Conflicts of Interest - Module 4 of 5

Module 4: Conflicts of Interest

Lawyers owe their clients, current and former, a duty of loyalty and a duty to protect confidential information. These duties form the basis of a lawyer’s role as an advocate who exercises independent judgment on the client’s behalf.[1] If a lawyer represents multiple clients, at the same time or successively, the interests of the clients may be at odds with one another, which would put the lawyer in a position to potentially violate these duties to one or both of the clients.

As such, when a lawyer undertakes to represent a new client, he must first ascertain whether agreeing to the representation would constitute a conflict of interest with respect to his obligations to his other clients. A lawyer may not represent a client if the representation would involve a substantial risk that the representation would be adversely affected by the lawyer’s duties to another current client, a former client or a 3^rd party to whom the lawyer owes a duty.[2]

Current Client Conflicts

The basic rule is that a lawyer may not represent two or more clients at the same time if the representation would involve a concurrent conflict of interest between the clients, unless the lawyer obtains the informed consent of the affected parties.[3]

There are two different sets of circumstances which may constitute a concurrent conflict of interest. One is when the representation of one client would be directly adverse to the other client.[4] This occurs when the interests of one client requires the lawyer to act against the interest of his other client.

Consider, for example, a lawyer who represents two clients in unrelated matters. The lawyer owes a duty of loyalty and independent judgment to both individuals. If one of the clients wishes the lawyer to represent her in a civil suit against the other client represented by the same lawyer in a different matter, this would be a conflict of interest for the lawyer. He may not represent the plaintiff even if the defendant was not represented by the lawyer in this matter, since the lawyer owes a general duty to advocate for the interests of his client.[5]

Likewise, a lawyer may not undertake the representation of a person engaged in negotiations with another party if that party is also a client of the lawyer in an unrelated matter, since the parties would be directly adverse to each other.[6]

A conflict may also arise even when the clients are not directly adverse to each other. This type of conflict occurs if undertaking a legal representation entails a significant risk that the representation will be materially limited by the lawyer’s responsibilities to another or the personal interests of the lawyer.[7]

To illustrate, if people forming a joint venture ask one lawyer to represent each of them, the lawyer is likely to be limited in her ability to recommend or advocate for all possible alternatives available to each client. The lawyer should not represent more than one of them since it is probable that the interests of the participants are not completely aligned. Although they may not be directly adverse, there is a significant risk that the lawyer’s ability to carry out the appropriate representation and fully pursue courses of action for each client will be curtailed.[8]

Still, the existence of a concurrent conflict of interest is not always a complete bar to accepting the representation of a client. Generally, a lawyer may proceed with a legal representation despite a conflict of interest if the following four criteria are met.

First, the lawyer must reasonably believe that she will be able to provide competent and diligent representation to each client affected by the conflict of interest if the clients are fully informed of the circumstances.[9] The lawyer must consider whether continuing to represent both parties despite the conflict would negatively impact the lawyer-client relationship with each, as well as the diligence of representation in each matter.

Factors relevant to such a determination include the degree to which the two matters are interrelated, the history of the relationship with each client and the sophistication of each client.  

If the matters are wholly unrelated, or if the history with each client does not suggest a special relationship with a particular one would be especially harmed, or if the client is experienced and understands how to protect his own interests, then it may be reasonable to seek the consent of each party to proceed with the representation. On the other hand, if the factors suggest that the conflict of interest would pose a risk to the lawyer’s relationship with his clients or impact the degree of diligence of representation possible to each client, it may not be reasonable to proceed with the representation.[10]

Second, to seek a waiver for the conflict, the representation must not be prohibited by law.[11] For example, in some states, lawyers are prohibited by statute from representing more than one co-defendant in a capital case.[12]

Third, the representation must not involve a claim by one client of the lawyer against another of the lawyer’s clients in the same litigation.[13] A lawyer may not represent both parties in the same case, even if all parties consent.[14]

