty and that but for this breach, the client would not have been injured in one or more respects. See Ronald E. Mallen & Jeffrey M. Smith, LEGAL MALPRACTICE ch (5th ed 2000). There are times when noncompliance with the disciplinary rules alone will not provide a plaintiff with a viable damages claim. Northwestern Life Insurance Co. v Rogers, 573 N.E.2d 159, 163 (Ohio 1989). Nevertheless, conflict of interest cases can be difficult to defend and damages can at times be significant. 4. The Risk of Disgorgement of Fees Attorneys who represent clients under circumstances in which an un-waived or inadequately waived conflict is present may be barred from collecting further fees and may, in fact, have to disgorge all fees received from the time at which the conflict first arose. Judge Learned Hand made this argument over half a century ago: Certainly by the beginning of the Seventeenth Century it had become a common-place that an attorney must not represent opposed interests; and the usual consequence has been that he is debarred from receiving any fee from either, no matter how successful his labors. Nor will the court hear him urge, or let him prove, that in fact the conflict of his loyalties has had no influence upon his conduct; the prohibition is absolute and the consequence is a forfeiture of all pay. Silberger v. Prudence Bonds Corp., 180 F.2d 917 (2d Cir. 1950). The prevailing rule in most American jurisdictions at this time is that the disgorgement of all fees is not automatic and that the court must apply all facts and circumstances. On the other hand, it is also clear that actual injury to the client is not a necessary precondition to a disgorgement claim. See generally Restatement 37 (stating the general rule and collecting cases); Kidney Assoc. of Oregon, Inc. v. Ferguson, 843 P2d 442, 447 (Or 1992) (same); Maritans GP Inc. v. Pepper, Hamilton & Scheetz, 602 A.2d 1277, 1285 (Pa. 1992) (noting that courts throughout the country have ordered the disgorgement of fees paid or the forfeiture of fees owed to attorneys who have breached their fiduciary duties to their clients by engaging in impermissible conflicts of interests). Of particular note, legal malpractice policies generally provide no coverage for disgorgement claims since such claims are, in effect, fee disputes. Page 2- Conflicts of Interest in Labor and Employment Law

5 B. Current-Client Conflicts 1. Simultaneous Adverse Relationships Are Generally Prohibited The core of the current-client conflicts rules can be simply stated: except as noted below, American lawyers and law firms may not represent one current client adversely to another current client on any matter unless, at a minimum, both clients consent to the conflict after full disclosure. See, e.g., ABA Model Rule 1.7; Restatement , In other words, current clients generally have veto power that allows them to prevent their current counsel from opposing them on any matter, whether it is related or unrelated to the work that is being done for that client. In the practice of labor and employment law, multiple representation and the potential conflicts they may trigger most commonly arise in the following contexts: a corporate employer and the employee whose conduct is alleged or might be alleged to be at issue; a corporation and the corporate affiliate; a government body and the government official whose conduct is or might be at issue; multiple plaintiffs in an action where recovery is potentially limited; and multiple defendants in an action where one might bear more or less responsibility for the alleged misconduct. In these textbook examples, conflicts arise because one client would or might benefit from either pointing the finger at the other or from seeking to diminish the value of the other s case. 2. The Prohibition Generally Applies to the Entire Firm The reference above to the disqualification of lawyers and law firms is, of course, intentional. Pursuant to what is sometimes called the firm unit rule, all lawyers presently at a firm are typically disqualified due to a current-client conflict if any lawyer is disqualified as the conflict of one attorney in a firm is generally imputed to all attorneys associated with the firm. See, e.g., ABA Model Rule 1.10(a); Restatement 123. This includes not only partners and associates but also of counsel attorneys and even some contract attorneys who have regular relationships with particular firms. Restatement 123 cmt. c(ii); ABA Formal Op ( of counsel lawyers are not temporary lawyers but are part of firm); ABA Formal Op ; Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384 (2d Cir. 1976). See also Hempstead Video Inc., v. Incorporated Village of Valley, 409 F.3d 127 (2d Cir. 2005) (discussing exception to imputed disqualification based on of-counsel relationship of tainted lawyer). On the other hand, an imputed conflict leading to the disqualification of one law firm may not require the disqualification of a separate law firm serving as co-counsel on a matter so long as Page 3- Conflicts of Interest in Labor and Employment Law

