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Beauty Contests Can Turn UglyAn initial interview can establish an attorney-client relationship and cause future disqualification By Craig E. Holden
The process of prospective clients consulting with and considering multiple law firms for potential representation has been characterized as the law firm “beauty contest.” But the so-called beauty contest can produce ugly results. Beauty contests are particularly common for attorneys competing for major litigation or prized clients. While it may be an honor to be considered for such beauty contests, rainmakers beware: law firm beauty contests are replete with ethical pitfalls. By consulting with multiple law firms for potential representation, some sophisticated litigants have employed a strategy of attempting to create a conflict of interest and disqualify these law firms from representing their adversaries. Even unsophisticated or good faith prospective clients who share too much confidential information in initial interviews can effectively disqualify a law firm from representing their opposition in the same or substantially related future litigation. While the prospective client may only meet with you once and never retain you, your firm may still be disqualified because the prospective client now qualifies as a “former client” to whom you owe fiduciary duties. Specifically, your firm may owe the now former client a duty of confidentiality that prevents your representation of adverse parties on related matters. Adding insult to injury, after losing a beauty contest, attorneys may unwittingly find that the disqualification extends to a large host of potentially adverse parties. One court poignantly explained this quagmire: “[h]aving apparently failed the swimsuit competition, [law firms] do not wish to be saddled with the ethical encumbrances of an attorney/client relationship for which it never received any money.” Bridge Products Inc. v. Quantum Chem. Corp., No. 88-C-10734, 1990 WL 70857 (N.D. Ill.). In California, attorneys are prohibited from undertaking representation in a matter that is adverse to a former client when there is a “substantial relationship” between the current and former matters. This prohibition stems from an attorney’s duty to maintain confidential information obtained from a former client. Business & Professions Code §6068(e) (attorneys must “maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her [current or former] client.”) An initial consultation with a prospective client (that never retains you) is sufficient to create an attorney-client relationship and make the prospective client a “former client” when confidential information is disclosed. Evidence Code §951 broadly defines a “client” as anyone who “consults a lawyer for the purpose of retaining the lawyer or securing legal service or advice . . . .” With this broad definition, virtually every prospective client that consults with you (but never hires you) becomes a former client. Ergo, mere participation in a beauty contest can land the losing law firm with onerous fiduciary obligations for years to come. Sullivan v. Sup. Ct. (Spignola), 29 Cal. App. 3d 64, 69, 105 Cal. Rptr. 241 (1972). Moreover, the ability of a former client to disqualify their former attorney often yields unfair results — particularly since the passage of time does not cure the conflict. River West Inc. v. Nickel, 188 Cal. App. 3d 1297, 1301-1304 (1987) (attorney disqualified from representing new client in matter “substantially related” to water rights case handled 30 years earlier). Identifying the ethical pitfalls Naive attorneys who enter beauty contests and receive confidential information can unwittingly be disqualified from representing parties that may not seem adverse. Consider the recent Orange County bankruptcy/securities fiasco which had Wall Street broker-dealers scrambling to interview the best securities and bankruptcy lawyers in town. An invitation to one of these beauty contests could be considered a potentially profitable blessing or a potential curse. One meeting with the wrong Wall Street firm for an initial consultation — coupled with exposure to vast amounts of their confidential information — could easily disqualify your firm from representing the many other brokerage firms that are not currently adverse, but may become adverse as the litigation matures. In today’s competitive legal market, sophisticated litigants and repeat players often consult with and consider dozens of firms for potential representation, especially in high-stakes litigation. Additionally, business clients often hire multiple firms for a single case. In the recent high-profile MGM v. Sony litigation concerning the rights to the James Bond trademark, each studio hired four top Los Angeles firms for the single lawsuit. This environment of attorney-shopping and the hiring of teams of law firms creates a fertile field for potential conflicts and future disqualifications for active business developers. Legal specialists and top-flight litigators are the primary target of the bad faith litigant whose only intention is to limit the adversary’s selection of attorneys. Certainly courts recognize that “motions to disqualify are often used as a tactical device” by former clients. Metro-Goldwyn-Mayer v. Tracinda Corp., 36 Cal. App. 4th 1832, 1847 (1995). Nonetheless, courts still mechanically apply the former client conflict rules, often without regard for seemingly unfair results. For instance, in Mailer v. Mailer, 390 Mass. 371, 390, 455 N.E. 2d 1211 (1983), the former prospective client successfully disqualified an attorney he consulted with (for approximately one hour) on only one occasion five years earlier — even though there was no evidence that any confidential information was disclosed to the disqualified