Bench & Bar – May 2006
One Heck of a Conﬂict of Interest Dilemma
Del O’Roark, Loss Prevention Consultant, Lawyers Mutual Insurance Company of Kentucky
Conﬂicts of interest problems are the hardest for lawyers to deal with for many reasons. To begin, the professional responsibility rules governing conﬂicts are the most difﬁcult to apply (at least for me). Next, throw in the fact that lawyers really do not want to see conﬂicts if they can help it. This is not a cynical observation – conﬂicts are practice stoppers. The conﬂict rules seriously diminish how large a ﬁrm can grow, either by adding lawyers or merging with another ﬁrm, and how much money can be made.
There is a current theory that it takes only six steps of connecting people you know topeople they know to make a connection between you and virtually everyone in the world. If there is any validity to this theory, it is hard to see how the national mega-ﬁrms can begin to meet their conﬂicts professional responsibility. My two favorite purported conﬂict of interest tests are the cash ﬂow test: “If this situation is going to interfere with my cash ﬂow, it is not a conﬂict of interest;” and the large law ﬁrm different ﬂoors test: “If the lawyer in the ﬁrm with a client causing a conﬂict with my client works on a different ﬂoor, it is not a conﬂict of interest.”
Two of the more agonizing conﬂict situations lawyers frequently face are:
After accepting a new client, a prospective client seeks representation in an unrelated lucrativematter adverse to that new client; andAfter accepting a new client, the lawyer suddenly realizes this creates a conﬂict in an unrelated matter with an existing, but less preferable client.
May you resolve either conﬂict situation by dropping the client like a ‘hot potato’ for the prospective client or for the later in time acquired client?
Related to the hot potato client is the ‘thrust upon client.’ The conﬂict with the thrust upon client arises when, through no fault or action of his own, a lawyer suddenly ﬁnds himself representing clients with conﬂicting interest. An example is when representing the plaintiff in asuit the defendant is acquired by a business that the lawyer represents in unrelated matters.Unforeseeably, the lawyer now has a conﬂict. Absent waiver must he drop one or the other ofthe clients – or both?
Failure to resolve hot potato and thrust upon client conﬂicts can lead to disqualiﬁcation motions, malpractice claims, breach of contract suits, and bar complaints. To assist you inavoiding those risks, this article reviews both conﬂict situations and their resolution. As will be seen, there is less ﬂexibility in resolving hot potato client conﬂicts than thrust upon client conﬂicts.
The Hot Potato Rule
A seemingly easy ﬁx to resolving a conﬂict on an unrelated matter between two clients is to disengage from one client converting that client to a former client. This move invokes Kentucky Rule of Professional Conduct (KRPC) 1.9 that governs former client conﬂicts. The essence of that rule is that if the matter of a current client that is adverse to a former client is not substantially related to the representation of the former client, the lawyer does not have aconﬂict of interest. As charming as this analysis is, it has proven unacceptable in the greatmajority of jurisdictions considering it. Lawyers Mutual’s Fall 1999 Newsletter illustrated thehot potato client problem and the rationale for rejecting the former client solution:
An Iowa lawyer got suspended from practice for violating the Hot Potato Clientrule. He was representing a client in a bankruptcy action at the time he accepted thedefense of a new client involved in an automobile accident. Turns out that the plaintiff in this personal injury case was his bankruptcy client. The lawyer claimedthat he did not realize this until after he had begun representing the second client.As there was only a little more to do to ﬁnish the bankruptcy action he unilaterally withdrew from representation. The lawyer said he believed the bankruptcy clientcould complete the bankruptcy on his own. Eureka! By withdrawing the lawyerconverted the bankruptcy client to a former client. Since there was no substantial relationship between the bankruptcy action and the personal injury case, no moreconﬂict of interest -- and the billing is good!
Unfortunately, the Iowa lawyer was unaware of the rule that you don’t cure aconﬂict of interest by dropping a current client like a hot potato to accept a new client with a more lucrative matter. …. When a lawyer accepts a client there is aﬁduciary obligation of loyalty to complete the work if at all possible. Withdrawal is appropriate only for compelling professional reasons. Fee optimization doesn’tmeet the test. If you inadvertently ﬁnd yourself representing two clients resulting in an unconsented conﬂict of interest, your professional responsibility [almost always] requires withdrawal from both representations.
The Restatement of the Law Governing Lawyers, Third, comes to the same conclusionon hot potato clients:
If a lawyer is approached by a prospective client seeking representation in a matteradverse to an existing client, the present-client conﬂict may not be transformed into a former-client conﬂict by the lawyer’s withdrawal from the representation of the existing client. A premature withdrawal violates the lawyer’s obligation of loyaltyto the existing client and can constitute a breach of the client-lawyer contract ofemployment.
The strict approach of the hot potato doctrine is sometimes contested with the point thatprofessional conduct rules allow unilateral withdrawal by a lawyer for no reason providedwithdrawal does not cause material adverse effect on the interest of the client (KRPC 1.16 (b)).That being the case, it is not unethical to disengage from one client to take on another for morechallenging or lucrative matters as long as the now former client suffers no material adverse effect.
