© Husch Blackwell LLP 1

Law Firm Risk Management is a

“Risky Business”

CONFLICTS 101

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Jennifer Schwendemann

Director of Risk Management &

New Business Intake

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Conflicts 101

Learning Objectives: Learn how and when to conduct a Conflict Search. Learn the ethical rules that surround lateral hires, current

and former clients. Discover how to deal with outside counsel, business

conflicts, and ethical walls. Examine best practices for lateral attorney hires. Customize your departing lawyer and lateral integration

process to limit risk to your firm.

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Conflicts 101

Why run a conflict search? How do you run a conflict? What are the Rules to resolve conflicts? What happens when we break the rules?

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Why do a Conflicts Check?

THE RULES OF PROFESSIONAL RESPONSIBILITYThe General RuleLawyers are precluded from taking on representations

adverse to existing clients, and sometimes former clients, unless clients consent, i.e. signed engagement letter with unrelated matter conflict waiver or a specific waiver

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Why do a Conflicts Check?

BUSINESS CONFLICTS Our clients expect loyalty. They don’t want us

representing their competitors. They expect us to fulfill our commitment to them and zealously advocate for their interests, not their business competitors.

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When do you run a conflicts search?

Before you do any new work. When you are adding any new parties to an existing

matter. Whenever you seek to take third party discovery (issue a

subpoena). (ABA Formal Opinion 92-367) When you are responding to an RFP or planning a

coordinated marketing pitch to a new client. Lateral Hires

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Conflicts of Interest: The Rules

Current Clients Former Clients Imputed Conflicts Lateral Conflicts

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Conflicts of InterestHow Do You Run a Conflict Search Need Accurate Information

NamesAddressesRelationships

Need an Experienced / Trained Staff Need Firm Management Support

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Conflicts of InterestGeneral Rule – Current ClientsABA Model Rule 1.7

RULE 1.7: CONFLICT OF INTEREST: CURRENT CLIENTS

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(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;

(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; and

(4) each affected client gives informed consent, confirmed in writing.

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DC Rule 1.7

Requires a waiver where a current client’s specific position in a matter is directly adverse (like the ABA) to another client or where the representation will be adversely affected by representation of another client or financial personal interests.

Client must give informed consent, but not necessarily in writing, after receiving full disclosure, and the attorney must reasonably believe that she can provide competent, loyal and independent judgment. (R.1.7(c))

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Conflicts of Interest Duties to Former ClientsABA Model Rule 1.9

RULE 1.9: DUTIES TO FORMER CLIENTS

(a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

 (b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client

(1) whose interests are materially adverse to that person; and

(2) about whom the lawyer had acquired information protected by Rules 1.6 (Rule dealing with Confidential information) and 1.9(c) that is material to the matter; unless the former client gives informed consent, confirmed in writing.

 

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DC Rule 1.9

Rules of Professional Conduct: Rule 1.9-

Conflict of Interest: Former Client

 

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent.

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What is “substantially related”?

Looking for cases that involve similar law and similar facts: • Same transaction or legal dispute.

• A substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the clients position in the subsequent matter.

Substantially related: Lawyer represented Seller in selling parcel of land. Now Buyer wants Lawyer to sue Seller for fraud in connection with that sale.

Not substantially related: Lawyer represented Seller in selling parcel of land. Now Accident Victim wants Lawyer to sue Seller/Driver for auto accident across town.

Substantially related: A lawyer who represented a business person and learned extensive private financial information about that person may not represent that person’s spouse in a divorce action.

Not substantially related: Lawyer represents client in securing environmental permits to build a shopping center. Lawyer is not precluded from representing a tenant of the shopping center for eviction based on non-payment of rent.

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What “Cures” a Conflict? Conflicts Waivers Must be in writing, in most jurisdictions (not D.C.) Full disclosure of facts and possible effects of conflict Should obtain consent of new client before disclosing

conflict to other client An email will suffice – confirming oral waiver is ok Sophisticated user of legal services

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Ethical Walls

Imaginary “wall” separating lawyers and files for one client or matter, from lawyers and files for another client or matter.

In most jurisdictions, can’t “cure” a conflict by itself – still need clients’ consent.

But may help persuade clients to consent. Exceptions: if set up in timely manner, resolve conflicts

for former government attorneys and non-lawyer staff.