6 there is only a small actual risk of confidential client information spreading from the primarily conflicted law firm to the second firm. Baybrook Homes, Inc. v. Banyan Construction & Development, Inc., 991 F. Supp (M.D. Fla. 1997); First Small Business Inv. Co. of California v. Intercapital Corp. of Oregon, 108 Wash.2d 324, 738 P.2d 263 (1987). One exception to the firm unit rule as applied to current-client conflicts exists in the context of lawyers who change jobs. In some jurisdictions, screens or ethical walls allow firms to avoid disqualification if, but only if, the conflict is a result of work done by a laterally hired lawyer before he or she joined his or her present firm. This subject is addressed further in Section III below. 3. The Hot-Potato Rule and Thrust-Upon Conflicts The former-client conflicts rules are more generous to law firms than the current-client conflicts rules. This makes sense: the duty of undivided loyalty that lawyers owe to current clients should be broader than the duty owed to former clients. On any number of occasions, law firms have attempted to fire current clients in the middle of handling a matter in an attempt to turn those clients into former clients for conflicts purposes. These attempts, which generally do and should fail, have given rise to what is called the hotpotato rule: a firm cannot drop a client like a hot potato simply because a more desirable client comes along. See, e.g., Restatement 132, Reporter s notes to cmt. c; In re Rite Aid Corp. Sec. Litig., 139 F. Supp. 2d 649, 658 n.15 (E.D. Pa. 2001) (citing general rule and enforcing a prospective agreement to retain one client over the other); Universal City Studios, Inc. v. Reimerdes, 98 F. Supp. 2d 449, 452 (S.D.N.Y. 2000). This rule applies also when the conflict is a result of a merger of two previously independent law firms. See, e.g., Picker Int l, Inc. v. Varian Assocs., 869 F.2d 578, 581 (Fed. Cir. 1989). In fact, conflicts waivers are required once law firm merger negotiations reach an advanced stage. ABA Formal Op The hot-potato rule has two potential exceptions and one limitation. One potential exception applies when a conflict is not a result of anything that a lawyer or firm may have done. Suppose for example that Adverse Party A in Matter A acquired a firm s client in Matter B and sought to use that new client relationship to disqualify the firm from Matter A. Some courts and some jurisdictions have addressed such thrust-upon conflicts to allow a lawyer to drop the manipulative client and maintain at least one of the relationships. Each state deals differently (if at all) with thrust-upon conflicts. Thrust-upon conflicts are directly addressed in DC RPC 1.7(d) as follows: If a conflict not reasonably foreseeable at the outset of representation arises... after the representation commences, and is not waived..., a lawyer need not withdraw from any representation unless the conflict also arises under paragraphs (b)(2), (b)(3), or (b)(4). In N.Y. City Bar Op (2005), The NY City Bar Association opined that a lawyer is permitted to withdraw from one and not the other representation under certain circumstances. First, the conflict must be truly unforeseeable; second, the conflict must be truly no fault of the Page 4- Conflicts of Interest in Labor and Employment Law

7 lawyer (e.g., conflicts other than those discovered late due to an inadequate conflicts check); and finally, the conflict must be waiveable. If these criteria are met, the lawyer may continue to represent the clients after performing a balancing test of the potential prejudice to one or both clients and the source or fault of the conflict. The full text of this well reasoned opinion is available at California has yet to address the question of thrust-upon conflicts directly, though an exception similar to that articulated in the DC rule has been discussed in case law, but not applied. See State Farm Mut. Auto Ins v. Federal Ins. Co., 72 Cal. App. 4th 1422 at 1432, 86 Cal. Rptr. 2d 20 (1999). The second possible exception is that lawyers with a clear primary client and an equally clear secondary or accommodation client may sometimes be allowed to fire the accommodation client and continue with the primary client. See, e.g., Restatement 132 cmt. i. As a practical matter, however, the accommodation client is unlikely to be a business entity. It is more likely to be, say, a middle-level manager whose business entity-employer has allowed its counsel to defend the manager as well as the entity in a case in which both were accused of wrongdoing. In such circumstances, the business entity would also be very well advised not to rely solely on the accommodation client theory but to seek a formal conflicts waiver from the middle-level manager as well. See Home Care Indus. v. Murray, 154 F. Supp. 2d 861 (D. N.J. 2001); Universal City Studios, 98 F. Supp. 2d at 453. In re Rite Aid Corp. Sec. Litig., 139 F. Supp. 2d at (enforcing prospective agreement to maintain primary client in face of conflict). The hot-potato rule applies only to current-client relationships. If a client is already a former client at the time that the firm takes on an adverse matter, the hot-potato rule does not apply. Whether a client is a current or former client depends, inter alia, upon the client s subjective belief in or the reasonableness of that belief under the circumstances. See, e.g., Oxford Systems, Inc. v. CellPro, Inc., 45 F. Supp. 2d 1055 (W.D. Wash. 1999). For the cases discussing the often difficult dividing line between current and former clients, see also Restatement 14 and sources cited therein. 4. Some Current-Client Conflicts Cannot Be Waived There are some conflicts between current clients that the law regards as so severe that they cannot be waived. Thus ABA Model Rule 1.7(a)(2) prohibits simultaneous representation if "there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client.... Similarly, ABA Model Rule 1.7(b)(1) prohibits simultaneous representation if the lawyer cannot reasonably believe[ ] that the lawyer will be able to provide competent and diligent representation to each affected client. See also Restatement 122(2)(c) (simultaneous representation prohibited if, inter alia, it is not reasonably likely that the lawyer will be able to provide adequate representation to one or more of the clients ). The nonwaivable-conflicts rules are not written or interpreted the same way in all jurisdictions. Under the existing NY Disciplinary Rules, the questions of waiveability is described as the disinterested lawyer test. NY DR 5-105(c) and require a lawyer to determine if a disinterested lawyer would believe that the representation will not be impeded by the conflict. Absent an affirmative answer to this question, the lawyer is prohibited from seeking a waiver. Examples of situations that have not passed the disinterested lawyer test include: Page 5- Conflicts of Interest in Labor and Employment Law

