 EDITOR’S
NOTE: This is the second of two MCLE self-study packages, each of which will
earn one hour of MCLE credit in legal ethics. Part 1 appeared in the December 1999 issue
of the California Bar Journal. Both parts also may be found online at the State Bar web
site, www.calbar.org.
“What a nightmare I had last night!” California Joan exclaimed to her partner, Meryl
Terpitude, on the morning of Jan. 3, 2000, as she entered the firm’s coffee room for
a cup of double cappuccino. “Happy new millennium to you too! What was the
nightmare?” invited Meryl.
 “I
was in the firm’s board room, sitting behind stacks of files, facing my partners. But
instead of lawyers, my partners were doctors, chiropractors, ambulance company owners and
other business people. They were reviewing my files; asking me about the profitability of
certain cases; exhorting me to take less discovery on most of my cases; and asking me why
I needed to bring motions for summary judgment on some. I woke up screaming when they told
me to dump about 25 percent of my cases because they weren’t going to make enough
money,” shuddered Cali.
“I had almost the same dream, but I thought I was in
heaven!” exclaimed Meryl. “There I was, in the biggest board room ever. My
partners were lawyers, accountants, captains of industry and entrepreneurs. We were
sharing strategies on cases and business ventures and it was exciting. I woke up as we
were going over the firm’s profits. The profits were bigger in a multidisciplinary
practice than they ever had been with the Law Firm!
“Reflecting on the new millennium, I realized that if the
American Bar Association proposal on multidisciplinary practice is adopted, my dream will
become a reality in my professional lifetime. That’s something to look forward
to!” Meryl ruminated aloud.
“Well, Meryl, for the sake of the profession, I hope the 21st
century sees your dream, not my nightmare, come true,” Cali retorted. “Until
multidisciplinary practice becomes a reality, lawyers still have the same duties,
obligations, liabilities and risks that we had in the last century.”
“Speaking of risks, Cali . . . could we talk about some conflict
of interest issues that came up in a few of my cases?” Meryl asked. After Cali sat
down in his office, nodding her assent, Meryl cleared his throat and began with his first
ethical dilemma of the new century:
“Elephantine Enterprise is suing the Firm’s client,
Gargantuan Group, in a piece of complex commercial litigation. Gargantuan asked me to
build a ‘dream’ defense team, so I consulted top rate trial attorney, Otto
Counsel, about joining the team. We spent hours on the phone and in meetings together. I
told Otto Gargantuan’s theories regarding defenses to the claims, my outline of
discovery strategy, and the procedural posture of the case. We discussed different
litigation strategies, the results of some preliminary research he did, and his analyses
of the issues. We were finalizing his retention, when, just before the New Year, the law
firm of Draft, File & Serve subbed in as trial counsel for the plaintiff, Elephantine
Enterprise. I was devastated.” Meryl almost whined.
“So, where’s the beef, Meryl?” Cali asked with
puzzlement.
“Well,” Meryl went on, “Otto Counsel is ‘of
counsel’ to Draft, File & Serve . . . he’s even listed as ‘of
counsel’ on their stationery. So, of course, Gargantuan told me to advise Otto we
would not be using his services. Gargantuan is mad at me for consulting Otto; they suspect
that Otto has probably told Draft, File & Serve everything. I don’t know what to
do.”
Cali’s ethical expertise snapped into action. “Meryl, you
should immediately bring a motion to disqualify Draft, File & Serve. Your case is
virtually identical to a recent California Supreme Court case — People ex rel.
Department of Corporations v. Speedee Oil Change Systems Inc. (“Speedee Oil”)
(1999) 20 Cal.4th 1135, 86 Cal.Rptr.2d 816, 980 P.2d 371 — disqualifying a law firm
because of the confidential information received about an adverse party in the same
lawsuit by a lawyer who was ‘of counsel.’”
“But, we did not retain Otto.” Meryl said skeptically.
“It doesn’t matter, Meryl. The Supreme Court observed that
the duty of confidentiality ‘extends to preliminary consultations by a prospective
client with a view to retention of that lawyer, although employment does not
result.’” (Speedee Oil, supra, 20 Cal.4th at pp. 1147- 1148.) “Moreover,
for the purposes of conflicts of interest analysis, an attorney represents the client when
the attorney knowingly obtains material confidential information from the client and
renders legal advice or services as a result. (Speedee Oil, supra, 20 Cal.4th at p. 1148.)
