 EDITOR'S NOTE: This
is the second of a two-part ethics series. The first part appeared in the December 1998
California Bar Journal. Each test qualifies for one hour of MCLE study in legal ethics."Happy
New Year, Professor Ethics!" California Joan greeted her favorite former law school
professor fondly. "Thanks to your help last month, my firm was able to steer clear of
conflicts of interest which arose from the duties of loyalty to current clients.
"Now the senior partners think of me as their in-house ethics expert. They
assigned me to the hiring committee to help manage conflicts of interest. This is great
for my advancement within the firm, but I need a refresher. O great guru of good
lawyering, can you point me to what I would look for to prevent conflicts when the firm is
contemplating adding a partner or associate?
"Cali, in this area," Professor Ethics responded, "the preventive ethics
road is treacherous because there are some big areas where the law is unsettled and it's
rocky because compliance with legal ethics can be counter-productive to the business of
law.
"The principles involved in the duty of loyalty which we discussed last month
apply to any new clients which would come to the firm with the new partner or associate.
In this case, your firm should ask for a list of all matters on and clients for which the
lawyer is working; then check those client names and matters with your firm's current
clients and matters for direct and potential adversity consistent with the principles we
discussed last month. If any of the new clients are adverse to any of your firm's current
clients, your firm can not accept representation of the new clients unless you get both
clients' written consent after written disclosure.
"But don't stop there. Also ask each potential partner or associate for a list of
every matter on and client for which that lawyer ever worked. Then check those matters and
clients against your firm's current clients and matters. If the proposed partner or
associate ever worked on any pending matter for an opposing party or even for the opposing
part on other matters, further inquiry is required."
 Cali already sensed
that Meryl Terpitude, the hiring committee chair, would object on the grounds that these
requirements were too onerous and that many lawyers would not have kept track of every
client matter they ever worked on. Wanting to be forearmed, Cali asked, "Gee, P.E.,
what's the basis for this kind of conflict checking?"
"To prevent your firm from representing adverse interests in which you have
confidential information. Rule 3-310(E), California Rules of Professional Conduct,
prohibits lawyers from accepting employment adverse to a client or former client where, by
reason of the representation of the client or former client, the member has obtained
confidential information material to the employment, unless the lawyer obtains the consent
of the client or former client. This rule's purpose is to protect current and former
client confidentiality and the confidential relationship between attorney and
client." (Flatt v. Superior Court (1994) 9 Cal.4th 275, 283 [36 Cal.Rptr.2d 537].)
"Confidentiality is the cornerstone of the foundation upon which the
attorney-client relationship is built. Confidentiality is our covenant with our clients
that we will maintain their confidence and secrets inviolate (Bus. & Prof. Code
§6068(e)), that we will assert the attorney-client privilege whenever disclosure of
attorney-client communications is sought (Evid. Code, §950 et seq.) and that we will keep
our work product confidential (Code Civ. Proc., §2018). ‘Confidence' is the trust
which a client reposes in a lawyer and includes communications protected by the
attorney-client privilege. A ‘secret' refers to any information obtained by the
attorney during the attorney-client relationship which the client has requested to be
inviolate or the disclosure of which might be embarrassing or detrimental to the
client." (Dixon v. State Bar (1982) 32 Cal.3d 728, 735; State Bar Committee on
Professional Responsibility and Conduct Formal Opinion Nos. 1993-133 and 1986-87.)
"Rule 3-310(E) serves as kind of an ark of confidentiality. In this ark we carry
this bundle of duties regarding our client's confidential information with us everywhere,
even beyond death. (Swidler & Berlin v. United States (1998) ___ U.S. ___, 118 S.Ct.
2081, 141 L.Ed.2d 379 [98 DJ DAR 6932].) The ark of confidentiality cannot be shrugged off
in the service of other clients without risk of dire consequences including
disqualification, ineligibility to receive fees, or malpractice or discipline claim,
complaint, damages or sanction." (The Rutter Group California Practice Guide
Professional Responsibility, paragraphs 4:18-4:23.)
"Does this mean, P.E.," queried Cali, getting more and more disheartened,
"that a lawyer can never take an adverse position against a former client? Will every
lawyer ultimately be limited to representing only one client?"