attorney. Similarly, the California Supreme Court found an attorney-client relationship to exist based on a single brief consultation which resulted in no retention of the attorney. Flatt v. Sup. Ct. (Daniel), 9 Cl. 4th 275, 280, (1994) (“We have little quarrel [finding that the prospective client became] that of a client,” after one hour-long meeting). In contrast, see Zimmerman v. Zimmerman, 16 Cal. App. 4th 556 (1993) (attorney’s 20-minute conversation with a prospective client was insufficient to prevent the law firm from subsequently representing the other side in the exact same matter). The inherent flaw with beauty contests is that the initial consultation — in order to be successful — almost always requires that the attorney obtain confidential information from the prospective client. Without this discussion, it is almost impossible for the attorney and prospective client to determine if, and on what terms, representation would be appropriate. City & County of San Francisco v. Sup. Ct., 37 Cal. 2d 227, 235 (1951) (for adequate representation the prospective client should provide “full disclosure of the facts”). For these reasons, the prospective client’s initial consultation (which results in no representation) almost invariably transforms the former prospective client into a former client for purposes of the ethical rules. The attorney who was briefly consulted and never hired is now (perhaps unfairly) bound with onerous fiduciary obligations to avoid representing potentially adverse new clients on substantially related matters. The governing conflict rules The primary California statutes governing an attorney’s fiduciary obligations to a former client are rule 3-310(E) of the California Rules of Professional Conduct (CRPC) and Business & Professions Code §6068(e). CRPC 3-310(E) provides that “[a] member shall not, without the informed written consent of the . . . former client, accept employment adverse to the . . . former client where, by reason of the representation of the . . . former client, the member obtained confidential information material to the employment.” Since “client” can be loosely defined as those who merely “consult” an attorney to consider “retaining,” the strictures of the foregoing statutes can easily come into play when attorneys participate in beauty contests. California courts apply the “substantial relationship test” to determine if a prior representation conflicts with or is adverse to a current representation. Flatt v. Sup. Ct., 9 Cal. 4th 275, 283 (1994). The California Supreme Court explained (in a case involving a motion to disqualify a law firm beauty contestant) the ethical rules relating to the subsequent representation of interests adverse to a former client: “Where the potential conflict is one that arises from successive representation of clients with potentially adverse interests . . . the chief fiduciary value jeopardized is that of client confidentiality. Thus, where a former client seeks to have a previous attorney disqualified . . . the governing test requires that the client demonstrate a ‘substantial relationship’ between the subjects of the antecedent and current representations. The ‘substantial relationship’ test mediates . . . the interest of the former client in ensuring the permanent confidentiality of matters disclosed to the attorney in the course of the prior representation . . . .” Flatt, 9 Cal. 4th at 283. Once the former client demonstrates a “substantial relationship” between the two representations, there is a presumption that material confidential information relevant to the second representation was obtained from the former client, and disqualification is therefore mandatory. Once the former client satisfies the substantial relationship test, it does not have to prove that confidential information was actually disclosed in the beauty contest. The attorney is automatically disqualified under the strictures of CRPC 3-310(E) and Bus. & Prof. Code §6068(e), unless the former client waives the conflict. In determining whether a substantial relationship exists between a prior consultation and current representation, courts will examine several factors such as: (a) the similarities between the factual and legal questions posed in the two representations; (b) the nature and extent of the attorney’s involvement in the prior consultation, including the amount of time spent by the attorney at the prior consultation; and (c) the attorney’s exposure to the former client’s policy and strategies. Losing beauty contest participants are usually not so lucky in avoiding disqualification from a former client since a “substantial relationship” will naturally exist when a law firm is retained by the former client’s adversary in the matter that was the subject of the beauty contest. When the substantial relationship test is not satisfied, courts have still entertained motions to disqualify attorneys who switch sides after a beauty contest based on the general appearance of impropriety. B.F. Goodrich Co. v. Formosa Plastics Corp., 638 F. Supp. 1050 (S.D. Tex. 1986). However, “California has never had a rule requiring that attorneys avoid the appearance of impropriety, and has expressly refused to adopt such a rule.” In re Mortgage & Realty Trust, 195 B.R. 740 (1996). See also Gregori v. Bank of America, 207 Cal. App. 3d 291, 305-308, (1989) (appearance of impropriety by itself does not compel disqualification, but is a factor). Recent court decisions Significant spotlight has been placed on two unrelated cases involving motions to disqualify law firms that switched sides after participating in beauty contests — particularly since the facts in both cases are similar, but the outcomes are not. See Bridge Products Inc. v. Quantum Chemical Corp., No. 88-C-10734, 1990 WL 70857 (N.D. Ill.); and B.F. Goodrich Co. v. Formosa Plastics Corp., 638 F. Supp. 1050 (S.D. Tex. 1986). In Bridge, plaintiff Bridge interviewed four Chicago area firms, including Sidley & Austin. Bridge disclosed confidential information to Sidley, including its trial strategy, weaknesses and bottom-line settlement figures. Bridge ultimately hired another firm. Defendant Quantum, however, ended up hiring Sidley. The court granted Bridge’s motion to disqualify Sidley and admonished Sidley for failing to caution Bridge not to disclose confidential information during the beauty contest. The Bridge court said:
In Goodrich, plaintiff Goodrich moved to disqualify defendant Formosa’s attorney, who was one of five that Goodrich had previously consulted, but never retained for its suit against Formosa. Goodrich (like Bridge) shared its trial strategy, and the strengths and weaknesses of its case during the beauty contest. The court, however, strangely denied Goodrich’s disqualification motion by finding that the substantial relationship test was not satisfied, even though Formosa’s attorney had “switched sides” in the same litigation. The substantial relationship test would have created a presumption that Goodrich shared confidential information during the beauty contest interview. Having failed to satisfy the substantial relationship test, Goodrich was left with the more onerous burden of proving (which it failed to do) that Formosa’s attorneys actually received confidential information. Business developers should not take too much solace in the Goodrich holding, however, since most commentators agree that the Goodrich outcome is the exception, whereas the Bridge holding is the rule. Avoiding disqualification Notwithstanding the plethora of ethical pitfalls facing law firm beauty contestants, there are several prophylactic measures law firms can take to avoid the conflicts of interest that arise. The first line of defense for a law firm takes place before the beauty contest commences. Law firms should have in place a comprehensive conflicts check system that not only identifies present and former clients, but also identifies individuals and companies that have interviewed (but not retained) the firm for representation. Most law firms lack a conflicts system that identifies the latter. This definitely creates problems with beauty contests at large firms, since attorneys do not know if their colleagues have ever participated in a beauty contest with the adversary of a new law firm client. In other words, the firm’s left hand not knowing what its right hand is doing is exacerbated at large firms — particularly those with multiple offices. Hence, having attorneys enter into a computerized conflicts system the prospective clients with whom they have consulted helps identify potential conflicts before they arise. Ideally, the best defense to a disqualification motion is an ironclad waiver agreement obtained from the prospective client before the beauty contest. Although it may seem impractical to begin your sales pitch with “Dear prospective client, please be advised that any confidential information you share may later be used against you,” the most effective insurance against future disqualification is to have the prospective client waive the potential future conflicts. CRPC 3-310(E). Law firms should have boilerplate waiver agreements for prospective clients to sign before the beauty contest begins. While many attorneys are only focused on winning the beauty contest, the waiver agreement can act as a form of insurance — particularly against malicious litigants whose only focus is to secure future disqualification. The contents of the waiver agreement, at the very least, should advise the prospective client that: (a) the meeting is merely preliminary and the prospective client will not disclose any confidential information; (b) if the attorney is not retained, any confidential information intentionally or inadvertently disclosed will not be protected and may be used in future litigation adverse to the prospective client; and (c) if the attorney is not retained, the prospective client waives the right to disqualify the attorney from representing any adverse party in the same or similar litigation. Undoubtedly, some attorneys who request a prospective client to sign a waiver agreement will be at a disadvantage before the beauty contest begins. Accordingly, attorneys will have to make the waiver agreement more palatable by informing prospective clients that it is also a device designed to protect the prospective client. This can be accomplished by noting that the waiver agreement also safeguards the prospective client’s confidential information by requesting that it not be disclosed unless or until the attorney is retained. While some prospective clients will reject your firm’s participation in the beauty contest if you first demand a waiver agreement, the prospective client who is considering hiring you in good faith should be less likely to object to a waiver agreement. As a final good measure, the unsuccessful law firm beauty contestant who is later hired by an adversary must also disclose to the new client the firm’s previous meeting with the other party. CRPC 3-310(B). Attorneys failing to make said disclosure can be exposed to both malpractice and disciplinary claims. Attorneys uncomfortable with requesting a waiver from prospective clients should
at least verbally admonish the prospective clients not to share any confidential