8 Franklin High Income Trust v. APP Global Ltd., N.Y.L.J. July 7, 2004 (NY County Supreme Ct.) (Herman Cahn, J.). Waiver rejected by court, and law firm disqualified, sua sponte by court where firm represented plaintiff, Fund, as well as third-party defendant, Fund Advisors, and defendant company asserted that the Fund Advisor was primarily responsible for the failed investment due to poor Fund management. The Court reasoned that it would not be obvious to a disinterested lawyer that one lawyer can represent both clients given the high likelihood of eventual direct conflict. Sapienza v. New York News, Inc., 481 F. Supp. 676 (S.D.N.Y. 1979). Disqualification of a lawyer who brought an antitrust suit against a current client while simultaneously representing that client in a similar matter (different parties) in a different court. In setting aside the waiver, the Court found that it was not obvious that the lawyer could adequately represent both clients in their respective matters, despite their consent. NY City Bar Op (2004). Simultaneous representation of corporation and its officers in a criminal investigation by the government will often, though not always, fail the disinterested lawyer test. In some jurisdictions, a lawyer or law firm cannot ethically represent both a buyer and a seller in a real estate transaction even if both clients consent after full disclosure. See, e.g., In re Johnson, 707 P2d 573 (Or. 1985). In others, a lawyer can do so if, and only if, the transaction is not too complex. See, e.g., Baldasarre v. Butler, 625 A.2d 458 (N.J. 1993). Still in others, such representations may be permissible if competent clients consent, if the differences between them are not too sharp, and if the work will not require extensive advice to the clients. See Restatement 122 illus. 10, 11; see also California RPC (broadly allowing such representations upon informed written consent). Although some states have disciplinary decisions or ethics opinions on this subject, there is presently no general and universal agreement among American lawyers about how this set of lines should be drawn. See, e.g., Peter R. Jarvis & Bradley F. Tellam, Conflicts About Conflicts, Prof. Law. 22, 23 (May 1996). The buyer-seller, lender-borrower, or landlord-tenant kind of dichotomy presents fixed-sum games in which more for one client typically means less for the other. Suppose, however, that several current or would-be clients simultaneously ask a single lawyer or law firm to represent all of them in putting together a corporation or other business entity through which they will do business together. In this type of situation, the adversity that is present in a straight buy-sell situation may as a practical matter be reduced, if not overcome, by the joint interests that the would-be incorporators or partners will have in putting together a profitable business. It should come as no surprise, therefore, that the general answer to the question of whether a single lawyer or law firm may represent multiple would-be incorporators or partners is yes, qualified. If the interests are wholly consistent, simultaneous representation may in fact be permissible even without a formal conflicts waiver. If the interests of the proposed multiple clients are too adverse, a single lawyer or firm cannot represent them all even if all consent. And in all situations in between (which, in our view, is about all of them), simultaneous representation is Page 6- Conflicts of Interest in Labor and Employment Law

9 permitted only on the basis of informed consent from all the clients. Comment 12 to ABA Model Rule 1.7 puts the matter as follows: For example, a lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other, but common representation is permissible where the clients are generally aligned in interest even though there is some difference of interest among them. 5. Intermediation Is Not a Free Pass Although the latest version of the ABA Model Rules no longer includes a separate rule on intermediation and instead addresses that subject in the revised ABA Model Rule 1.7 (quoted in full in Appendix B hereto), the former ABA Model Rule 2.2 is still in force in some states. By its terms, it allows a lawyer to act as an intermediary for multiple parties in ways that may seem at first to some lawyers to allow greater flexibility than the current-client conflicts limitations in Rule 1.7. In our opinion, however, there is less wiggle room here than meets the eye. By its terms, Rule 2.2 does not apply unless, inter alia, the lawyer-intermediary reasonably believes that the matter can be resolved on terms compatible with the clients best interests and that the common representation can be undertaken impartially and without improper effect on other responsibilities the lawyer has to any of the clients. For the most part, the circumstances in which the normal current-client conflicts rules, such as Rule 1.7, do not allow a waiver will likely parallel those in which intermediation is not allowed under Rule 2.2. See, e.g., DC Ethics Op. 243 (1993) (lawyers can neither represent both parties to divorce pursuant to RPC 1.7 nor intermediate divorce for both parties pursuant to RPC 2.2); see also Furia v. Helm, 111 Cal. App. 4th 945, 4 Cal. Rptr. 3d 357 (2003) (court questioned but did not decide whether an attorney for one party to a dispute may act as a neutral mediator in the dispute). 