TEXAS LAWYERS' INSURANCE EXCHANGE
by Janis Reinken, TLIE Director of Risk Management
Conflicts of interest between clients cannot be avoided entirely; the question is how to handle them appropriately. Sadly, it seems that more often than not, a conflict of interest between clients occurs because the wound is self-inflicted. In our most recent Advisory, we provided our readers a ten-point test to determine their "conflicts awareness level."
As promised, this article presents our informal "twelve-step recovery program" to help overcome the tendency toward conflicts denial. Although client conflicts can hardly be managed with a cookie-cutter approach, we hope these principles will help you and your law firm identify and implement some ways to improve your current conflicts management.
1. Recognize a conflict for what it is.
If you're not sure, there probably is a conflict. The time to identify a
conflict is before notice of a claim from a current or former client
(or a grievance notice from the State Bar). Begin by acknowledging the facts.
If your conflicts management system isn't working like it should, the problem
may be the system, faulty input, or flawed analysis. 2. Have a system in place before a conflict dilemma occurs.
No system is perfect, and human error is possible: do your best. A
conflicts management system based solely on billing records is incomplete.
Some firms cross-check with two databases, one for client identification and
one for subject matter. The extent of the conflicts check should be
proportional to the importance of the issues to the client(s), not just the
amount in controversy. The higher the stakes, the stronger the conflicts
filter ought to be. 3. One conflict check is not enough.
There is no one bright line. Some sources advocate checking conflicts
three times: at first contact (preliminary), at the first client interview
(more thorough), and when a new party enters the case.1 One top-flight firm
checks three times each month: at first contact, each week, and at the end of
the month; and, then again later as appropriate. A change of name or capacity
of the parties, or the addition or departure of firm personnel may call for
another review.2 Especially sensitive matters might justify a
check after expert witness designations. Ideally, the time to determine when
to do follow-up checks is when developing conflicts management policies. 4. Clients care most about commitment to confidentiality and loyalty.
Don't use a technicality or semantics to justify not complying with the
conflict rules. With certain exceptions, Rules 1.06 and 1.09 prohibit
contemporaneous and former/subsequent client representations in "substantially
related / materially adverse" matters. When a lawyer serves as intermediary
between two or more clients who have potentially conflicting interests,
Rule 1.07 applies but the "substantially related / materially adverse"
standard does not.3 Confidentiality (Rule 1.05) is the
underpinning of the conflict rules. 5. Conflict waivers aren't really worth much without independent advice.
The lawyer or firm should consider but not limit its analysis to the
"substantially related / materially adverse" test. Rule 1.07 governing
intermediary representation requires written consent of all parties
represented, after disclosure about waiving the attorney-client privilege.
Lawyers focus on disciplinary rule terminology, but the client and the jury
will be suspicious that an alleged breach of confidentiality may indicate
concealment or dishonesty. When discussing possible consent to the conflict,
encourage the clients to seek independent counsel. 6. Resist the impulse to duck the issue.
Nix ambiguities: get everyone on the same page. If you aren't sure who
is the client, how can you (and your staff) abide by the duties of
confidentiality and loyalty? Resist thinking that you represent "the deal"
when establishing a business entity: that is a common minefield because
there could be several clients. If there is no entity yet, the deal has no
legal status, and therefore cannot be the client. If representing an
existing entity, Rule 1.12 duties apply if confidentiality issues arise
regarding constituents of entity clients. 7. Don't kid yourself; follow your gut instinct.
You know when it doesn't smell right. So will the client; so will the
jury or grievance committee. No system can assure proper factual analysis
or guidance out of the dilemma. It is up to the firm to exercise sound judgment.
Absent consent from all parties as required under the applicable Rule, the
safest course of action is not to take the case (or withdraw). 8. When in doubt, do the next right thing.
Don't be afraid to refer a "conflicted client" to another lawyer; the
favor will likely be repaid by sending their next "conflicted client" to you.
The client's frustration at your decision to decline or withdraw may pale in
comparison to their fury later, if you are disqualified shortly before trial
without a continuance - and they get a large bill regarding the disqualification
dispute. 9. In comedy, timing is everything; in conflicts, it still counts for a lot.