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What “Cures” a Conflict?Ethical Walls & Consent Ethical Wall bars affected lawyer(s) from: Communicating regarding the matter Accessing any documents or files (hard or electric) for

matter Clients sometimes require or request these as conditions

of their consent to waive conflicts Except for conflicts involving government lawyers,

generally firm can’t unilaterally set up a wall to “cure” a conflict – clients must still consent

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Ethical Walls… continued

1.  Ethical walls unilaterally set up by a firm do not resolve conflicts (except for former government employees, non-lawyers, and prospective client conflicts).  See D.C. R.P.C. 1-10 (imputation of conflicts); D.C. Formal Ethics Op. No. 279 (1998).

2.  From Op. No. 282 (1992), Fn. 1:  “[A]n ‘ethical wall’ has only been discussed once in dicta by our Court of Appeals, and any inference that such a wall would lessen the strict imputed disqualification stated in Rule 1.10(a) was removed by the Court when it promulgated Comment [15] to Rule 1.10(a). Thus, the existence of an ‘ethical wall’ does not remove the obstacle of imputed disqualification presented by Rule 1.10(a).”

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What happens if we fail to identify and resolve a potential conflict of interest?

Sanctions Court Costs / Other Fees Refund Fees Malpractice Damages Attorney Disciplinary Action Lose Clients

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Take Aways:

Always Run a Conflict – Have Experienced Staff; train your lawyers on the information needed to run a legitimate conflict.

Be Aware of Your Current & Former Clients

Ethical Walls Do Not Automatically Cure a Conflict

Failing to Identify Conflicts of Interest Can Lead to Harming a Firm or a Lawyers Reputation

© Husch Blackwell LLP 21

Law Firm Risk Management is a

“Risky Business”

Advance Conflicts Issues

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More Complicated Conflict Issues

Direct Adversity “Substantially Related” matters How to treat corporate families Hot Potato Conflicts Lateral Conflicts Outside Counsel Guidelines How to Resolve Conflicts Advance Conflict Waivers

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Direct Adversity - Same Litigation

General Rule: The same lawyer cannot represent opposing parties in the same litigation even if consent from both parties is given.

Exception: No fault divorce – no alimony, custody, child support or

property issues. A minority view that one lawyer can represent both parties if the parties consent to the joint representation.

DC rule 1.7 comment (6) anticipates such a situation

DC Opinion 143 (1984) and 243 (1993)

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Direct AdversityOther Matters (continued…) Can be adverse in matters other than same litigation if: • Both clients consent, and• Lawyer reasonably believes she can represent both

clients competently and diligently

(ABA Model Rule 1.7(b); D.C. Rule 1.7(c)) The more similar the matters, the harder it may be to get

consent and be competent and diligent

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Corporate Client Conflicts

How many of you search or know if you search the corporate family tree of the parties submitted for a conflicts check?

Corporation A, a longtime firm client asks you to represent it in a major commercial suit against Corporation B. The conflicts search reveals that one of your partners is involved in a large real estate deal for Corporation C and Corporation C’s parent is Corporation B. May your firm sue corporation B while simultaneously representing its subsidiary, Corporation C, in an unrelated matter?

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How to Treat Corporate Clients (continued…) No Bright Line Test Rule 1.7 comment (34) suggests it’s permissible

A lawyer who represents a corporation or other organization does not, by virtue of that representation, necessarily represent any constituent or affiliated organization, such as a parent or subsidiary. See Rule 1.13(a). Thus, the lawyer for an organization is not barred from accepting representation adverse to an affiliate in an unrelated matter; unless affiliate should be treated as client of representation likely to be impaired.

ABA Formal Opinion 95-390 Also rejecting a bright-line approach, ABA Formal Opinion 95-390(Jan. 25, 1995) held that “affiliates should not be considering a single entity for conflicts purposes based solely on the fact that one entity is a wholly-owned subsidiary of the other, at least when the subsidiary is not otherwise operationally integrated with the parent company.” Probably fact-specific, depending on how “integrated” the affiliated companies are. Do they share same legal counsel? Financially Connected

Lesson: Try to limit the representation to the named entity – solely – the client not subs, parents, affiliates.

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Hot Potato Conflicts

“Hot Potato” Rule

Hypo: Representing a small client in New Client business matters comes in who wants to sue another Firm small client and multiple other parties for infringement matters. The new matter could lead to a lot of new work. The IP work is unrelated to the work the Firm does for the second client.

• Can’t disengage from a current client to “convert” it to a former client.

• “A firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more lucrative client.” Picker Int’l, Inc. v. Varian Associates, Inc., 670 F. Supp. 1363, 1365 (N.D. Ohio 1987).

• Majority rule – a few jurisdictions have limited authority to the contrary (but generally the cases disagreeing with “hot potato” rule have been in the limited “thrust-upon” conflicts context).