6. Corporate Families Does a firm s representation of one member of a corporate family constitute representation of all related or affiliated corporations or entities? The answer is it depends. See, e.g., ABA Formal Op , Cal. State Bar Formal Op , 1989 WL The deciding factors are such issues as whether the entities operate as one or different businesses, whether the entities share counsel, whether they have a unity of interests in the representation at issue and the like. See, e.g., Certain Underwriter's at Lloyds of London v. Argonaut Ins. Co., 264 F. Supp. 2d 914 (N.D. Cal.2003). C. The Former-Client Conflicts Rules 1. Former Clients Have More Limited Powers Former clients also have veto power, but it is limited to two situations. In addition, former clients can always waive conflicts, while as noted above, current clients can not. See generally ABA Model Rule 1.9; Restatement 132. The two types of situations in which former-client conflicts waivers are required have sometimes been referred to as matter-specific and information-specific. See In re Brandsness, 299 Or 420, 702 P2d 1098 (1985). In many cases, Page 7- Conflicts of Interest in Labor and Employment Law

10 matter-specific and information-specific conflicts will both be present. In many other cases, neither one will be. The point for present purposes is only that the presence of either one requires a conflicts waiver from both the former client and the current client before a lawyer or law firm can proceed. 2. Matter-Specific Conflicts A matter-specific conflict exists, and a conflicts waiver is required, if the transaction or litigation that a lawyer or law firm proposes to handle adversely to a former client is the same as or sufficiently related to the transaction or litigation that the lawyer previously handled for that client. For example, a lawyer who represents the seller in a real property transaction cannot subsequently represent the buyer in litigation against the seller relating to that contract even if it could be shown that the lawyer learned no pertinent confidences or secrets from the seller at the time of the former representation. See, e.g., Collatt v. Collatt, 782 P2d 456 (Or Ct App 1989). Not surprisingly, there is some dispute in the case law concerning how closely two matters must be related before a conflicts waiver is required. See, e.g., Portland Gen. Elec. Co. v. Duncan, Weinberg, Miller & Pembroke, P.C., 986 P2d 35 (Or Ct App 1999); Am. Heritage Agency v. Gelinas, 774 A.2d 220 (Conn. App. Ct. 2001). For other cases on this subject, see Restatement Information-Specific Conflicts An information-specific former-client conflict exists if, during the course of work on a prior matter, a lawyer or firm learned confidential client information that could be used adversely to the former client in the present matter. See, e.g., In re Brandsness, 702 P2d 1098 (Or 1985) (identifying information-specific category); Jessen v. Hartford Casualty Insurance Co., 111 Cal. App. 4th 698, 3 Cal. Rptr. 3d 877 (2003) (court applied the "substantial relationship" test to determine if information material to the evaluation, prosecution, settlement, or accomplishment of the prior representation was also material to the evaluation, prosecution, settlement, or accomplishment of the current representation for purposes of determining whether insured's lawyer must be disqualified because he was previously an associate in a law firm that frequently represented the opposing party); OSB Formal Op , 1991 WL (giving examples). Not surprisingly, there is also disagreement within the case law on this issue regarding how clear the proof must be. 4. The Firm Unit Rule Applies to Former-Client Conflicts There is no general distinction between current- and former-client conflicts when it comes to the firm unit rule. The need to disqualify a single lawyer will result in the need to disqualify an entire firm. See, e.g., ABA Model Rules 1.9, 1.10(a); Restatement 123, 132. In some cases, however, ethical screens or walls may help a firm avoid disqualification due to a former-client conflict of a laterally hired lawyer. Disqualification may also be avoided if all attorneys who have worked on the matter giving rise to the former-client conflict have left the firm. These points are discussed in Section III below. Page 8- Conflicts of Interest in Labor and Employment Law

11 5. Conclusion: Former Clients Are Not Without Potential Recourse Even when a company must concede that it is a former and not a current client of a law firm, this does not mean that it is powerless to prevent that law firm from acting adversely to it. In at least some circumstances, for example, a careful review of the confidential client information communicated to the former law firm may permit the argument that information could be used adversely to the company in the present matter and that the law firm must therefore be disqualified. In other circumstances, the relationship between the present and former matters may be enough. However, at least some courts have held that disqualification may not be available even in a matter-specific context if the law firm can prove that it did not acquire any pertinent client confidences and secrets. See, e.g., Christensen v. United States Dist. Court, 844 F.2d 694 (9th Cir. 1988). Interestingly enough, this does not necessarily mean that the lawyers in that firm are not subject to discipline for proceeding in such circumstances even if they are not disqualified. D. Personal or Business Conflicts The duty of loyalty can be violated not only by conflicting obligations owed to multiple current or former clients, but also by conflicts between a single client s interests and the lawyer s own personal or business interests. In some jurisdictions, all or nearly all such conflicts would appear to be waivable. In others, some conflicts of this type cannot be waived. These conflicts are generally dealt with in ABA Model Rule 1.7(b) and Rule 