"No," responded the professor. "Prior representation of a client would
not preclude you from accepting employment thereafter which is adverse to that client
unless the new employment requires you to use confidential information to the detriment of
the current or former client or act in a manner that will injure the former client in
matters involving the former representation." (Wutchumna Water Co. v. Bailey (1932)
216 Cal. 564, 573; Grove v. Grove Valve & Regulator Co. (1963) 213 Cal.App.2d 646,
651-652.)
"I'm confused, marvelous mentor," queried Cali. "How can we tell whether
a lawyer's prior representation of one of our client's adversaries would risk
disqualification of our firm?"
"Since 1983, Cali, California case law has employed the ‘substantial
relationship' test to determine whether a law firm should be disqualified. If the
requisite substantial relationship between the subjects of the prior and the current
representations can be demonstrated, the lawyer's access to confidential information in
the course of representing the previous client is presumed." (Flatt v. Superior
Court, supra, at p. 283.)
"In applying the substantial relationship test, the courts adopted a more precise
three-part analysis; first, whether there are similarities between the two factual
situations; second, whether the legal questions posed in the two representations are
similar; and, finally, what was the nature and extent of the attorney's involvement in the
prior matter for the former client." (H.F. Ahmanson & Co. v. Salomon Brothers
Inc. (1991) 229 Cal.App.3d 1445, 1453, 1455-1459.) Where a court finds that there is a
substantial relationship between an attorney's former and current employment,
disqualification must be ordered to protect the integrity of the attorney-client
relationship and resolve the impossible conflict of interest.
"It is important, therefore, to evaluate the prospective firm member's prior
representation and the firm's current representation, weighing each of the three prongs of
the substantial relationship test in each case. Remember, self-evaluation is dangerous: we
are tempted to minimize the similarities and magnify the factors which permit us to take a
risky case or continue the representation and add the new lawyer. I usually recommend
that, in taking a risk of future disqualification, a firm seriously evaluate the arguments
your adversary's counsel would make to determine whether the substantial relationship is
likely to be found by a court should a disqualification motion be brought," opined
Professor Ethics.
"Just because a prospective associate may have a conflict prior to ever working
with our firm, why would that affect our firm's ability to continue representation of our
client who just happens to be an adversary?" asked Cali.
"Because if the lawyer would be disqualified, the disqualification extends
vicariously to the entire firm. (Wasson v. Sonoma County Junior College District (1997
N.D. Cal.) 4F.Supp.2d 893, 910; Flatt v. Superior Court, supra, at p. 283.) California
courts have adopted the ‘imputed knowledge' or ‘vicarious disqualification' rule
to recuse entire firms, even in the absence of a rule or statute, to protect the
confidentiality of current or former clients. (State Bar of California Formal Opinion No.
1998-152.) The imputed knowledge or vicarious disqualification rule provides that if one
lawyer or member of a law firm possesses confidential information, knowledge of that
confidential information is deemed to be possessed by all other members of the firm. (See
e.g. Rosenfeld Construction Co. v. Superior Court (1991) 235 Cal. App.3d 566, 573;
Chadwick v. Superior Court (1980) 106 Cal.App.3d 106, 116.) This presumption that client
information has been shared among lawyers in a law firm is based on the common-sense
notion that people who work in close quarters talk with each other, and sometimes about
their work. (California State Bar Formal Ethics Opinion 1998-152.)
"Therefore, when a lawyer joins a new firm, his or her knowledge from past cases
is immediately imputed to all the other members of the firm upon joining the firm.
(Henrikson v. Great American Savings & Loan (1992) 11 Cal.App.4th 109, 115-116.) And
don't forget that partners or associates who depart the firm with certain clients can
still be a source of disqualification, because the knowledge they had prior to departing
has been imputed to the firm, particularly where the client's files still remain with the
former firm." (Elan Transdermal v. Cygnus Therapeutic Systems (N.D. Cal. 1992) 809
F.Supp. 1383.)
"Suppose we find that there is a substantial relationship between a prospective
lawyer's former clients' case and a current case our firm is handling for a client against
that lawyer? What can we do?" pleaded Cali.
Professor Ethics responded: "Law firms basically try three alternatives: not
hiring or adding the new lawyer if the conflicts are egregious enough; obtaining the
informed written consent of all affected clients; or employing screening devices or cones
of silence. All of the alternatives have risk."