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Thrust-Upon Conflicts

Possible Exception: “Thrust-Upon” Conflicts

• Firm may be able to “drop” one client where the conflict was “thrust upon” the firm by clients or others. E.g., Gould, Inc. v. Mitsui Mining & Smelting Co., 738 F. Supp. 1121 (N.D. Ohio 1990); D.C. Formal Ethics Op. No. 272 (1997).

• If conflict was created by a client merging with another client’s adverse party, firm has usually been allowed to drop one of the clients to “cure” conflict.

• Same result where a client in one matter creates a conflict by joining (or being joined by another party) in a different matter adverse to firm’s other client.

• Narrowly construed – it really has to be unforeseeable by firm, and no fault of firm.

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Outside Counsel Guidelines

Increasing numbers of clients, especially large corporate clients, require firms to agree to client’s Guidelines or Contract

Several risk management issues can arise Conflicts

• May have to treat all affiliates as one

• May not allow certain waivers

• May tell how to get waivers/required forms

• May include certain waivers Data & document management – may impose IT or other

security requirements Be on the look out for “positional conflicts” clause

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Prior Work Conflicts

To Avoid Prior Work Conflicts Sometimes litigation arises that is not only related to a previous matter, but also draws into question

the nature or quality of the firm’s work on the previous matter. If the firm represents the same client in later litigation, there may be what is called a “prior work conflict” – a conflict that develops when the client and the law firm have different interests that may affect the attorney’s judgment in representing the client.

For example, if a firm represented a corporate client in a real estate deal with ABC, Inc. and after the matter is concluded a third party sues the corporate client, claiming they suffered economic damages as a result of the transaction between the client and ABC, the original transaction between the corporate client and ABC is the firm’s prior work. If the firm is asked to represent the corporate client in the lawsuit initiated by the third party, the situation could give rise to a conflict of interest because there is significant risk that the firm’s personal interest in avoiding liability could improperly influence the firm’s legal judgment in representing the client in the new matter. This is a violation of the Rules of Professional Conduct.

This situation also arises in the intellectual property world in matters where the firm opines that a new client’s trademark does not infringe upon another company’s mark. If the client relies upon the opinion and is later sued for infringement, and the firm represents the client in that infringement suit, the prior work, or the prior opinion, could be called into question, creating in a conflict situation with the client.

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Lateral Conflicts

A major risk of disqualification Lateral hire brings his current and past clients with him,

for conflicts purposes Decide now far back to request past matters – 3 years Need complete information from lateral Need time to run and clear If waivers needed, get them before lateral starts

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Advance Conflict Waivers

Get the waivers up front, before a problem arises• Good to include in engagement letter

As detailed as possible, given that exact facts can’t be known – specifically mention possibility of litigation, for example

Enforceability may vary based on level of detail in waiver, sophistication of client, whether client has independent counsel (including in house counsel), etc.

ABA

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Our Basic UMCW Conflicts Paragraph from Standard Engagement Letter“Conflicts. As we have discussed, Husch Blackwell LLP has offices in a number of cities, and we represent many clients on a regional or national basis. It is possible that some of our present or future clients will have disputes with [CLIENT] during the time we are providing legal services. Therefore, as a condition to our undertaking this engagement, you have agreed that our firm may continue to represent or undertake in the future to represent existing or new clients whose interests are adverse to yours in matters, including litigation matters, that are not substantially related to the matters as to which we are representing you. You have agreed that the validity and enforceability of this unrelated matter conflict waiver is an essential condition to the firm’s willingness to accept this engagement, and the firm would not have accepted the engagement but for this waiver. Accordingly, you agree that, if the validity or enforceability of this waiver is ever challenged or revoked, we may withdraw from representing you and continue to represent our other clients even in matters directly adverse to [CLIENT]. We agree, however, that your prospective consent to conflicting representation shall not apply in any matter substantially related to a matter in which we have provided legal services to [CLIENT].”

© Husch Blackwell LLP 34

Law Firm Risk Management is a

“Risky Business”

RISK MANAGEMENT BOOT CAMP

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Agenda

Client Communication

Client Confidentiality

Lateral Hire Issues

Departing Lawyer Issues

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Client Communications

Engagement Letters

Disengagement Letters

Declination Letters

“I’m Not Your Lawyer” Letters

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Engagement Letter:What Is It?

A communication to the client accepting responsibility for the case or the matter and outlining the terms of the representation.

A contract between the lawyer and the client setting forth the terms of the engagement.

A fee letter. A document that manages client expectations,

prevents complaints and defends claims!

