California
Attorney Ethics Counsel

March 17, 2020

12 Steps to a Healthier Law Practice in 2020: Step 3 – Avoid Conflict

Happy March! In November 2018, 69 new or amended California Rules of Professional Conduct (“CRPC”) were thrust upon California’s more than 250,000 lawyers. These rules were renumbered and reorganized to align with the American Bar Association’s (“ABA”) Model Rules and replaced the 46 ethics rules that California lawyers had been following for nearly 30 years.  Despite each of us having been responsible for adhering to these rules over the last year, many California lawyers and law firms still do not know, or do not fully appreciate, the significance of the modifications. Therefore, as we move into this new decade and the second full year of these rules being in effect, I invite you and your firm to join my 12-step program to healthier law practice in 2020 and the years to come. Each month I will feature an article on the key ethics rule changes aimed at guiding you and your firm to a healthier law practice by better managing your risk of liability.  “Step 1 – Responsibility” was published in January and “Step 2 – Treat Others The Way You Want To Be Treated” was published in February 2020.

You can access each article directly on this blog page or you can subscribe to this blog to ensure that you don’t miss any of the 12-steps.  Please note that the articles on this blog are not legal advice and do not take into account specific facts or circumstances for which a tailored analysis and risk management plan is recommended.

STEP 3 – AVOID CONFLICT

According to the 2019 Ames & Gough Ninth Annual Legal Malpractice Survey, conflicts of interest continue to lead the way each year as the most cited legal malpractice error.  Seven out of the eleven insurers surveyed reported that actual and/or perceived conflicts are the first or second leading cause of legal malpractice claims.  Interestingly, about half of the insurers surveyed cite lateral hires or “merged” lawyers not being properly trained or supervised as the root cause of conflict of interest claims.

Putting effort and energy into avoiding conflicts is good business.  Conflicts of interest issues can be very costly, both to the firm’s finances and its reputation. Investing in a good conflict system and educating each lawyer in the firm about the conflict rules and risks will be paid back in spades.  Properly managing your risk of liability from conflicts of interest may result in turning down work or spending more time vetting a lateral hire, but it will save you money in insurance costs, litigation defense expenses, settlement payments, and fighting disqualification motions and disciplinary complaints.

Prospective Client Conflicts

Rule 1.18 has no old rule counterpart, but it is meant to follow California’s Business & Professions (“B&P”) Code §6068(e), California Evidence Code §951 and California case law.  See, e.g. People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1147-1148 [“The fiduciary relationship existing between lawyer and client extends to preliminary consultations by a prospective client with a view to retention of the lawyer, although actual employment does not result”].    

The rule defines a prospective client as “[a] person who, directly or through an authorized representative, consults a lawyer for purposes of retaining the lawyer or securing legal services or advice from the lawyer in the lawyer’s professional capacity.” Rule 1.18(a).  When a lawyer learns confidential information from a prospective client, Rule 1.18 may be triggered even if the lawyer declines to take the case or no lawyer-client relationship otherwise ensues. Rule 1.18(b).  The same duty of confidentiality is imposed on a lawyer’s communications with a prospective client as with a former client, such that a lawyer shall not use or disclose protected, confidential information, except as otherwise permitted under the rules.  See B&P Code §6068(e), Rule 1.6, Rule 1.9.

Importantly, a lawyer shall not represent a client with interests “materially adverse” to those of prospective client in the same or substantially related matter if the lawyer received protected information from the prospective client that is “material” to the matter. Rule 1.18(c).  This prohibition is imputed to other lawyers in a law firm as specified in Rule 1.10

However, the consequences of imputation may be avoided.  A lawyer and the law firm “is permitted to accept or continue representation of a client with interests adverse to the prospective client,” in two limited situations.  First, the representation of the affected client is permissible if informed written consent is obtained from both the affected client and the prospective client.  Rule 1.18(d)(1).   Second, under subparagraph (d)(2), informed written consent is not necessary for the representation of the affected client if, and only if, the lawyer who received the information from the prospective client took reasonable measures to avoid exposure to more information than was reasonably necessary to determine whether to represent the prospective client; AND “(i) the prohibited lawyer is timely screened from any participation in the matter and is apportioned no part of the fee therefrom; and (ii) written notice is promptly given to the prospective client to enable the prospective client to ascertain compliance with the provisions of this rule.” Rule 1.18 (d)(2)(i-ii).   Therefore, when a lawyer is contemplating whether or not to take a representation, the consultation or other initial communications must be limited to obtain only such information that is reasonably necessary for the purpose of that evaluation.  See Skybell Technologies, Inc. v. Ring, Inc. 2018 WL 6016156 (No. 18-cv-14, C.D. Cal 9/18/18).  Notice to the prospective client is required to include a general description of the subject matter about which the lawyer was consulted as well as the screening procedures utilized.   Further, a screened lawyer may not receive compensation directly related to the prohibited matter; however, a screened lawyer may still receive a salary or partnership share that was established by prior independent agreement.  Rule 1.18, Comment [4].