One authority summarily dismisses this approach as having little but consistent languagein the rules to support it and added:
The most obvious problem is a moral one: the lawyer’s motivation is patently baseand disloyal to the abandoned client. Courts, obviously motivated by concern overthe lawyer’s disloyalty, have spoken with one voice. The now widely acceptedrule is that a lawyer who withdraws – whether otherwise in conformity with thelawyer code or rules or not – from representing a current client for the purpose ofproceeding adversely to the client on behalf of another client does not therebyconvert the representation into that of a former client.” (footnotes omitted)
A New York City Bar ethics opinion echoes this view:
While the Code may not expressly prevent a lawyer from dropping one client inorder to represent another, it is well-settled that the duty of loyalty prevents anattorney from doing so opportunistically. For example, under the so-called "hot•potato" rule, a lawyer or law ﬁrm should not ordinarily be permitted to abandon one client in order to take on the representation of a more lucrative client, whererepresenting both would create a conﬂict of interest. This approach has been followed in several court cases involving attorney disqualiﬁcation motions, where courts have articulated the need to protect conﬁdential client information, as well as to protect the disfavored client from being "cut adrift" simply because a morelucrative client comes along with a claim against it.
The best way to solve the hot potato situation, if feasible, is to get both clients to consentto waive the conﬂict. Some lawyers try to anticipate the problem by getting an advance waiverfor possible future conﬂicts in a letter of engagement. While it is difﬁcult to describe potential future conﬂicts in sufﬁcient detail to enable clients to give informed consent, advance waivers are permissible according to the ABA. Use the KBA Ethics Hotline if in doubt about how to proceed.
Thrust Upon Clients – An Exception to the Hot Potato Rule
While the hot potato rule appears to be a bright line test, as so often happens in thepractice of law developing business trends introduce new considerations in conﬂict resolution – enter the thrust upon client. The case of Installation Software Technologies, Inc. d/b/aInstallshield Software v. Wise Solutions, Inc. and the New York City Bar Ethics Opinion2005-05, Unforeseeable Concurrent Client Conﬂicts, are two opinions that explain well when a lawyer may resolve a conﬂict by disengaging one client while continuing to represent another when the conﬂict is thrust upon the lawyer.
In Installshield Baker & Mckenzie represented Installshield in a suit against Wise forcopyright infringement and misappropriation of trade secrets. Five months after ﬁling suit Altiris, a client of Baker, acquired Wise creating a conﬂict of interest for Baker that Installshield agreed to waive, but Altiris would not. Baker then moved to withdraw from representingInstallshield or other appropriate relief due to a conﬂict representation. The NYC Bar opinionprovides this analysis of the case in terms of the thrust upon client and the hot potato rule:
For purposes of this opinion “thrust upon” conﬂicts are deﬁned as conﬂicts between two clients that (1) did not exist at the time either representationcommenced, but arose only during the ongoing representation of both clients,where (2) the conﬂict was not reasonably foreseeable at the outset of the representation, (3) the conﬂict arose through no fault of the lawyer, and (4) the conﬂict is of a type that is capable of being waived …, but one of the clients will not consent to the dual representation. Although the “thrust upon” conﬂict may be unforeseeable and arise through no fault of the lawyer or law ﬁrm affected, when it gives rise to a concurrent conﬂict … the lawyer must nevertheless take action to avoid [a conﬂict of interest] violation …. The customary response to such conﬂicts is for the lawyer to withdraw as necessary to avoid the conﬂict.
The "hot potato" rule prohibiting the abandonment of a current client to take on a more lucrative representation is a salutary one, but it is not commanded by the text of the Code or the ABA Model Rules and should not apply to situations where its underlying rationale would not be served. The rule condemns affirmative self-interested acts of disloyalty by an attorney to an existing client in order to switch allegiance to a new one. In circumstances where an attorney is representing two clients, and an unforeseeable conflict between the two arises during the ongoing representation of both, concerns about opportunistic attorney activity are less evident: by definition, the problem was "thrust upon" the lawyer.
Many courts have also found that the duty of loyalty concerns underpinning the “hot potato” rule are not present in the “thrust upon” situation where the lawyer has not instigated the conflict or deliberately sought to abandon a client. In addition, in the current business climate, corporate mergers and acquisitions occur with sufficient regularity that conflicts of interests between two clients will often arise unexpectedly and through no fault of the lawyer, creating conflict situations that are not governed by the “hot potato” rule. Consequently, many courts have applied a flexible approach to “thrust upon” situations that focuses on balancing the interests of all affected parties rather than mechanically applying the “hot potato” rule to prevent a lawyer from withdrawing from one client in order to continue representing the other.