1.8; see also Restatement Doing Business with Clients Suppose, for example, that a corporate client wishes to compensate a lawyer through the issuance of stock to the lawyer. Subject to the applicable limitations on excessive or unreasonable fees, such an alternative payment relationship is generally permissible as long as the deal is fair and the lawyer provides a sufficient explanation of the pros and cons. ABA Model Rule 1.8(a); see also ABA Formal Op ; Restatement 126. Other financial transactions with clients similarly must be not only fair and reasonable, but also must occur with the informed consent of the client. See also Matter of Gold, 240 A.D.2d. 74, 668 N.Y.S. 2d 605 (1 st Dep t 1998) (attorney arranged for a $57,000 loan from clients to himself and his wife, and prepared loan documents, however, the terms of the loan were neither fair nor reasonable, the lawyer failed to inform his clients of the advisability of seeking independent counsel, and did not obtain written consent despite the apparent conflict); Matter of Pollack, 238 A.D.2d. 1, 664 N.Y.S. 2d 772 (1 st Dep t 1997) (attorney solicited $10,000 loan from client, but failed to disclose the extent of his financial difficulties, in violation of NY DR (A)). 2. Lawyers on Client Boards Personal or business conflicts can also arise when a lawyer or member of a lawyer s firm also occupies a position on a client s board of directors. In this type of situation, the conflict arises because the lawyer s or firm s duties, as lawyers, may conflict with the individual lawyerdirector s duties as director. Once again, such conflicts are likely to be waivable after full disclosure. See, e.g., ABA Formal Op Page 9- Conflicts of Interest in Labor and Employment Law

12 3. Other Personal Conflicts This is not an exhaustive list of personal or business conflicts. For example, personal conflicts can also occur when married or otherwise related lawyers are on opposing sides of a matter. In a transactional setting, counsel should be mindful that a personal interest conflict exists when the lawyer is to be paid by someone other than the client. See In re Jordan III, 299 A.D.2d. 34 (2002) (New York lawyer disbarred for repeated representation of real estate buyers while legal fees were being paid by the brokers and sellers without the informed consent of the client). Also, see generally ABA Model Rule 1.8. E. A Conflicts Rules Postscript Four points are worth noting: 1. Fiduciary Duties May Go Beyond Ethical Obligations First, the conflicts rules do not necessarily provide the full measure of a lawyer s duties to a client. A lawyer or firm could conceivably be held civilly liable for breach of fiduciary duty even though a violation of the formal ethical rules may not be present. Conversely, there are also times when a lawyer will be subject to discipline even though the client would have no private cause of action. See Owens v. McDermott, Will & Emery, 736 N.E.2d 145 (Ill. App. Ct. 2000). 2. Be Careful About Disciplinary Threats Although the ABA Model Rules as such no longer contain a specific threatening prosecution rule equivalent to former ABA DR 7-105, extortion is still prohibited. In some jurisdictions, a threat to file a bar complaint may violate either the general law against extortion or a surviving variant of the threatening prosecution rule. See, e.g., Wash. Rev. Code 9A ( Extortion means knowingly to obtain or attempt to obtain by threat property or services of the owner.... ); California RPC Conflicts in Corporate Investigations a. Joint-Defense Conflicts On a sheer numbers basis, the incidence of joint-defense conflicts waiver problems is far less than the incidence of current-client, former-client, and personal or business conflict problems. Nevertheless, in the present era of corporate investigations, the issue is important enough to deserve separate mention, because it can provide a trap for the unwary that ought to be considered as part of an overall conflicts waiver process. Suppose that two unrelated corporations are named as defendants in litigation and that they decide to be separately represented but to share privileged information on the basis of a jointdefense agreement. Suppose that a great deal of information is shared on this basis but that the interests of the two corporations subsequently diverge. Can the lawyers for each of the corporate clients continue to represent their client even though they now have information subject to the joint-defense privilege? The answer is perhaps not. See, e.g., ABA Formal Op ; City of Kalamazoo v. Mich. Disposal Serv., 151 F. Supp. 2d 913 (W.D. Mich. 2001); United States v. Page 10- Conflicts of Interest in Labor and Employment Law

13 Anderson, 790 F. Supp. 231 (W.D. Wash. 1992). Clients who enter into joint-defense agreements should consider whether, for example, they want to include a provision that allows each party to the agreement to continue to be represented by its counsel in the event of a breakup. At least one court has found that joint-defense agreements can be implied from the sharing of confidential information and the disclosure made under the implied joint-defense agreement could become the basis to disqualify one of the attorneys who participated in the joint defense. In re Skiles, 102 S.W.3d 323 (Tex. App. 2003). But See United States v. Stepney, 246 F. Supp. 2d 1069, (N.D. Cal. 2003) ( Joint defense agreements... cannot extend greater protections than the legal privileges on which they rest. ). b. Entity Representation As a general proposition, a lawyer who represents a corporation is deemed to represent only the corporation and not its officers, directors, shareholders, or employees as such. In the event of a falling out between the corporation and one or more of its officers, directors, shareholders, or employees, the lawyer is therefore