The Limitations of Advance Conflict Waivers for Corporate Subsidiaries

In Lennar Mare Island, LLC v. Steadfast Insurance Company, a district court judge in the Eastern District of California granted a motion to disqualify defendant’s law firm, and illuminated the conflict analysis for advance waivers and corporate subsidiaries.

The case involved a dispute regarding environmental clean-up obligations for Mare Island, a former U.S. Navy base in Vallejo.  In 2012, Lennar Mare Island, LLC (LMI) sued Steadfast Insurance Company alleging that it has wrongfully refused or delayed payments on its claim under an environmental insurance policy. Steadfast filed counterclaims against LMI and CH2M Hilll Constructors, Inc. (CCI), LMI’s subcontractor, seeking declaratory relief.  Attorneys from Hogan Lovells US LLP (the Firm) associated as counsel as Steadfast in August 2014.  In January 2015, CCI moved to disqualify the Firm as Steadfast’s counsel, asserting that the Firm had a conflict because it had represented CCI’s parent company, CH2M Hill Companies, Ltd. (CH2M).

Steadfast made three arguments in opposition to the motion to disqualify: (1) if any conflict exists, it was a successive conflict, not a concurrent conflict, and the prior matter was not substantially related to this one; (2) an advance waiver from CH2M applied and waived any conflict; and (3) CCI delayed bringing the motion, which showed that it was a tactic to disrupt Steadfast’s representation, and should be denied.

The Court began by noting that neither California nor ABA ethics opinions have a per se ban on representing parent and subsidiary corporations whose interest may conflict.  However, the Court detailed the analysis for the two types of conflicts.  Successive conflicts, where the interests of a current client conflict with those of a former client, implicate primarily an attorney’s duty of confidentiality. The Court inquires whether the two matters are substantially related and, if the parties are a parent and subsidiary, whether there is a unity of interest between the two parties.  Ethical screens may prevent disqualification.  Concurrent conflicts, where the interests of two current clients conflict, implicate primarily an attorney’s duty of loyalty.  The Court focuses on whether there is a unity to interest. If so, disqualification is automatic without the clients’ informed written consent.

The Court concluded that CCI and CH2M are a “unified client” because, among other things: the Firm had advised CH2M on strategy that impacted “the entire corporate family,” including CCI; CH2M and CCI share the same legal department, and CH2M considers the Firm to be both its and its subsidiaries’ legal counsel.  As a result, the Court concluded that both CCI and CH2M are current clients of the Firm, and the situation presented a concurrent conflict.  Significantly, the Court rejected the argument that the Firm did not represent the subsidiary because its engagement letter limited its scope of representation to the parent only.  Despite that agreement, the parties’ subsequent conduct showed that all parties understood that the Firm was “more than just CH2M’s law firm.”

The Court also rejected the argument that the Firm’s advance waiver of conflicts by CH2M resolved the conflict, holding that the waiver was too “broad, general, and indefinite” to constitute “informed written consent” under Rule 3-310(C).  The Court held that waiver’s scope was “essentially unlimited” because it applied to virtually any type of matter, and “insufficiently disclosed the nature of a subsequent conflict.”

Finally, the Court rejected the argument that CCI’s delay in bringing the motion showed that it was a maneuver designed for a tactical advantage.  The Court concluded that CCI’s delay of five months in bringing the motion did not constitute “extreme prejudice” that would justify the “toleration of a concurrent conflict of interest.”

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