"Well, if lawyers become risks to future firms," complained Cali,
"lawyers won't be able to change firms. The second suggestion is even less practical.
Many departing employees or lawyers are understandably reluctant to discuss these matters
with either the law firm from which they are leaving or with their former clients prior to
joining a new firm. If there is any discord or dissension between the firm and the
departing lawyer or employee, attempts to resolve a potential risk of disqualification may
meet with lack of cooperation or even antagonism (including threats to bring a
disqualification motion)."
"On the other hand," retorted Professor Ethics, "there are many clients
who will agree to let their prior lawyers join a firm that is currently adverse to them,
particularly where the firm establishes an ethical wall, screening or cone of
silence."
"How does an ethical wall, a cone of silence or screening work, Professor?"
inquired Cali.
"Ethics walls, screening or cones of silence employ the following measures to
prevent actual or imputed confidential information from leaking into and tainting a new
firm:
Physical, geographic and/or departmental
separation of the ‘tainted' member;
Prohibitions against and sanctions for discussing
confidential matters;
Established rules and procedures for preventing
access to confidential information and files;
Procedures preventing a ‘tainted' or
disqualified attorney from sharing in profits from the representation; and
Continuing education in professional
responsibility. (Henrikson v. Great American Savings & Loan Association (1992) 11
Cal.App.4th 109, 114.)
"California courts have repeatedly rejected use of an ethical wall to cure
conflicts of interest where the ‘tainted' lawyer possessed actual knowledge of
confidential information. (Henrikson v. Great American Savings & Loan Association,
supra, pp. 115-116; Rosenfeld Construction Co. Inc. v. Superior Court (Sivas) (1991) 235
Cal.App.3d 566.) These cases may be distinguished because screening had not been
implemented until long after the ‘tainted' member joined the firm and the
‘tainted' possessed actual confidential information. We do not know whether the
California courts, when faced squarely with a screening mechanism implemented prior to the
entry of the ‘tainted' member will approve an ethical wall as a remedy. Because of
the uncertainty, merely employing the ethical wall without the affected client's consent
poses a risk of disqualification and other risks mentioned previously.
"There are three exceptions where California courts have approved an ethical wall:
Former judge, who, when on the bench, presided
over a case in which only public information was acquired, who was screened by an ethical
wall erected prior to joining a firm, and who, upon retirement, joined a firm as ‘of
counsel' which was currently representing a party to the same litigation over which the
judge previously presided. (Higdon v. Superior Court (1991) 227 Cal.App.3d 1667.)
Former government lawyer whose office handled a
case in which the law firm he joined was counsel of record for the opposing party and who
was properly screened upon joining the firm. (Chambers v. Superior Court (State of
California) (1981) 121 Cal.App.3d 893, 902.)
A paralegal who worked on a case while at the
opposing counsel's firm and is properly screened from the moment he or she is employed at
the firm. (In re Complex Asbestos Litigation (1991) 232 Cal.App.3d 572.)
Having taken guidance from Professor Ethics and having read the cases he suggested,
California Joan felt confident in attending her first meeting as a member of the hiring
committee the following week. Chair Meryl Terpitude recommended that the law firm add
Counsel as a partner. "Counsel's current and former clients have no conflicts with
the law firm's current clients. Moreover, Counsel's book of business is extremely
profitable and will boost our profits."
Feeling her heart sink, Cali voiced an objection. "There is a problem. Counsel's
current firm is an opposing counsel to us, representing Acme Co. in a moderate piece of
commercial litigation against our client XYZ Corp."
Meryl quickly interjected. "That's not a problem since Counsel never worked on
that case, has no confidential information about it and does not have access to any
confidential information."
"It still poses a substantial risk," Cali retorted. "A similar case like
this is currently pending in the Second District Court of Appeal after a firm was
disqualified at the trial level. Prior California case law has prohibited lawyers from
side switching; representing client A against client B and then joining the law firm
representing B. (Henrikson, supra, at pp. 117.) If the imputed knowledge rule is applied
to Counsel, she will arrive at our firm with imputed confidential knowledge about Acme
Co., notwithstanding that she claims to have no actual knowledge. Moreover, upon her
arrival at this firm, her imputed knowledge will be imputed to this firm. California
courts have not yet decided whether a law firm could be disqualified due to a double
imputation of confidentiality. This could be a risk."