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Engagement Letter: Why Do You Send It?

Firm’s Protection!• Manages client expectations• Prevents complaints• Assists in defending claims

Ethical Rules

• ABA Model Rule 1.5 (b) The scope of the representation and the basis or rate

of the fee and expenses for which the client will be responsible shall be

communicated to the client, preferably in writing, before or within a reasonable

time after commencing the representation, except when the lawyer will charge

a regularly represented client on the same basis or rate. Any changes in the

basis or rate of the fee or expenses shall also be communicated to the client.

• D.C. Rule 1.5(b) (“When the lawyer has not regularly represented the client”)

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Engagement Letter:When Do You Send It?

Always when opening a new matter for a new client. Recommended every time a new matter is being

opened for an existing client, especially for major new cases/projects or work in different area of law.

May want to consider using an acknowledgement letter or email confirmation.

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Engagement Letter:How Do You Draft It?

Identify the client and possibly who is not the client Identify the scope of representation, as well as any

limitations Conflict Waivers Basis for acceptance of additional work Fees/Cost/Billing Rates/Deposits Reporting Obligations Arbitration Records Retention Clarify authority and confidentiality issues Withdrawal Issues Client Signature

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Engagement Letter: Who is the Client? Who is not the client?

An individual? A Corporation, LLC, etc. or the principal? The business after the shareholders form the corporation? An association or its members? A named couple? An Employer or the Employee? Affiliated companies, corporate parent, subsidiaries? (Our work in connection with this engagement shall not be

considered to create an attorney-client relationship between us and any other persons or entities related to the client; including parents, subsidiaries, shareholders, partners, members, joint members; thus, our sole client for this engagement is _____ ____________.)

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Engagement Letter:What Should Be Included?

The scope of the representation

• What will you be doing?

• What won’t you be doing?

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Engagement Letter:What Should Be Included?

Advance Unrelated Matter Conflict Waivers• An unrelated matter conflict waiver protects you!

ABA Formal Ethics Opinion 05-436 Issued by The Standing Committee on Ethics and Professional Responsibility

Sophisticated client: User of legal services Advised by independent counsel or in-house counsel Matters not substantially related Not abuse or misuse of confidential information

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Engagement Letter:What Should Be Included?

Specific waivers/disclosures may be necessary In the letter explain the potential conflict – “risks and

alternatives.” Ask for specific authority to proceed in light of the

potential conflict. Possibly, suggest a screen/Ethical Wall

• Could be dangerous – may scare the client

• Not always necessary

• Does not cure the conflict unless client consents

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Engagement Letter:What Should Be Included?

Fees Provisions:• Clearly set out firm fees• Clearly set out what the firm usually does to

collect them (escape clause, work continuation)• Flat Fee or Retainer Agreement?• Who will pay the fees – if multiple clients or

third party or payer• Incidental charges - No surprises• Alternative Fee Arrangements

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Engagement Letter:What Should Be Included?

Records Retention• Put the client on notice of how long you will retain file• Will the files be destroyed after retention period• Language should include reference to electronic files• Some states allow lawyers to agree with clients in

advance which items in their file the lawyer will return, discard or save once the representation is concluded – N.Y. City Ethics Opinion 2010-1. DC Rule

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Engagement Letter:Special Situations

Joint Representations Insurance Companies Local Counsel Serving as Arbitrator/Mediator Serving as Expert Witness Lobbying Pro Bono

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Outside Counsel Guidelines or Client Retention Letter vs. Engagement Letter

The Traps• Review the conflicts clause

• Unintended representation of parent, subsidiaries or affiliated companies

• Billing caveats and requirements

• Reporting requirements

• Confidentiality requirements (HIPAA, HITECH) includes accessibility of client work product, right to audit security systems and regulations that impact clients

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Reluctance to Send Engagement Letter?

Too long Afraid client will alter Call the prospective client Explain why letter is important Set up time to answer questions Use it as an opportunity to improve client relations up

front Consider Email

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Disengagement Letter:Why Do We Send Them?

Many of a lawyer’s duties and responsibilities to a client terminate with the conclusion of the representation. If the status of the matter is unclear, then the firm’s continuing obligations are unclear.

Future conflicts may be avoided in subsequent representations if the matter is unrelated and the representation properly terminated.

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Disengagement Letter:Why Do We Send Them?

Re: Conclusion of Representation

Dear :

We are writing to confirm that our representation in connection with the matter has been concluded. Because the attorney-client relationship between us has ceased, we will have no further obligation to advise you in connection with this matter or as to legal developments that may have a bearing on the matter. However, unless we hear from you to the contrary, we intend to keep you on our mailing list that we use to provide friends of the firm with information as to various legal developments that may be of interest.