As specified in Comment [2] to Rule 1.18, this rule does not protect all persons who communicate with a lawyer.  A person who communicates information unilaterally to a lawyer “without reasonable expectation that the lawyer is willing to discuss the possibility of forming a lawyer-client relationship or provide legal advice is not a ‘prospective client’ within the meaning of paragraph (a).”  Rule 1.18, Comment [2]. In other words, a lawyer should not be disqualified merely because one party provided unsolicited confidential information to that lawyer in a malicious attempt to conflict out that lawyer from representing an adversary (think Meryl Strep in Season 2, Episode 4 of “Big Little Lies” or Scarlett Johansson in “Marriage Story”). However, if you welcome that communication and receive confidential information before nailing down the representation, you could be out of luck.

Conflicts procedures should address Rule 1.18 mandates by requiring all attorneys to add any prospective client who revealed confidential information to the conflict system. Disclaimers on websites, email pop-ups and outgoing voicemail messages notifying a prospective client that no confidential or private information should be provided, nor will it be kept confidential and that no attorney-client relationship is formed without a written agreement, may help to deter unintended consequences.

Current Client Conflicts

The present current client conflict rule, Rule 1.7, replaces the “checklist” approach under old rules 3-310(B-C) and 3-320 with much broader, generalized standards that conform more to the Model Rules, but are still California-centric.  The rule eliminates the classification between actual and prospective conflicts and, instead, focuses on “significant risk.” It defines two conflicts which require a lawyer to obtain the informed written consent of each client before representation is permitted.  The first is when representation is directly adverse to another client in the same or a separate matter.  Rule 1.7(a).  The second is when there is a “significant risk” the lawyer’s representation of the client will be “materially limited” by the lawyer’s responsibilities to or relationships with another client, a former client or a third person, or by the lawyer’s own interests.  Rule 1.7(b). 

Rule 1.0.1(e) and (e-1) define “informed written consent” as a written agreement to a proposed course of conduct after the lawyer has communicated and explained (i) the relevant circumstances and (ii) the material risks, including any actual and reasonably foreseeable adverse consequences of the proposed course of conduct.  Generally, informed written consent is not required simply because a lawyer takes an inconsistent legal position on behalf of different clients in different tribunals at different times, but the particular circumstances of each situation must be separately analyzed before such a determination can be made.  See Rule 1.7, Comment [6].

Only written disclosure is required for personal conflicts falling under paragraph (c).  1.7(c) carries over the current client conflict provisions of old rules 3-310(B)(3) and 3-320, but considers the individual relationships of both the specific lawyer involved, as in the old rules, and adds “another lawyer in the lawyer’s firm.”  Rule 1.7, paragraph (c) requires written disclosure to the client where:

(1) the lawyer has, or knows that another lawyer in the lawyer’s firm has, a legal, business, financial, professional, or personal relationship with or responsibility to a party or witness in the same matter; or

(2) the lawyer knows or reasonably should know that another party’s lawyer is a spouse, parent, child, or sibling of the lawyer, lives with the lawyer, is a client of the lawyer or another lawyer in the lawyer’s firm, or has an intimate personal relationship with the lawyer.

However, representation is NOT permitted under subsections (a), (b) or (c) UNLESS the lawyer can also comply with subsection (d):

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law; and

(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal.

Rule 1.7(d)(3) presents the unwaivable conflict.  When a claim is asserted by one client against another client represented by the lawyers in the same litigation or other proceeding before a tribunal (which is defined as a court, arbitrator, administrative law judge, administrative body in adjudicative capacity, special master or other person whom court refers), the representation is prohibited regardless of whether the clients are willing to consent.

Rule 1.7 does not preclude a client’s informed written consent to a future conflict in compliance with applicable case law.  However, whether or not an advance consent will ultimately be upheld by the court is generally determined by the extent to which material risks are reasonably understood by the client at the time the consent is given.  Rule 1.7, Comment [9].  The more comprehensive the explanation of future events, the more likely the client will have the requisite understanding needed for the waiver to be effective.  The experience and sophistication of the client and whether the client was independently represented at the time the waiver was made are also considered.  “An advance consent cannot be effective if the circumstances that materialize in the future make the conflict non-consentable under paragraph (d).”  Rule 1.7, Comment [9].  Further, a lawyer cannot obtain advance consent to incompetent representation as detailed in Rule 1.8.8.  For more information, see my article entitled “The State of Advance Waivers in California” in the Bar Association of San Francisco’s (“BASF”) November 2019 Bulletin.

