Important Concepts on Ethical Duties Of Loyalty and to Maintain Confidentiality
Every lawyer, whether engaged in litigation or transactional work, must have a working knowledge of the law relating to conflicts of interest to properly deal with conflicts situations when they arise, as they very likely will. Failure to have such an understanding can result in disqualification, imposition of a civil sanction, fee disgorgement, malpractice liability, professional discipline, not to mention loss of business.
Although conflict rules vary depending on the jurisdiction, at bottom they address similar concerns. A fair, one sentence overview is set forth in 121 of the Restatement (Third) of the Law Governing Lawyers (2000):
A conflict of interest is involved if there is a substantial risk that the lawyer’s representation of a client would be materially and adversely affected by the lawyer’s own interests or by the lawyer’s duties to another current client, a former client, or a third person.
Some Important Concepts
Conflicts rules generally implicate two fundamental ethical duties owed to clients: the duty of loyalty and the duty to maintain confidentiality. A lawyer whose loyalty to client A is in any way compromised by his relationship with client B, or on account of some other external factor, has a conflict which must be addressed. Moreover, a lawyer cannot adequately resolve a conflict if to do so would involve the unauthorized revelation of confidential information obtained from another client, or the unauthorized use of such information adversely to the other client.
While many conflicts are consentable, whether a conflict may be waived depends on several factors — principally, whether there has been full disclosure and informed consent, but also the nature of the conflict itself, the timing of the request for a waiver, and whether the conflict involves a current or former client. Obviously, an attempt to procure the waiver of a nonconsentable conflict will likely fail, and New York is governed by an objective (disinterested lawyer) standard in regard to whether a conflict is amenable to waiver.1
Imputed disqualification requires the disqualification of an entire law firm or law department because of a conflict involving one of its lawyers.2 This rule not only applies to law firm partners and associates; it also encompasses lawyers practicing in a firm of counsel, as well as affiliated firms.3
Screening, or the creation of an ethical wall, is a law firm invention employed to ameliorate the harsh effect of an individual lawyer’s conflict imputed to an entire firm, and allows a law firm to continue with a representation. Unlike many jurisdictions, courts in New York have not approved screening4 except in the context of revolving door conflicts where government lawyers are moving to private practice or vice versa.5
Finally, all law firms and practicing lawyers in New York must now maintain an effective conflicts checking system. The failure to do so in and of itself violates the disciplinary rules.6
Types of Conflicts
There are essentially three broad categories of conflict of interest: personal interest conflicts; multiple client conflicts; and, third party conflicts. An understanding of the different types of conflicts will greatly assist in their identification and proper resolution.
(A) Personal Interest Conflicts. These are conflicts in which a lawyer’s own personal, financial, business, or other interests may differ from those of a client, may in some way be adverse to the client, or may otherwise detrimentally affect the representation. Personal interest conflicts are generally waivable, but a disinterested lawyer would have to reasonably conclude that the conflict is not so acute as to be nonconsentable.7
There are also several special subcategories of personal interest conflicts, and specific rules that govern a lawyer’s handling of these situations.
- The rule regulating business transactions with a client.8 As a general proposition, the courts are skeptical of situations where lawyers enter into business transactions with current clients. For that reason, the New York Lawyer’s Code of Professional Responsibility was recently amended to require a written waiver (the only such requirement of a writing in the conflicts rules) any time a client enters into such a relationship. The waiver must include: a clear description of the transaction, why it is fair and reasonable, the risks and advantages of employing the lawyer under the circumstances, and the fact that the client has been advised to seek independent counsel.
- The advocate-witness rule.9 This is the rule that proscribes, under certain circumstances, a lawyer’s serving both as a trial advocate and as a witness for a party. Although some states allow lawyer A at a firm to try a case in which lawyer B at the firm will be a witness on behalf of the firm’s client (as long as lawyer B does not otherwise participate in the trial), even in these states the entire firm must withdraw (or be disqualified) if a lawyer in the firm has testimony to give that is materially adverse to the firm’s client.