Our final statement for services rendered and disbursements and other charges is enclosed. If you have questions regarding our statement, please call me. If you wish to have any of the documents that you supplied to us returned to you, please so advise us.

We are pleased to have had the opportunity to be of service to you, and we thank you for asking us to do so. Should there be matters in the future where we might be of assistance again, we hope you will call upon us and we shall be pleased to consider possible retention with respect to those matters.

Sincerely yours,

[Firm Lawyer]

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Disengagement Letter& Conclusion of Representation

Client – friendly – marks end of matter but also asks for new business.

Very important for: • Ending the duty to give ongoing advice

• Starting clock on when a claim could be filed

• Clearing future conflicts of interest Prepare one when:

• You transfer all matters to new counsel or departing attorney

• You return all files to client

• You are closing the matter because no engagement letter was received.

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Declination Letter: Thank You But No Thank youHow Do You Draft it?

State clearly the matter under consideration and nature and extent of investigation into the matter.

State clearly that the matter is not being accepted. State declination does not reflect an opinion on the

merits. State documents, if received, are being returned and

itemized. Remind them they may be facing deadlines.

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I’m Not Your Lawyer LettersIt may be useful and sometimes necessary to advise unrepresented parties in multi-party transaction that you do not represent, and therefore owe no duty to such parties.

Example:

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Lateral Hires & Departing LawyersA Revolving Door

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Lateral Hires:A Revolving Door

Establish a Process

Identify Conflicts

Due Diligence

Integration

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Lateral Hires: A Revolving DoorEstablish a Process with Rules Background check – evaluate disciplinary issues, other

concerns; confirm basic facts (schools, admissions) All offers contingent on conflicts clearing Address any business conflicts before lateral starts

(consider client quality analysis) Risk Management Training – meet immediately to let the

Lateral know how new firm handles New Business Intake; educate them to Risk Management policies, introduce Loss Prevention Team

Integration Plan

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Lateral Hires: A Revolving DoorConflicts Decide how far back to go (rec. at least 3 years) Require complete party and matter information Require enough lead time to clear If waivers needed, require that they be in place before

lateral starts Have any ethical walls in place on Day 1

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Lateral Hires: A Revolving DoorDue Diligence Background check

• criminal

• state licensures

• law school verification Check References Be sure Lateral’s Practice Plan fits with firm’s Work with your firm’s L&E representative

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Lateral Hires: A Revolving DoorIntegration Set up weekly and then monthly meetings with lateral Make sure the lateral attends firm meetings and

functions Verify lateral is using firm systems – DM, RM, Docket Review pro formas Make sure lateral’s matters are properly staffed Check to see if other attorneys are working on lateral’s

matters and vice versa

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Departing Lawyers: A Revolving Door Essential Steps

Establish a team of key people

Notification to clients

Risk Management concerns

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Departing Lawyers: A Revolving DoorEstablish A Team of Key People Department or Practice Group Head Information Technology Liaison Human Resources Liaison Risk Records Administration Accounting Representative

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Departing Lawyers: A Revolving DoorNotification to Clients Departing attorney has fiduciary obligations to clients and

firm.

ABA Formal Opinion 99-414

Firm has fiduciary duty to clients, must treat partner fairly.

Clients always get to choose who represents them.

Joint letter usually looks better, is more fair.

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Departing Lawyers: A Revolving DoorRisk Management ConcernsAsk the Question – any claims or circumstances

to report? Check the Docket Transition of Work No Client Left Behind EmailDisengagement Letters

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Client Confidentiality

ABA Model Rule 1.6(a) states general rule: “A lawyer shall not reveal information relating to the representation of the client” absent the client’s express or implied consent.

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Client Confidentiality

Don’t discuss client matters with anyone not an employee or member of the firm.

Be sensitive to other confidentiality issues created by visitors in the office.• Elevators

• Bathrooms

• Other Public Places

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Action Items

Consider requiring signed Engagement Letters from ALL your clients.

Document when the work for a client is concluded. Establish a thorough process and identify a trained team

to deal with lateral hires and departing lawyers. Educate your staff about protecting a client’s

confidences.

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Contact Information

Jennifer Schwendemann Director of Risk Management & New Business Intake190 Carondelet Plaza, Suite 600Clayton, Missouri 63105Phone: 314.480.1871Facsimile: 314.480.1505Email: Jennifer.Schwendemann@HuschBlackwell.com

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