Just like that case, Otto obtained material confidential information about
Gargantuan’s case and is deemed, for conflict purposes, to have represented
Gargantuan.”
“Well, that confidential information can’t be imputed to
Draft, File & Settle, since Otto is not a partner or associate in the firm, can
it?” queried Meryl.
“Yes, confidential information acquired by a lawyer who is
‘of counsel’ to a firm can be imputed to the firm for vicarious disqualification
purposes.” Cali recited the Supreme Court’s reasoning:
“First, the law firm which lists an attorney as ‘of
counsel’ on its letterhead or other listing is making an affirmative representation
to its clients that the services of that attorney are available to the clients of the
firm. (Speedee Oil, supra, 20 Cal.4th at p. 1153.)
“Second, the Supreme Court adopted the definition of ‘of
counsel’ as set forth in rule 1-400(E), standard 8. The relationship between a lawyer
serving as ‘of counsel’ (who is one other than partner or associate, or law
corporation shareholder or officer) and a firm is close, personal, continuous and regular.
(Speedee Oil, supra, 20 Cal.4th at p. 1153.)
“Third, the close, personal, continuous and regular relationship
between a law firm and an attorney affiliated with it as ‘of counsel’ contains
many of the same elements that justify vicarious disqualification applied to partners,
associates and members. (Speedee Oil, supra, 20 Cal.4th at p. 1154.)
“Finally, where a lawyer is held out to the public as ‘of
counsel’ to a law firm, the law firm and the ‘of counsel’ relationship must
be considered a single de facto firm for the purposes of rule 3-310, Rules of Professional
Conduct. Where one is disqualified, the disqualification is imputed to the other. (Speedee
Oil, supra, 20 Cal.4th at p. 1154, 1156.)
“Rule 3-310(E), California Rules of Conduct, prohibits attorneys
from accepting, without the client’s informed consent, employment adverse to the
client, where by reason of the representation of the client, the attorney has obtained
confidential information material to the employment. Since Otto obtained confidential
material information about Gargantuan’s case, that confidential information is
imputed to Draft, File & Serve because it is holding out Otto as its ‘of
counsel’ to the public. Draft, File & Serve was therefore precluded from
accepting any employment in the same case which is adverse to Gargantuan,” Cali
concluded.
“But what if Otto asserts that he never talked to anyone at
Draft, File & Serve?” asked Meryl.
“That’s insufficient to prevent disqualification. The
Supreme Court found that the mere assertion that the ‘of counsel’ attorney had
not and would not in the future discuss the case with other members of the firm was
insufficient to establish any formal screening procedure. Although California courts have
not yet accepted screening, the Supreme Court held out a ray of hope that screening might
rebut the presumption of shared confidences and avoid disqualification. (Speedee Oil,
supra, 20 Cal.4th at p. 1151-1152) But, even if a court would accept screening as a
defense to disqualification, Otto and Draft, File & Serve would have to show that they
instituted formal screening procedures as soon as they learned of the conflict, which I
doubt,” replied Cali.
“I’m just so relieved that Gargantuan has a remedy!”
sighed Meryl. “How ironic that I am on the other end of the conflict sword, for a
change.”
“Wait a minute . . . I am also ‘of counsel’ to another
firm. Does this mean that I could be vicariously disqualified from representation of my
clients because of my affiliation with that law firm?” Meryl asked with alarm.
“Yes, it’s a possibility,” Cali said. “I
recommend that any ‘of counsel’ and firms with which they are associated should
share a conflict data base. Neither the ‘of counsel’ nor the affiliated firm or
lawyer should accept any adverse employment without checking the mutual data base, on pain
of disqualification. By the way, the Firm has already instituted shared conflicts data
bases with all of our ‘of counsel.’”
“Let me ask you about another issue involving confidential
information” Meryl went on quickly. “From 1980-1990, I defended Colossal
Construction Company in most of the construction defect litigation against it. From 1990
to the present, although I have not represented Colossal, I have served as monitoring
counsel to Colossal’s underwriter, Warranty Bond Co. In that capacity, I have
monitored all construction defect litigation in which Colossal was a defendant, advising
Warranty about settlement, suggesting certain defenses and other litigation strategy.
“Bay Area County has asked just me to file a construction defect
action against Colossal for its failure to supervise subcontractors in a dam construction
project. I don’t think it is substantially related to any litigation that I handled
for Colossal in the past. Are there any problems with me taking the case?” asked
Meryl hopefully.