Sharing of confidences in a multi-party situation may create unintended
client relationships and conflicts. In a multi-party situation, either you
have one client or you have more. Before receiving confidential information
from an interested party, identify all the clients and clear the conflicts
hurdles with them. Send all clients an engagement letter, and all non-clients
non-engagement letters, as soon as possible after the initial consultation,
and preferably before the first billing statement. Failure to send non-engagement
letters in multi-party situations can give rise to one or more imputed client
relationships, as well as conflicting representation without disclosure or consent.4
10. Put garbage in, get garbage out.
Develop a good system, use it and maintain it. Even the best conflicts
system can fail without proper, timely, regular, and accurate input. Use
safeguards to detect misidentified clients: a corporation's General Counsel
should not be entered as the client name or it may defeat the system. 11. Disclose conflicting interests to clients appropriately and promptly.
Is it a waivable conflict? The responsible lawyer should be notified of a
conflict flag immediately; the lawyer or firm should disclose the conflict to
the client, to enable the client to make an informed decision (Rule 1.03).
Rules 1.06, 1.07, and 1.09 require consent from each client. Decline or
withdraw if any affected client declines to waive a waivable conflict, or if
it is inherently unwaivable. If declining, notify the potential client
immediately and send a nonengagement letter (or combine the two). 12. Clarify and communicate proper values on conflicts issues within the firm.
The extra fee is not worth getting sued or losing your license. Under
Rule 1.06(b)(2), representation is not allowed if interests of the client
have become adverse to or appear to be limited by the lawyer's own interests.
The younger lawyers may follow suit, if the senior partners cut corners or
allow economic interests to cloud their better judgment. Any lawyer may well
consider whether it is worth jeopardizing one's career to associate with
another attorney or firm that acts contrary to strong professionalism values,
risking liability and disciplinary exposure.
Not being a profit center for law firms, conflicts management may receive less priority than it should. Some client conflicts of interest may be averted or reconciled by consent before trouble develops, by waiver under Rules 1.06, 1.07, and 1.09. However, some conflicts may be irreconcilable -- even with a written conflict waiver.5 Conflicts of interest give rise to a statistically significant number of malpractice claims.6 Also, motions to disqualify counsel present a potentially volatile risk. In litigation when client consent or a waiver is lacking, alleged breaches of Rules 1.05 and 1.09 can be expected. Such conflicts might create both a malpractice claim and a grievance matter.7 For the May 1, 2002-April 30, 2002 reporting period, conflict of interest issues occurred regarding 126 grievance matters, according to statistics as-yet unpublished by the State Bar of Texas. Although that number seems small, it is up from 2000-2001 (103 conflict-grievances), and represents the highest number for this category since 1997-98. The sheer numbers of grievances and published appellate opinions hardly reflect the full "inside story." More likely, the greater number of such conflict and disqualification matters are resolved without publication, and only after significant expenditures of time, expense, and angst. Overcoming "conflicts denial" can help avoid those problems.
1 A Guide to Setting Up and Running Your Law Office, p. 32 (( Oregon State Bar Professional Liability Fund, 1999 rev.).
2 See Ethics Opinion 527, which analyzes a variety of fact situations more flexibly than earlier opinions. Tex. Comm. on Professional Ethics. Op. 527, V. 62 Tex. B.J. 4 (April, 1999) at www.txethics.org.
3 Arguably, Rule 1.07 most properly applies to intermediary situations where the lawyer works to establish or adjust "potentially conflicting interests" of multiple clients on an amicable and mutually advantageous basis. J. Dzienkowski, "Lawyers as Intermediaries: The Representation of Multiple Clients in the Modern Legal Profession," ILL. L. REV. Vol. 1992, No. 3 pp. 741-817 at 774 ((1993, John S. Dzienkowski).
4 See, e.g., Vinson & Elkins v. Moran, 946 S.W.2d 381 (Tex. App.--Houston [14th] 1997, writ dism'd by agr) ($38 million verdict; client relationship found between beneficiaries and counsel for the executors).
5 See, e.g., General Motors Acceptance Corporation, 986 S.W.2d 632 (Tex. App. - El Paso 1998, no pet.) (summary judgment for law firm reversed and remanded; written conflicts waiver between GMAC and other party in interest was held invalid).
6 According to Profile of Legal Malpractice Claims 1996-1999, ABA Standing Committee on Lawyers' Professional Liability (( American Bar Association, April, 2001), 5.12% or 1,602 of all 31,315 claims analyzed in this nationwide report involved a conflict of interest as a primary cause. This represents the sixth most common type of error identified; failure to obtain client consent ranked third (3,724). TLIE claim statistics between 1996 and March 2002 show that 16.4% included a conflict claim but accounted for 22.5% of losses paid.
7 Unfortunately, the impact on the courts of motions to disqualify is presently an unquantified factor. Possibly because such motions are non-dispositive, financial cost and docket time factors have not been measured by the Texas Office of Court Administration, or by the National Center for State Courts.
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