Meryl became almost apoplectic, stating sharply, "Counsel's book of business alone
is worth far more than the fees we might earn in the Acme Co. v. XYZ litigation. It is
worth the risk of disqualification." After Cali pointed out the firm's duty of
loyalty to XYZ to not jeopardize their representation for a more lucrative client, the
committee determined to investigate the risks further and to explore whether approaching
the clients for informed consent was feasible.
In frustration, Meryl queried: "The next case involves hiring an associate whose
firm prepared an underlying contract for Movie Co., which is now the subject of litigation
in which our client, Producer, is suing Movie Co. for breach of contract. The associate
never worked on any Movie Co. matter, has no access to any of Movie's confidential
information, and the associate's current firm represented Movie Co. solely in
transnational matters, never in this litigation. There is no question that the contract
and the breach of contract action are substantially related. I suppose that he, too, is a
great risk as well?"
"Actually, hiring the associate may be less of a risk," Cali said
encouragingly. "California state courts have not yet decided whether the imputed
knowledge rule should be applied where a lawyer who possessed no confidential information
about a client while working at a former firm and thereafter joined a firm representing a
client adverse to the former client in the same case or a substantially related case.
(Klein v. Superior Court (1988) 198 Cal.App.3d 894, 910-911.) But the third prong of the
substantial relationship test suggests that a lawyer who has little or no involvement in a
case might not be disqualified. (H.F. Ahmanson & Co. v. Salomon Brothers Inc. (1991)
229 Cal.App.3d at pp. 1455-1459.)
"A recent federal case applying California law denied disqualification in exactly
these circumstances. (Dieter v. Regents of the University of California (E.D. Cal. 1997)
963 F.Supp. 908.) Also, the Restatement of the Law Governing Lawyers §204, comment
(c)(ii) provides that the imputed knowledge rule is terminated in most cases once a lawyer
leaves a firm representing a client, provided that the lawyer does not have actual
confidential information about the client or does not have continuing access to
confidential information about the client.
"While there is still a risk that a California court will rule differently, hiring
the associate in the absence of California authority and in reliance upon Dieter and the
Restatement is less of a risk," Cali suggested.
She also reminded the hiring committee that damaging conflicts can arise from other
members or employees of the firm, reciting the following instances:
Former judges or judicial officers who obtained
confidential information in settlement conferences or other judicial duties. (Cho v.
Superior Court (1995) 39 Cal.App. 4th 113).
"Of counsel" attorneys' conflicts can
infect the entire firm even though the firm never represented the former client. (Cho v.
Superior Court (1995) 39 Cal.App.4th 113 [former judge became of counsel to the firm]; In
re Mortgage & Realty Trust, Debtor) 195 B.R. 740 (Bankr. C.D. Cal. 1996); but note
that disqualification of a firm because of "of counsel" conflicts is pending
before the California Supreme Court in People ex rel. Dept. of Corporations v. Speedie Oil
Change Systems Inc., Cal. Supreme Ct. Docket No. SO58639.)
Secretaries. (See Gregori v. Bank of America
(1989) 207 Cal.App.3d 291.)
Paralegals. (In re Complex Asbestos Litigation
(1991) 232 Cal.App.3d 572.)
Law students. (Allen v. Academic Games Leagues of
America Inc. (C.D.Cal. 1993) 831 F.Supp. 785.)
Attorney formerly employed by client's competitor
in a non-attorney capacity. (Alchemy II Inc. v. Yes! Entertainment Corp. (C.D. Cal. 1994)
844 F.Supp. 560.)
While California Joan and Professor Ethics have not yet found any foolproof solutions
to conflict management, at least Cali's firm is able to weigh the relative risks in
maintaining the ark of confidentiality of former and current clients in adding new
partners and associates to the firm.
Ellen R. Peck, a former trial judge of the
State Bar Court now practicing law in Malibu, is a member of the State Bar Committee on
Professional Responsibility & Conduct, chair of the Los Angeles County Bar
Association's Professional Responsibility & Ethics Committee and co-author of Vapnek,
Tuft, Peck & Weiner (1997) "The Rutter Group California Practice Guide -
Professional Responsibility" and Lewis & Peck (1998) "Lawyer's Handbook on
Fees and Fee Agreements." |