“I do not think you can,” Cali began. “Your proposed
representation is very similar to a recent disqualification case, Morrison Knudsen Corp.
v. Hancock, Rothert & Bunshoft, LLP (1999) 69 Cal.App.4th 223, 81 Cal.Rptr.2d 425. In that case, the Court of Appeal held that
monitoring counsel for an underwriter owes a duty to maintain the underwriter’s
client’s confidential information and not accept representation adverse to that third
party, which is substantially related to the confidential information acquired in its role
as monitoring counsel.”
“The substantial relationship test in H.F. Ahmanson & Co. v.
Salomon Brothers Inc. (1991) 229 Cal.App.3d 1445, 1455, 280 Cal.Rptr. 614 required three
elements: similarity between the two factual situations, similarity between the legal
questions posed, and the nature and extent of the attorney’s involvement with the
cases. I think I can beat that test and avoid disqualification. My case against Colossal
involves the negligent use of a special kind of soils in a dam project. I never had any
case, either as monitoring counsel or as Colossal’s counsel, involving this
particular kind of soils. So the factual and legal issues are not similar,” Meryl
pointed out triumphantly.
“Please reconsider, Meryl.
Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, LLP, supra, 69
Cal.App.4th at p. 234 observed that since the facts of cases are never entirely alike, no
cases would ever be substantially related if they could be distinguished on such narrow
grounds,” countered Cali. “Here’s what a Court may find:
“Like the Morrison case:
You’ve monitored Colossal
cases involving charges of negligent engineering services and construction management
claims. (Morrison, supra, at pp. 234-235.)
You’re monitoring other
cases involving negligent supervision in connection with soils issues and this case
involves failure to properly supervise the choice of the use of the correct soils for the
project. (Mor-rison, supra, at p. 235.)
You have considerable exposure
(for 20 years) to Colossal’s litigation policies and strategies. (Morrison, supra, at
p. 235.)
“Not only are the factual issues similar, but the legal issues
in prior cases are similar to the present case, since both involve duty of care issues
rendering professional services on construction projects. (Morrison, supra, at p. 235.)
And you admit that you have been extensively involved in representing Colossal and in
monitoring its litigation defense.
“I believe it’s probable that you will be disqualified if
you accept this representation and that you might even face breach of fiduciary duty
claims against the Firm,” Cali said flatly.
For a moment, Meryl was dejected. Then a new idea brightened his
face. “Well, then, I won’t sue Colossal. Bay Area County has claims against
Colossal’s independent subsidiary, Subsidiary Engineering Co. Since the greatest
claims are against Subsidiary, we don’t even have to name Colossal. Best of all,
I’ve never represented Subsidiary.”
“Well, Meryl, last month we discussed that Brooklyn Navy Yard
Cogeneration Partners v. Superior Court (1997) 60 Cal.App.4th 248, 70 Cal.Rptr.2d 419 held
that the representation of a subsidiary did not necessarily create ethical duties to its
parent corporation, precluding representation of adverse interests against the parent
assuming that one was not the alter ego of the other. Recently, Morrison Knudsen Corp. v.
Hancock, Rothert & Bunshoft, LLP, supra, 69 Cal.App.4th at pp. 238-248, criticized the
alter ego test, and observed that if a parent and Subsidiary have a unity of interests,
then they will be considered one entity for the purpose of maintaining confidential
information. Unity of interests can be grounded upon shared legal departments, the
subsidiary’s lack of independent contractual authority, integrated operations and
management personnel, overlapping functions and personnel on the same project, or
financial information about Colossal which might affect the settlement posture of
Subsidiary. If a court finds a unity of interests between Colossal and Subsidiary, it will
likely disqualify you and the Firm,” Cali counseled.
Meryl thought for a moment and said that he would either seek
Colossal’s informed consent to represent Bay Area County or would not take the case.
“I probably should not even mention the next case to you,
because it involves suing the former client of an underwriting client similar to
Morrison,” Meryl said. “About three years ago, I represented Investment Banking
Firm (IBF), which served as an underwriter for DOTCOM’s public stock offering,
purchasing 1 million shares of DOTCOM’s stock for resale to the public. On behalf of
IBF, I prepared the registration statement, prospectus and certain regulatory filings,
conducted a due diligence investigation concerning the correctness of DOTCOM’s
representations, and worked to qualify the stock under the ‘blue sky’ laws of
states where the securities were to be sold. I frequently met DOTCOM’s personnel and
obtained information from them. DOTCOM was separately represented by counsel and also
agreed to pay my fees for representing IBF. IBF now wants me to represent it, in filing an
action against DOTCOM for breaching the underwriting agreement, by selling shares of its
stock on its own, and breaching the warrant agreement by failing to register the
shares.”