free to represent the corporation. See, e.g., Meehan v. Hopps, 144 Cal. App. 2d 284, 301 P.2d 10 (1956); In re Banks, 283 Or 459, 469, 584 P2d 284 (1978); See Commodity Futures Trading Comm n v. Weintraub, 471 US 343, 105 S Ct 1986, 85 L Ed2d 372 (1985). See also former ABA EC 5-18 ( A lawyer employed or retained by a corporation or similar entity owes his allegiance to the entity and not to a stockholder, director, officer, employee, representative, or other person connected with the entity ); In re Kinsey, 294 Or 544, 556 n. 4, 660 P2d 660 (1983) (citing and quoting ABA EC 5-18 with approval). Representation of a corporation that is wholly owned by a single family or individual may be seen by some courts as a per se representation of the shareholders. See, e.g., In re Banks, 283 Or 459; In re Brownstein, 288 Or 83, 86 87, 602 P2d 655 (1979). If the lawyer leads the shareholders to believe that each of them is a client, however, it seems quite likely that a court would hold that all are clients. See Atlas Partners II, Limited Partnership, v. Brumberg, Mackey & Wall, PLC, 2006 WL (W.D.Va 2006). An attorney-client relationship can, of course, be created with officers, directors, shareholders, or employees if the lawyer does legal work for them. ABA Model Rule 1.13(d) (e). Suppose, for example, that a lawyer is in the process of assisting an employee with a personal matter when the company president asks the lawyer s help in dismissing that employee due to an alleged theft of company property. The lawyer then has a conflict of interest and will be unable to proceed without, at a minimum, disclosure and consent. See National Texture Corp. v. Hymes, 282 NW2d 890 (Minn 1979); In re Banks, 283 Or 459. Finally, it should be noted that, for at least some purposes, representation of an incorporated trade association may per se constitute representation of the association s members. See, e.g., Glueck v. Jonathan Logan, Inc., 653 F.2d 746, (2d Cir. 1981); Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, (7th Cir. 1978). Also, and perhaps obviously, a lawyer (in-house or outside) should not represent an entity or any of its members if the lawyer is herself a target or potential target of the investigation. See Chang v. Chang, 190 A.D.2d 311, 597 N.Y.S. 2D 692 (1st Dep t 1993) (attorney violated NY DR (A) (conflict of interest) by representing the shareholders of a closely held family corporation in an action alleging self-dealing and conversion of corporate funds where the Page 11- Conflicts of Interest in Labor and Employment Law

14 attorney had personally represented the corporation in all of the challenged transactions and was himself a defendant accused of participating in the scheme to loot and defraud the corporation). 4. Circumstances Change Finally, and because the nature or degree of a conflict of interest may change over time as circumstances or client interests may change, conflicts waivers will sometimes need to be repeated or renewed. It is also possible that what was once a waivable situation will become one in which the conflict cannot be waived. See, e.g., In re Johnson, 707 P.2d 573; See Restatement 121 cmt. 9; N.Y.C.L.A. Op. 724, 1998 WL Both corporate counsel and outside counsel must therefore remain alert as events unfold. III. ETHICAL SCREENS AND WALLS Suppose that a law firm wishes to recruit a government lawyer but that government lawyer is then working for the government adversely to the law firm s corporate client. In most if not all American jurisdictions, the law firm can hire the government lawyer and even make him or her a partner without disqualification, as long as he or she is appropriately screened from any involvement in the matter. See, e.g., ABA Model Rule In some American jurisdictions, there are also black-letter rules that allow screening when a lawyer moves from one private place of employment to another. See, e.g., Washington RPC 1.10(b); Oregon RPC 1.10, (I); Pennsylvania RPC 1.10(b). In addition, some other states may allow screening for private-lawyer moves by case law. See, e.g., Clinard v. Blackwood, 46 S.W. 3d 177 (Tenn. 2001). Panther v. Superior Ct. of San Diego 123 Cal. Rptr. 2d 599 (rev. granted, 2002) (screening may be an effective defense to a disqualification motion for firm switching conflicts); Kassis v. Teachers Insurance and Annuity Ass n., 93 N.Y. 2d 611, 695 N.Y.S. 2d 519 (1999) (though screening is theoretically possible, when a lawyer was either heavily involved in the matter or if the firm at issue is so small that screening may not be realistic, disqualification is required). When, on the other hand, all lawyers at a firm who have worked on a matter or acquired confidences and secrets about a matter have left the firm, screening is unnecessary and the lawyers remaining at the firm will not be disqualified. See, e.g., ABA Model Rule 1.10(b); Restatement 124. IV. COMPONENTS OF EFFECTIVE CONFLICTS WAIVERS Also similarly, some conflicts that are waiveable in theory are non-waiveable in fact because, in order to obtain an effective waiver, a lawyer would have to disclose to one client the confidential information of another client that the lawyer is not allowed to disclose. Nevertheless, it is unquestionably better to be safe than sorry: A conflicts waiver letter that is insufficient for disciplinary purposes may nonetheless be sufficient to defeat or at least minimize a civil damage action or disqualification motion. Page 12- Conflicts of Interest in Labor and Employment Law