In Installation Software Technologies … for example, a conflict of interest arose when a current client of the law firm representing the plaintiff acquired the defendant and then refused to consent to the dual representation. The plaintiff’s law firm sought guidance from the court by moving for permission to withdraw or for “other relief.” The court denied the motion to withdraw after balancing (i) the prejudice to the non-consenting client, including whether its confidential information was at risk if the law firm stayed in the case; (ii) the financial costs to the plaintiff if it was forced to retain new counsel in the matter, (iii) the complexity of the matter, and (iv) the origin of the conflict so as to ensure that the ‘conflict by acquisition’ . . . [did] not become a means for [the defendant] to strategically disadvantage [the plaintiff].”
In adopting the thrust upon client exception to the hot potato rule the NYC Bar opinion added these caveats: the conﬂict must truly be unforeseeable, the conﬂict must truly be no fault of the lawyer, the conﬂict must be between concurrent clients, and implementation of the balancing test for thrust upon conﬂicts must be performed in good faith.
Finally, the NYC Bar opinion offers some ideas for avoiding the thrust upon client conﬂict issue:
“When client relationships change during the course of a representation, the lawyershould ﬁrst determine whether the changed circumstances create an actual conﬂict.”
What may initially appear to be a conﬂict may, in fact, involve a former client instead of a current client. Many lawyers represent clients intermittently or have a pattern of repeatedretainers with a client that open the door to a claim of continuous representation that creates aconﬂict of interest with a new client. While it may seem good business to have an open-endedrelationship with an inactive client, the best practice is to cleanly indicate the representation isover with a closing letter to the client. This is proof positive that the client is now a formerclient and that future representation of a client adverse to the former client on an unrelatedmatter is not a disqualifying conﬂict.
“Representation of one member of a corporate family … does not automatically constituterepresentation of another member of the same corporate family. For the purposes of theethics rules, a current client's adversary that, due to a merger or acquisition, has becomethe parent or subsidiary of another client, may not be considered a "client" at all.”
KRPC 1.7, comment (2) recognizes this concept in the following language: “…simultaneous representation in unrelated matters of clients whose interests are only generallyadverse, such as competing economic enterprises, does not require consent of the respectiveclients.” See ABA Formal Op. No. 95-390 (1995) for factors to consider when determiningwhether this exception applies.
Obtain advance waivers for future conﬂicts.
Since by deﬁnition thrust upon conﬂicts are unforeseeable, an advance waiver that provides a client sufﬁcient information to make an informed waiver is difﬁcult in the extreme – but is worth the effort. As observed in the NYC Bar opinion: “… in appropriate instancesclients can give informed and therefore effective waivers in advance to a sufﬁciently described set of circumstances without necessarily knowing all details or the identity of the other client.… the lawyer seeking an advance waiver should be as speciﬁc as possible regarding the types of possible future adverse representations, the types of matters that might present conﬂicts, and at least the class of potentially conﬂicted clients ….”
Use letters of engagement that carefully describe the relationship and scope of engagement.
Include in letters of engagement:whether a representation is ongoing,who is and is not the client,specify which entities of a corporation are represented,expressly exclude other afﬁliates and future acquisitions, limitations on the scope of engagement to a described area of practice or matter, andthat new business requires a new agreement of engagement.
A conflict of interest involving a hot potato client or thrust upon client cannot go unresolved. Obtaining the consent of both clients to waive the conflict is the best resolution. If you find yourself in a conflict with a hot potato client and cannot get a waiver from both clients, with few, if any, exceptions the required resolution is disengaging from both clients – the worst of all results. If the circumstances involve a prospective client and a hot potato client, a prudent solution is not to engage the prospective client and avoid the conflict at the outset.
The balancing test described in Installshield and the NYC Bar opinion for thrust upon clients offers the opportunity to retain one of the clients provided the balancing of interest is done in good faith. The NYC Bar opinion concluded with this guidance on deciding which client to drop: “In reaching this decision, the overarching factor should be which client will suffer the most prejudice as a consequence of withdrawal. In addition, the attorney should consider the origin of the conflict, including the extent of opportunistic maneuvering by one of the clients, the effect of withdrawal on the lawyer's vigor of representation for the remaining client, and other factors mentioned in this opinion.”
- The Kentucky Rules of Professional Conduct are contained in SCR 3.130.
- There is apparently no Kentucky authority addressing the hot potato client doctrine.
- Sec. 132, Comment c and Reporter’s Note to Comment c.
- Wolfram, Former Client Conflicts, 10 Geo. J. Legal Ethics 677, 708(1998). The Association Of The Bar Of The City Of New York Committee On Professional And Judicial Ethics Formal Opinion 2005-05, Unforeseeable Concurrent Client Conflicts.
- ABA Formal Op. No.93-372 (1993). Advance waivers have a greater possibility of being successful in transactional matters than litigation 2004 WL 524829 (N.D.Ill).
- The Association Of The Bar Of The City Of New York Committee On Professional And Judicial Ethics Formal Opinion 2005-05, Unforeseeable Concurrent Client Conflicts.