information unless and until they are retained. It should be noted that waiver agreements have their limitations and may be declared invalid under certain circumstances. In this regard, attorneys should remember that the most important precaution one can take in a beauty contest is to avoid ever receiving any confidential information. If an attorney actually receives confidential information from a prospective client, a waiver agreement will be deemed invalid. The rationale is that the waiver agreement lacks “informed consent” because the prospective client cannot consent to an actual breach of confidence. Elliott v. McFarland Unified School Dist., 165 Cal. App. 3d 562, 573 (1985). Thus, a waiver agreement can only rebut the presumption that confidential information was shared during the beauty contest that bears a “substantial relationship” with the new representation. Even if a law firm secures a valid waiver agreement, the law firm may still run afoul of the obligation not to represent a client when a “previous relationship would substantially affect the member’s representation.” CRPC 3-310 (B)(2)(b). In this regard, an attorney’s confidentiality duty to a former client may interfere with the new client’s right to effective representation, not to mention expose the attorney to a potential malpractice claim. Some law firms choose to erect the proverbial Chinese Wall around the tainted attorney as an effort to cure the conflict resulting from representation of a party adverse to a former client in substantially related litigation. However, courts have not readily accepted this as sufficient means to overcome disqualification. Henriksen v. Great American Sav. & Loan, 11 Cal. App. 4th 109, 114 (1992) (law firm vicariously disqualified notwithstanding ethical screening wall around attorney infected with former client’s confidences). Aside from waiver agreements, seasoned business developers rely on good discretion and common sense to avoid conflicts in beauty contests. However, business developers should take particular caution when entering beauty contests involving: (a) multiple opposing parties; (b) high-stakes litigation where both sides are consulting many firms; (c) unknown or cold-call prospective clients who will not sign a waiver agreement, but nonetheless wish to volunteer confidential information; (d) a prospective client that is adverse to a prized potential client your firm wishes to represent (e.g. prospective Doe vs. Fortune 500 company); or (e) a prospective client that you do not have a strong chance of acquiring. When entering such contests, the primary goal (aside from winning) is to ensure that no confidential information is disclosed before retention, and more important, that this understanding is reduced to writing. Applying the foregoing efforts and discretion, law firms can better balance the risks of (a) choosing to receive confidential information from prospective clients in order to put on a good show at the contest, or (b) protecting the firm from future disqualification. Sometimes law firms make the mistake of relaxing their conflict protection measures when a beauty contest manifests itself in unexpected forms. Tellingly, business developers should keep their guard up when participating in a prospective client’s Request for Proposal (RFP), which is merely another form of the law firm beauty contest. RFPs, like traditional beauty contests, can also be fraught with peril. The prospective client at certain phases of the RFP evaluation may disclose confidential information for your firm to consider. Moreover, unsuccessful participation in the RFP can disqualify participating attorneys from representing new clients adverse to the company that issued the RFP. Law firms should therefore consider circulating a waiver agreement before responding to the RFP. Despite the inherent ethical and business development dangers posed by beauty contests, many attorneys still fail to undertake any precautionary measures before entering them. Perhaps these attorneys are only focused on winning the beauty contest, and not on protecting against the theoretical risk of being disqualified in the future. However, in an era of eroding client loyalty, cost-conscious clients, and clients desiring legal specialists, beauty contests are becoming more common, as is the risk of future disqualification. Remember that your former client that never hired you may: (a) disqualify you from representing the adverse parties in the same litigation; and (b) conflict you out from representing a host of future potential clients who are adverse to your short-lived former client in substantially related matters. It might appear that the beauty contest is powerful weaponry for the prospective client or in-house counsel who wishes to disqualify the best law firms in town from representing their adversaries. This is a dangerous tactic for prospective clients to employ, however, because if the participating law firm is not disqualified, then the prospective client’s case may be compromised by the adversary’s attorney’s knowledge of disclosed confidences. One court noted this reality: “disqualifying all the lawyers interviewed by a company for prospective employment would itself undermine the public’s confidence in the judicial process.” Goodrich, 638 F. Supp. at 1054. It behooves both the prospective clients and the attorneys who participate in beauty contests to avoid discussing confidential information during initial consultations and to reduce this understanding to an agreement. The attorneys who do employ scrupulous protection measures before entering beauty contests are far less likely to face the prospect of losing twice: i.e., the beauty contest and the subsequent new client. •Craig E. Holden is a senior associate at Robins, Kaplan, Miller & Ciresi LLP in Los Angeles, specializing in intellectual property Certification
Self-Assessment TestAnswer the following true-false questions after reading the MCLE article on “beauty contests.” Use the answer form provided to send the test, along with a $20 processing fee, to the State Bar. If you do not receive your certificate within four weeks, call 415/538-2504.
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