Fourth, each affected client must give informed consent.[15] The lawyer must present each client with all the relevant information regarding the potential adverse impacts of proceeding despite the conflict.  The lawyer must communicate adequate information and explanation about the risks and alternatives open to the clients under the circumstances.[16] The waiver must be recorded in written form.[17]

Former Client Conflicts 

After a lawyer-client relationship comes to an end, the lawyer still has an ongoing duty to former clients. In particular, a lawyer must protect confidential information obtained in the course of representing a client even after the active representation is over.[18] As such, the same basic rule that is applicable to conflicts of interest between current clients applies to a conflict between a current client and a past client. If undertaking to represent a client in a new matter would present a substantial risk that the representation will be adverse to a former client, the attorney must decline unless proper informed consent is received from all parties.[19]

Just as the duties to a former client can materially limit a lawyer’s ability to meet his duties of loyalty and independent judgment, so may the representation of a new client adversely impact the lawyer’s duty of confidentiality to a former client. [20]

To uphold this duty, a lawyer who has represented a client in a matter must not represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of a former client.[21]

When a lawyer agrees to a new representation, he must undertake a three-step analysis to determine whether a conflict with the interests of a former client will preclude him from agreeing to the representation or if it would require seeking informed consent from a previous client.

First, the lawyer must determine whether or not he has in the past represented a client in the same matter for which the new, prospective client seeks the lawyer’s counsel and representation. A legal matter is anything which is the subject of a legal representation, including a civil lawsuit, a business transaction requiring legal input or any subject on which a client seeks a lawyer’s legal counsel.[22]

If the lawyer finds that he has not represented another client in the same matter, the second step is to ascertain whether the matter for which the new client seeks representation is substantially related to a matter in which he has represented clients in the past.  Matters are substantially related if information obtained in the earlier representation would advance the interests of the client in the current representation.[23]  

For example, take the case of a lawyer who had represented a businesswoman in the past in a matter which involved obtaining personal financial information. The lawyer is later asked to serve as counsel for the businesswoman’ spouse at a divorce proceeding. The divorce proceeding would be considered a substantially related matter, since it is to be expected that the confidential information obtained in the earlier representation would advance the interests of the spouse in the divorce proceedings.[24]

Even if the lawyer discovers that he has formerly represented an individual in the same or in a substantially related matter, the new representation is okay unless the interests of the former and prospective client would be adverse to each other. So, the third step is to determine how diligent representation of a new client would impact the interest of the former client in having confidential information protected. This is not always a clear-cut determination.  

Courts have held that the question of material adversity is whether the new representation would likely risk legal, financial or other identifiable detriment to the former client, as well as whether performing diligently in the new representation would “induce [the lawyer] to use confidential information that could adversely affect the former client.”[25]

Finally, bear in mind that conflicts of interests between current and former clients, like conflicts between concurrent clients, may be waived if all affected parties give informed consent.[26] Unlike in the case of current client conflicts, the lawyer need not inquire whether the representation is reasonably conflict-free. Consent is assumed to cure a former client conflict.

Imputed Conflicts

Conflicts of interest may arise even when a lawyer has not personally represented one of the conflicted parties. If a lawyer works at a law firm or is employed by a legal services organization with multiple lawyers, she may inherit conflicts of interest from other lawyers with whom she is associated. The Rules of Professional Conduct treats all the lawyers of a law firm or an organization as having a duty of loyalty to the client of any of the lawyers of the firm or organization.[27] This is known as an imputed conflict, and it is based on the principle that a law firm or similar organization is considered as one lawyer for purposes of duties to a client.[28]

As such, if any lawyer in a law firm would be prohibited from representing a client due to a concurrent conflict of interest, or a conflict of interest with a past client, then every lawyer in the firm is likewise prohibited from undertaking the representation.[29] Conflicts are imputed to other lawyers in a law firm because of the joint duty of loyalty and the duty to protect confidential information.