- Rules concerning loans to clients, book deals, and liens.10 In essence, these rules prohibit a lawyer from loaning money to a client or acquiring an interest in literary or media rights, in a client’s case, although a lawyer may file a lien as allowable by law to secure the lawyer’s fees and expenses.
- The rule explicitly proscribing sexual relations with clients.11 This rule formalizes what has generally been the policy the courts have applied on various occasions when lawyers have exploited clients improperly in this manner.
- Rules concerning when (or whether) lawyers may accept gifts from clients.12 These include, in particular, the proffer of testamentary gifts where the lawyer drafts the will.
B. Multiple Client Conflicts. These are conflicts in the representation of two or more clients with differing or potentially adverse interests. They may take several forms, which, as in the case of personal interest conflicts, entail special rules governing their handling
- Concurrent representation conflicts involve the representation of two or more current clients with differing or potentially adverse interests.13 These conflicts often arise in the context of joint representation of co-plaintiffs or co-defendants, or the representation of client A who is adverse to client B in the same, a substantially related, or a completely unrelated matter. The basic rule, with few exceptions, is that 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 and fair disclosure.14 Some current client conflicts are so severe that they cannot be waived.15 Nor, with few exceptions, can a law firm drop a current client like a hot potato in order to continue with a more desirable client.16 Many courts carefully scrutinize the relationship between corporate entities when a potential conflict arises involving a corporate affiliate of a client, and generally apply a more stringent test to determine whether the entities are the same for conflicts purposes.17
- Successive representation conflicts occur when a current client is adverse to a former client in the same or a substantially related matter, or where the need arises to use confidences or secrets obtained from the former client in the present representation.18 In either case, a conflict waiver is required from both the former client and the current client before a lawyer or law firm can proceed. There is a substantial body of case law concerning how closely related two matters must be before a conflicts waiver will be required.19
- Revolving-door conflicts concern the lateral movement of lawyers from government to private practice, or in the other direction, and where the lawyer was substantially and personally involved in the matter at issue.20 Because public service is to be encouraged, this is the one type of multiple client conflict for which the Code in New York specifically approves the use of an ethical wall in order to avoid imputation of the conflict to the lawyer’s new firm or agency.
- Business conflicts entail the representation of company A in a manner that adversely affects company B, also a client, even if the representations are unrelated.
- Issue conflicts are those concerning the representation of a client on a particular legal issue where the outcome of the representation may have an adverse impact on a legal position advocated for another client in an unrelated matter.
(C) Third Party Conflicts. These are conflicts in which a third party — someone other than the client — potentially controls or directs a representation, and thus may interfere with a lawyer’s independent professional judgment on behalf of the actual client.21 One such example would be a company’s retention of a lawyer on behalf of an employee where the lawyer’s primary loyalty is to the company, not the employee. Although payment of a lawyer’s fee by an insurance company is a recognized practice, the insurer cannot thereby interfere with or otherwise direct the attorney-client relationship except as that relationship is limited by the reasonable terms of an insurance contract.22
The relationship between client and attorney is a fiduciary relationship, of which a key aspect is the duty of undivided loyalty lawyers owe their clients. Conflicts of interest rules attempt to codify and thus institutionalize the duty of loyalty as an ethical concept.
Reprinted with permission from the September 27, 2004 edition of the New York Law Journal ©2004 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 – firstname.lastname@example.org or visit www.almreprints.com.
- See Disciplinary Rules (DRs) 5-101(A) and 5-105(C) of the New York Lawyer’s Code of Professional Responsibility.
- See DR 5-105(D).
- N.Y. City Op. 2000-4 (2000).
- For example, compare Kassis v. Teacher’s Insurance and Annuity, 93 N.Y. 2d 611(1999) with Cummin v. Cummin, 264 A.D. 2d 637 (1st Dept. 1999).
- See DR 9-101(B).
- See DR 5-105(E); N.Y. City Op. 2003-3 (2003).
- See DR 5-101(A).