Conflicts of interest.

An increasingly common problem for partners considering departing a law firm and joining another is whether and to what extent the partner can share confidential business information about the lawyer’s practice with the new firm without violating legal and ethical obligations. It is difficult to imagine any law firm agreeing to bring in a lateral partner or group of lawyers without reviewing detailed information about the prospective practice, including financial information like revenue and profitability details, client details, staffing considerations, and related business information. But for a partner at a firm, disclosing any of these categories of information to a new firm in negotiations can implicate the partner’s duties to the old firm and to clients.

California’s Rules of Professional Conduct include some of the strictest client confidentiality requirements in the country, making this issue especially relevant for California partners.  What are the risks of disclosing information in negotiations with a potential new firm? In summary, there are several:

• Potentially violating your fiduciary duties, duties of confidentiality, and similar obligations to your firm and violating other partnership agreement provisions;
• Potentially violating your ethical obligations of client confidentiality and loyalty; and
• Potentially revealing your departure planning just by accessing the confidential information at your firm.

You can mitigate these risks, but it requires detailed advance effort and practical planning. You need to know the rules governing these potential disclosures and develop a specific strategy to navigate them.

The California Supreme Court yesterday approved a significant overhaul of California’s legal ethics rules, moving California’s rules closer to the structure of the ABA’s Model Rules for the first time. The Court’s Order approved 27 rules as submitted last year by the State Bar’s Commission for the Revision of the Rules of Professional Conduct, 42 rules as revised by the Court, and denied approval of one proposed rule (regarding a lawyer’s obligations representing a client with diminished capacity). The revised rules, effective November 1, 2018, change the numbering and format of California’s rules.  Substantively, the revised rules relate to personal relationships with clients, conflicts imputed through a law firm, attorney advertising, and attorney’s fees, and represent a years-long effort to simplify and to update the rules that govern California lawyers.

Properly managing a modern and profitable law firm in 2017 and beyond requires balancing vigilance and innovation.  The legal headlines are full of emerging risks to law firms, including confidentiality breaches and technology disasters.  The legal headlines are also full of competitive risks for law firms.  Passive management of a law firm, even a successful one, is not a good strategy.  You may not change, but the marketplace surely will.

January seems like the right time of year to face up to the things we should be doing, but aren’t.  Here are 5 firm systems that you should review critically in 2017, and annually:

1. Firm Management. Consider whether your Partnership Agreement or other organizing documents are up to date, with detailed compensation structures that incentivize partners and other attorneys at the firm to think about and comply with all ethical requirements.  Analyze governance policies to ensure that you prioritize compliance with legal ethics requirements, and to ensure an appropriate response in the event of an ethics question or a potential ethics issue.

2. Clients and Matters. Analyze technology systems for identifying and resolving client conflicts, protecting client confidentiality, and documenting each of the firm’s engagements.  Any system is only as good as the information that goes into it and only works if it is used consistently and uniformly.  Many conflict issues arise from latent conflicts (a subsidiary vs. parent conflict, for example) that may not be obvious on the face of a conflict search.  Ensure that your systems are properly set up, and are being used, and used in the right way.

3. Calendaring and Deadlines. A sophisticated calendaring system to monitor all firm deadlines is essential.  Take advantage of new technology to integrate calendaring functions into attorney workflow, and to ensure accuracy.  Ensure that your system is durable and can be accessed in the event of an emergency or significant disruption.

4. Information Management. Client confidentiality in California is not a gray area: you must keep client information confidential.  This means that your firm must have sufficient systems in place to ensure that information is secure.  Analyze whether your information security policies are sufficient (what rules exist regarding laptop security, thumb drives, cloud data, for example).  Analyze whether attorneys and staff are following the policies.  Consider whether your firm’s technology is sufficient to prevent a breach, and/or to respond to one if it occurs.

5. Financial Management. Review your trust accounting procedures and safeguards to ensure that client funds are handled properly.  The rules are quite clear about what you can, and cannot, do with these funds.  Ensure that your attorneys and staff are properly trained to identify appropriate issues and to handle these items properly.  Separately, consider any alternative fee arrangement from an ethical perspective: does the arrangement place the client’s interest in conflict with yours?  does the arrangement incentive something that could be an ethical concern (e.g., incentivizing attorneys to spend as little time as possible on a case)?  is the arrangement properly documented, to avoid ambiguity when bills come due?

Any law firm’s goal should be to avoid conflicts.  That starts with detecting them, and today, most law firms have relatively robust conflicts-checking systems in place and in regular use.  It’s fairly straightforward to deploy software that will keep a record of clients and permit searches to detect conflicts, or potential conflicts, when a new matter arises.  But like all software, its output is only as good as the information you input.  Some supplements are fairly easy, and you may already be doing them.  Entering multiple variations, and spellings, even mis-spellings, of client names will increase the accuracy of your system.  But recent conflict cases suggest that law firms should also be considering more than just the parties when entering client conflict data.  A robust client conflicts system should give you a clear picture of your clients and their businesses, including subsidiaries, parents, affiliates, and potentially even other parties with whom they do business or compete.

Consider an example.  If your current conflicts system does not include names of client subsidiaries, when you check party names for a new matter where the client would be adverse to a client’s subsidiary, the system won’t alert you to anything.  And it’s true that conflicts are not always imputed from subsidiary to parent.  But sometimes they are: if a subsidiary uses the same internal counsel, or shares confidential information, or otherwise looks and acts the same as the parent for legal matters, this should set off alarms about the potential conflict for your firm.  So taking in a new matter for a client whose interests may be adverse to one of your current client’s subsidiaries is a potential problem.  If the current design of your current conflicts-checking system, or the current implementation of it, would not signal this issue, you need to make it more robust.