A conflict may also arise due to the personal interests of the lawyer, such as the example offered in the comments to the Model Rules of a lawyer who cannot effectively represent a given client because of strong political beliefs.[30] Personal conflicts, however, are not imputed to fellow lawyers in a law firm.[31] Likewise, if the conflict of interest exists due to the interests of a law firm employee who is not a lawyer, such as a paralegal or a legal secretary, this conflict is not imputed firm-wide.[32]

As with direct conflicts, an imputed conflict of interest may be waived when a waiver would otherwise be permissible, and the affected parties have given their consent.[33]

Former Clients and Screening

Imputed conflicts can cause particularly harsh results when attorneys move from firm to firm. If a potential client approaches the firm to seek representation, but the interests of the prospective client are adverse to those of a client represented by the new lawyer’s old law firm, all lawyers in the new law firm could be disqualified from representation.[34]

To illustrate, suppose Lisa used to work at A & B Law, but has since left, and now works at C & D Law. While working at A & B, Lisa learned confidential information about one of the law firm’s clients, a doctor whom the firm was representing in a malpractice litigation. After Lisa had joined C & D, a hospital patient approaches C & D seeking representation. While reviewing the case, the firm discovers that the patient is involved in a matter substantially related to the malpractice lawsuit, and the interests of the patient are adverse to those of the doctor. Since the doctor was a former client of Lisa’s old firm, Lisa and the whole new firm could be disqualified from representing the patient unless proper informed consent was obtained![35]

To mitigate this harsh result, many states permit the law firm to accept the representation if the disqualified lawyer is screened off from any participation in the matter. The law firm must notify the former client that a conflicted lawyer will not participate in a matter which is adverse to the former client’s interests, but need not seek the consent of the former client.[36] The device of screening the attorney with the conflict is sometimes known as an “ethical wall” or “Chinese wall” (after the Great Wall of China).

This device may be allowed to cure current client conflicts as well. Still, it must be reasonable under the circumstances. While it can generally be used to “screen” attorneys with conflicts in other offices or who work in large firms, it would be difficult to effectively screen another attorney in a small firm of, say 3 or 4 attorneys, who all work in the same office.

Transactions with a Client

Another form of conflict of interest may arise when a lawyer’s personal interests come into conflict with the interests of a client. When a lawyer engages in a business transaction with a client, there is a risk that the lawyer’s financial interests may conflict with the interests of the client, or otherwise limit the lawyer’s ability to advocate for the client’s interests.

The lawyer’s skill and training, along with the relationship of trust between lawyer and client, create opportunities for lawyers to take advantage of their clients.[37] As such, legal ethics rules limit the types of business transactions which lawyers may undertake with clients. A lawyer who seeks to do business with a client is obligated to ensure that the terms of the transaction are fair and reasonable for the client, and that such terms are disclosed in writing to the client in a manner which is understandable to the client.[38] The lawyer should also advise the client that it would be to the client’s advantage to seek the advice of an independent lawyer regarding the transaction.[39]

At that point, if the client still wishes to proceed, the lawyer must obtain the client’s informed consent. This involves a written statement, signed by the client, which details the essential terms of the transaction and explains the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.[40]

Note that these rules apply even when the transaction is not related to the subject matter of the representation. They do not, however, apply to fee negotiations for the representation. Likewise, they do not apply to standard commercial transactions for products or services that the client generally markets to others, such as banking services, or medical products, since in such transactions the lawyer does not have an advantage as compared with others doing business with the client.[41]  

Additionally, a lawyer may not solicit a substantial gift from the client or help to prepare an instrument such as a will in which the lawyer is a recipient, unless the lawyer is a relative of the client. However, the lawyer may accept a gift from the client, as long as the circumstances surrounding the acceptance of the gift do not in some way violate the general standards of fairness.[42]  

Finally, a lawyer should not have a sexual relationship with a client unless the relationship started before the lawyer-client relationship commenced.[43] This rule stems from concerns that such a relationship can involve unfair exploitation of the lawyer’s role as a fiduciary for her client, and that the emotional involvement between lawyer and client will hinder the lawyer’s ability to exercise independent judgment in the representation of the client. [44] This rule does not apply to relationships between lawyers and former clients.

In our last module, we’ll look at the business of law, including advertising and soliciting clients, fee structures and fee-splitting between attorneys and between attorneys and non-attorneys.