15 To our knowledge, no one has yet been disciplined for writing a conflicts waiver letter that was too clear or for writing such a letter and obtaining client consent when no consent was necessary. V. DEFINING INFORMED CONSENT The definition of informed consent contained in Oregon Rule of Professional Conduct 1.0(g) is a good place to start: "Informed consent" denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct. When informed consent is required by these Rules to be confirmed in writing or to be given in a writing signed by the client, the lawyer shall give and the writing shall reflect a recommendation that the client seek independent legal advice to determine if consent should be given. We see this definition and its place in the attorney disciplinary rules as encompassing two general starting points: The lawyer must take affirmative steps to raise conflicts issues with potentially affected clients and is ill-advised to say nothing even with the most sophisticated of clients. A conflicts waiver should do more than just provide an overview of the facts giving rise to the conflict. It should also address the plusses and minuses of granting consent from the client s point of view. Typically, this will include at least some reference to the potential effect of the conflict on the attorney s zealousness or eagerness on behalf of the client as well as some reference to the potential effect of the conflict on client confidentiality. We now turn to the more specific requirements of effective conflicts waivers. 1. Document Consent Contemporaneously There are times when an attorney must begin work on a matter without delay and when the documentation of the oral consent that should itself precede the commencement of work will be somewhat postponed. If such a situation exists, so be it. Nevertheless, in the absence of a crisis situation or even if a crisis does exist, it is unwise to allow too much time to pass between the onset of a conflict and the documentation of a conflicts waiver. See In re Jeffery, 321 Or 360, 371, 898 P2d 752 (1995) ("consent" document signed by clients "fell short in form, because the written consent was not obtained at the time the accused undertook the dual representation"); but see In re Brandt/Griffin, 331 Or 113, 10 P3d 906 (2000) (four-day delay is still contemporaneous). Page 13- Conflicts of Interest in Labor and Employment Law

16 2. Get the Client s Waiver in Writing Even if the disciplinary rules of a jurisdiction do not expressly require it, the clearly better and safer practice is to provide clients with written waiver letters (either by regular mail or ) and to obtain the client s contemporaneous written consent (again, either by regular mail or ). If regular mail is used, the better practice is to enclose an extra copy of the letter to the client with a space for the client s signature so that the client can sign and return it. On the other hand, a faxed signature should work just as well, and so too should a return acknowledgement by . The obvious benefit to the lawyer is that the client s signature makes it difficult if not impossible for the client to assert that it was not made aware of the need to consider the conflict or did not understand the conflict. This is especially so if the letter asks the client to let the lawyer know of any questions that the client would like the lawyer to address prior to the client reaching a decision. 3. If It s Important, Spell It Out As a general proposition, it is fair to say that more disclosure must be made to a less sophisticated client than to a sophisticated client. See, e.g., Restatement 122. It can be dangerous, however, to rely too much on client sophistication as a substitute for consent that is truly and unambiguously informed. See Financial General Bankshares, Inc. v. Metzger, 523 F. Supp. 744, 760 (D.D.C. 1981). When it comes to conflicts waivers, the applicable yardstick for measuring client sophistication is unlikely to be the client s sophistication about the client s own business. It is likely to be the client s sophistication about attorney-client and multiple-client conflicts. Many sophisticated businesspeople, and even sophisticated in-house counsel, are unsophisticated about attorneyclient and multiple-client conflicts. A non-substantive letter that effectively says nothing more than I, the lawyer, asked for your consent and you, the client, gave it leaves it open for the client or the bar to assert that the lawyer failed to discuss key issues with the client at all or to explain one or more issues adequately to the client. As a corollary, plain English is better than legalese. 4. Clearly Identify the Consent Sought Conflicts letters must be adapted to their specific circumstances. If, for example, consent is being sought to represent a current client against a former client, the letter should identify the current and former clients and should clearly state that the attorney proposes to represent one against the other in a particular type of matter (e.g., negotiation of a contract, the pursuit of a collection action, the filing of marital dissolution proceedings). Page 14- Conflicts of Interest in Labor and Employment Law

17 If what is involved is a conflict between a personal interest of the lawyer and the client, the lawyer s personal interest should clearly be identified. If what is involved is a joint business transaction between attorney and client, the letter should clearly identify the proposed participants, their proposed roles, the nature of the business to be undertaken and the like. It is risky to assume that the client knows all of these things and will always remember having known them if a dispute subsequently arises. If consent is sought to negotiate on behalf of one client against another but not to litigate, the letter should so state. If, on the other hand, consent is sought both to negotiate and to litigate, the letter should again so state. If one of the conditions of the waiver is that the particular lawyers or particular offices of a firm that work for a client on one matter will not work adversely to it on another matter, the letter should so state. When a blanket waiver is sought, the lawyer should be especially careful to delineate its intended scope in the disclosure and consent letter. See Restatement 122 cmt d. On the other hand, a lawyer who is inclined to ask for a blanket waiver should also consider whether a less broad (but potentially more reasonable and enforceable) waiver may be better than an unlimited one. For example, it may be that what the lawyer truly needs from a client is a blanket waiver as to conflicts of a particular type with a particular adverse party. In addition to making the waiver appear more reasonable and appropriate to a subsequent judge, jury or disciplinary board, this narrower scope may also increase the likelihood that the client will give the requested consent. 