Fortunately, it’s not that difficult to examine your current system to determine potential weak spots, and to fix them.More

When a client matter raises a legal ethics issue or, in the worst-case scenario, when a client accuses you of malpractice, it’s a good idea seek the advice of other lawyers at your firm.  But maintaining the privilege of those communications within your firm, related to legal ethics issues or malpractice, is more difficult than it may seem at first glance.  Until relatively recently, California cases suggested that the attorney-client privilege for attorneys seeking legal ethics advice within their own firm regarding ethics issues about current clients necessarily gave way to the firm’s fiduciary duties to its client.

This generally meant that when a lawyer sought in-firm legal advice from another attorney, even one designated as the firm’s general counsel, there would be no attorney-client privilege for those communications.  This seemed an odd result, since we would expect courts to encourage attorneys to seek advice internally when an ethical issue, or a malpractice issue, arises.  If those communications are not privileged, and beyond that, if you had an affirmative duty to disclose all of them to the clients, how likely would you be to seek that advice?

California courts are now clearly moving in the direction of recognizing the attorney-client privilege for in-firm communications regarding legal ethics issues.  Following similar trends in other jurisdictions, including New York, Massachusetts, and Georgia, recent California opinions suggest that courts will recognize the attorney-client privilege for in-firm ethics advice and communications.  So you can assert and protect the attorney-client privilege for in-firm ethics advice, but successfully asserting the privilege in these situations requires advance planning.

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California’s Commission for the Revision of the Rules of Professional Responsibility has proposed 68 new and amended rules for attorneys, and is seeking public comment on the  proposed rules.  California is the only state that whose professional responsibility rules do not track the ABA Model Rules.  The Commission has issued an Executive Summary detailing the proposed and amended rules, comments, and dissenting views.  The Commission also issued a detailed list of rule revisions considered, but rejected.  Among other things, the proposed rules include suggested revisions to rules related to personal relationships with clients, conflicts imputed through a law firm, attorney’s fees, and handling clients with diminished capacity.  The public comment period expires September 27.

The California Supreme Court has granted review in Sheppard, Mullin, Richter & Hampton, LLP v J-M Manufacturing Co., Inc. to address several legal ethics issues of critical importance to California law firms.  The Court of Appeal in the case below held that the question of whether the firm’s arbitration provision was enforceable was for the court, not the arbitrators, to decide; that the firm’s simultaneous representation of J-M and another client violated California Rules of Professional Conduct 3-310(C)(3); and that the firm’s violation of Rule 3-310(C) made the entire fee agreement unenforceable, meaning the firm was not entitled to any fees related to the matter from the date of the conflict forward.

The Supreme Court’s review will consider the following: “(1) May a court rely on non-legislative expressions of public policy to overturn an arbitration award on illegality grounds? (2) Can a sophisticated consumer of legal services, represented by counsel, give its informed consent to an advance waiver of conflicts of interest? (3) Does a conflict of interest that undisputedly caused no damage to the client and did not affect the value or quality of an attorney’s work automatically (i) require the attorney to disgorge all previously paid fees, and (ii) preclude the attorney from recovering the reasonable value of the unpaid work?”More

Recent examples in California courts have demonstrated the limits of advance conflict waivers and the effects of these limits.  Needless to say, finding out that an advance conflict waiver is not effective to resolve a conflict can come as a shock, because it generally happens after-the-fact. Recent cases suggest that attorneys and firms who use advance conflict waivers should go back to the drawing board to evaluate how they are used and, more importantly, what they can accomplish and what they cannot.

Start at the beginning. California Rules of Professional Conduct Rule 3-310(C) provides that attorneys cannot represent clients with conflicting or potentially conflicting interests “without the informed written consent of each client.” Rule 3-310(A)(2) provides that “‘Informed written consent’ means the client’s or former client’s written agreement to the representation following written disclosure.”  In general terms, an advance conflict waiver is a provision in an attorney-client fee agreement that notifies the client of the potential for conflicts and ostensibly gets the client to waive those potential conflicts in advance. But waiving potential conflicts in advance is the trick. Before a conflict arises, how can you adequately describe the circumstances of the conflict to a client so that the client can give informed consent? The answer is fairly straightforward: you can’t. This does not mean that advance conflict waivers are worthless, however.More

Assume that your firm has made a mistake that led to an ethical lapse: a conflict of interest with no informed consent, or a similar misstep.  Once the actual fallout from the situation subsides, from a compliance perspective the relevant question is whether you can learn from these circumstances and avoid similar issues.  For any law firm in similar situations (and there are many, since California law firms deal with similar issues nearly every day) if it appears that your firm may have made mistakes that led to ethical lapses, once you move beyond the paranoia and anxiety phase it is critical to conduct a thorough and objective post-mortem analysis to prevent similar occurrences in the future.  To do this, you must ask, and answer, some potentially difficult questions.More

The recent Second District Court of Appeal opinion in Sheppard, Mullin, Richter & Hampton, LLP v J-M Manufacturing Co., Inc. sent a shock wave through California law firms.  The case started when a firm sued a former client for $1.3 million in unpaid fees, after it had been disqualified from a matter for that client because of conflicts.  The case ended (at least for now) with an order from the Court of Appeal that rejected the firm’s advance conflict waivers and neutered the arbitration provision in its fee agreement.  Instead of collecting an additional $1.3 million in fees, the firm has to refund nearly all of the $3.8 million in fees it collected for the underlying matter.  Among other things, the case illustrates the limited application of advance conflict waivers and what happens when they are not effective to prevent or to cure conflicts.  It also may portend a much more difficult landscape for analyzing conflicts of interest, and what is now at stake if that analysis turns out to be incorrect.More