Conflicts must continuously be evaluated as the attorney-client relationship progresses and if circumstances change.  A lawyer may need to withdraw if requisite consent cannot be obtained, provided that standards under the termination rule, Rule 1.16, are followed.

Former Client Conflicts

Forty-nine jurisdictions follow ABA Model Rule 1.9. California’s Rule 1.9 tracks the Model Rule by applying the substantial relationship test.  Although different from old rule 3-310(e), the substantial relationship test has long been applied by California courts. See, e.g., Morrison Knudson Corp. v. Hancock, Rothert & Bunshoft (1999) 69 Cal.App.4th 223, 234; Jessen v. Hartford Cas. Ins. Co. (2003) 111 Cal.App.4th 698, 709.  In sum, informed written consent of the former client is required under Rule 1.9 if: (a) the representation is materially adverse to the interests of the former client in the same or substantially related matter; or (b) if the law firm with which the lawyer was formerly associated had previously represented a client whose interests are materially adverse to that person in the same or substantially related matter AND the lawyer had acquired from that client confidential information protected by B&P Code §6068(e) and Rules 1.6 and 1.9(c) that is material to the matter.  Two matters are “the same or substantially related” for purposes of the rule if they involve a substantial risk of a violation of one of the two duties to a former client. Rule 1.9, Comment [3].

Subparagraph (b) addresses the lateral hire situation.  Comment [4] to the rule states that a conflict of interest exists only when the lateral hire has actual knowledge of the protected, confidential client information.  Thus, neither the lateral hire nor the law firm would be in violation of this rule if the lateral hire did not participate in the matter at the prior firm and/or did not acquire any protected knowledge or information relating to that particular client which is material to the matter.  It is important to note that although information received from the client may be discovered in the public record that does not, on its own, mean the information is not considered protected, confidential information under this rule.  Rule 1.9, Comment [5] (citing e.g. In the Matter of Johnson (Review Dept. 2000) 4 Cal. State Bar Ct. Rptr. 179.).  Therefore, in a situation where material, confidential information was not previously obtained by the lateral hire, even if the clients’ interests conflict, the lateral hire and law firm should be able to represent the current client in the same or related matter.  

Finally, even if informed written consent is possible under the circumstances and as required by subsections (a) or (b), a lawyer still owes two duties to a former client.  One, the lawyer may not do anything that will injuriously affect the former client in any matter in which the lawyer represented the former client.  Rule 1.9(c), Comment [1].  Two, the lawyer may not at any time use protected, confidential client information against the former client. Id. 

Imputation of Conflicts of Interest

Rule 1.10 goes hand in hand with the above-discussed conflict rules.  Generally, it states that a conflict of interest prohibiting one or more attorneys in a law firm from representing a client is imputed to all attorneys in the firm, subject to certain exceptions.  Yet, it is the acknowledgment in the rule that ethical screens may be effective to cure an imputed conflict that is the most noteworthy part of this new rule. 

California case law has recognized that screening of a tainted lawyer in a civil matter might be a means of rebutting a presumption of shared confidences and, thus, used as a way to avoid vicarious disqualification of the rest of the firm, in certain circumstances.  See, e.g., Kirk v. First American Title Insurance Co. (2010) 183 Cal.App.4th 776; California Self-Insurers’ Security Fund v. Superior Court (2018) 19 Cal.App.5th 1065.  However, until now, ethical screens have never been endorsed by the rules.  The new rule clarifies that although the use of ethical screens is limited to the circumstances specified in the rule, screens may help mitigate against discipline under the rules.  

One of those limited situations concerns lateral lawyers as mentioned above under Rule 1.9.  Under Rule 1.10(a)(2)(i), screening is prohibited where the lateral hire substantially participated in the matter at issue with the former firm.  In such a situation, the presumption of shared confidences cannot be rebutted and even the most thorough screening procedures are not effective.  As stated in Comment [1] to this rule, “substantial participation” is determined by a number of factors such as “the lawyer’s level of responsibility in the prior matter, the duration of the lawyer’s participation, the extent to which the lawyer advised or had personal contact with the former client, and the extent to which the lawyer was exposed to confidential information of the former client likely to be material in the current matter.”  In contrast, Model Rule 1.10(a)(2) allows screening regardless of whether the prohibited lawyer was substantially involved in the prior matter.

Please contact the author, Kendra Basner, if you have any questions about this article or if you would like guidance as to the application of or compliance with these rules.

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