5. Clearly Identify Why the Client Should Care There have been times in the past when lawyers who have sought our services in the preparation of conflicts waiver letters have told us not to include certain subjects on the ground that if those subjects are included, the client will not consent. We submit that if such an subject appears to be present, it is essential that it be included in the waiver. If the client truly is hesitant or squeamish, it is best to know in advance. Spelling out the nature of the potential adverse risks to the client in writing forces both the lawyer and the client to think about them. If the risks, once placed on paper, do not look palatable or like something that a client should be willing to accept, the attorney should seriously consider whether discretion may be the better part of valor. If, on the other hand, the attorney is subsequently called to account for the adequacy of disclosure and consent, a detailed letter is likely to be of greater assistance than a terse one. In the case of a representation adverse to a current or former client, at least two issues should always be discussed. One is zealousness: Is there a risk that the zealousness of an attorney's involvement on behalf of one client may be adversely affected by the interests of the attorney on behalf of the attorney's other current or former clients? Even if the lawyer is convinced that there is no such risk, however, this subject should be raised so that the client can review it to his or her own satisfaction. Page 15- Conflicts of Interest in Labor and Employment Law

18 Another potential risk that should be addressed in the context of a current or former-client disclosure and consent letter is the risk of adverse use of client confidences and secrets. If, because of a prior or concurrent representation, the attorney would be in a position to use confidences or secrets of one client adversely to that client, any disclosure process that fails to identify this particular risk and the particular confidences or secrets involved is likely to be held invalid. Even if the attorney is convinced, however, that there is no material risk of an adverse use of client confidences or secrets, it is better to call the issue to the client's attention and let the client consider it. In fact, these two basic issues zealousness and the risk of adverse use of client confidences or secrets should probably be raised and discussed in all, or almost all, disclosure and consent letters. There are also some more specific risks or considerations that are appropriately discussed in various situations. In the event of a personal or business conflict between attorney and client, it is important to describe how, in practice and in principle, the attorney's specific interest could or might affect the attorney's exercise of independent professional judgment on behalf of the client. See, e.g., ABA Formal Op (2000) (addressing stock-for-fee conflicts). This matter should be called to the client's attention even if the attorney is convinced that there is no material risk. If the lack of any need for concern by the client is indeed obvious, the client will presumably agree. Although no one can predict the future, it is often advisable to refer to the possibility that additional conflicts may arise at a later time and to describe the possible effects of those conflicts. The letter could explain, for example, that if the interests of two jointly represented defendants in a civil case subsequently diverge, the lawyer may have to withdraw from representing both and the clients will then be stuck with the bother and expense of obtaining new counsel. See, e.g., OSB Formal Op Similarly, much the same point should be made if a lawyer proposes to represent two or more would-be incorporators in forming a corporation. The letter should state that if the parties come to disagree in the future, the lawyer will not be able to take sides and advocate for one client s interests in opposition to another client s interests. Depending upon the circumstances, it may be appropriate to recommend that the client whose consent is sought consult independent counsel or even to insist upon such consultation. As a practical matter, such a recommendation should help a lawyer establish that she really did attempt to make the importance of the matter clear to the client before the client consented. And if the client actually consults another lawyer, the likelihood that the waiver will be upheld will probably be significantly increased. 6. When Applicable, Discuss Joint Defense Privilege Issues Pursuant to attorney-client privilege law in most if not all American jurisdictions, the attorneyclient privilege applies somewhat differently when an attorney has several clients in a matter than when the attorney has only one. In the former instance, communications by one of the clients to or from the attorney are privileged as against the rest of the world but are not privileged as between the clients. In other words, and at least absent an express agreement to the contrary, Page 16- Conflicts of Interest in Labor and Employment Law