“Believe it or not, a new case Strasbourger Pearson Tulcin Wolff
Inc. et al., v. Wiz Technology Inc. (1999) 69 Cal.App.4th 1399, 82 Cal.Rptr.2d 326, rev.
den. 5-19-99, under similar facts, suggests that you have acquired no confidential
information and therefore would not be disqualified.” Cali advised.
“I don’t get it,” Meryl said in exasperation.
“Morrison and Strasbourger both involve taking an adverse interest to an
underwriter’s customer, where the underwriter is the firm’s client. How can the
opposite results be harmonized?”
“The key to when a third party’s information acquired from
a client must be kept confidential by a lawyer, is the third party’s reasonable
expectation of confidentiality. Just like the company in Strasbourg-er, IBF had no duty of
confidentiality to DOTCOM and DOTCOM had no reasonable expectation that IBF would maintain
confidentiality of information being gathered for public dissemination. By contrast, the
company in Morrison, supra, had a reasonable expectation that its underwriters would
maintain its litigation strategy and private financial information confidential during the
course of litigation,” replied Cali.
“OK, here’s my final concern: Before I started consulting
with you, I defended two clients, Cain and Able, who had potential conflicts of interest,
in commercial litigation. I sent them both a potential conflicts disclosure, but Able
never got around to signing his consent to the joint representation. I got a terrific
result, staving off all fraud and other potential punitive damages, with a very nominal
judgment against them. Able has not paid the Firm and argues that I should not get any
fees because I did not comply with rule 3-310(A) in getting his consent to the potential
conflict. Is there any hope?” Meryl asked fearing the worst.
“Did the potential conflicts ever become actual conflicts?”
asked Cali.
“No. No potential conflict ever ripened to an actual conflict
and no other actual conflict arose. It was a smooth case,” replied Meryl, his overdue
fee hanging in the balance.
“Well, there was a ‘good news’ case for lawyers that
may assist you: Pringle v. La Chapelle (1999) 73 Cal.App.4th 1000, 87 Cal.Rptr.2d 90. The
Court held that the violation of a rule of professional conduct does not automatically
preclude an attorney from obtaining fees. It also held that a client, seeking to prevent
an attorney’s recovery for past due fees, must prove that the attorney engaged in a
‘serious’ violation of the attorney’s responsibilities. The Court upheld
the attorney’s right to fees because the client had not proven that the rule
violation was incompatible with the faithful discharge of the lawyer’s duties,”
Cali responded. (Pringle, supra, 73 Cal.App.4th at p. 1005-1007.)
“The Court did not
distinguish between a ‘serious’ violation, which would preclude fees, or a
‘non-serious’ violation, which does not (Pringle, supra, 73 Cal.App.4th at p.
1006),” Cali went on. “ However, the Court based its holding upon cases
precluding fees for actual conflicts of interest. (Pringle, supra, 73 Cal.App.4th at p.
1006, fn. 4.) Therefore, a good rule of thumb is that there must either be one or more
actual conflicts or potential conflicts coupled with demonstrated harm and the absence of
informed written client consent in order for a client to preclude an attorney’s
recovery of fees.”
“Well, Cali, it sounds like I might be able to get those fees
paid after all. The new millennium is looking better already!” Meryl exclaimed
brightening.
“Meryl, as we enter the 21st century, the Courts are continuing
to expand the application of the duty of loyalty, expanding our duties of confidentiality
from clients to third parties and expanding imputed knowledge and vicarious
disqualification to other law firm affiliates,” Cali summarized. “Stay tuned to
‘the biggest ethics show on earth’ to see whether these trends will continue in
the future.”
Ellen R. Peck is a former
trial judge of the State Bar Court, State Bar of California (1989-1995), a former ethics
counsel to the State Bar of California and the American Bar Association, the vice chair of
the State Bar Committee on Professional Responsibility and Conduct and the immediate past
chair of the Los Angeles County Bar Association’s Professional Responsibility and
Ethics Committee. She is a co-author of Vapnek, Tuft, Peck & Weiner (1997) “The
Rutter Group California Practice Guide — Professional Responsibility.” |
