Week 7 - Simultaneously Representing and Opposing a Client in Transactional Matters; Successive Representation – Opposing a Former Client; Conflicting Representation in the Transactional Context

Class Notes

Type of Conflicts

• Current client: cannot be directly adverse to any firm client on any matter - related or not. Rule 1.7(a)(1)

• Former client:

Gonazalez-Lopez: Counsel of choice (US COnst., not RPC)

Murphy & Demory - no sheme ag. a clinet

IBM - no adversity to current client

Strategem - can’t hot potato a client to become adverse to that client (caselaw, not RPC)

BabyCtr: when is client’s affiliate also a client?

• (i) operational commonality, (ii) financial interdependence. And R.1.7 cmt 34

• As to i, same human/dep’t conferring with same law firm as both client and adversary

NYC Bar ethop - if thrust upon conflict, drop conflicted rep for client least prejudcied by w/d

Merril Lynch - ok to jointly re co. & ‘ees if

Prob. 4-7: Same firm reps adverse parties in deal, some conflicts screens cannot solve

Prob. 4-8: So-called “scrivener for the deal”: ok w/ disclosure and waiver in Indiana court, but scrivener ideal is most likely impossible

• Lawyer’s knowledge of chain of title issues a problem: Challenge - small communities, lawyer deserts, clients of modest means

Prob. 4-9: Friendly merger = no conflicts, correct? wrong

• Win Minot: Who gets paid and when?: Helps figure out when exactly the conflicts are, when to get waviers

Analytica Case

• Could have been avoided with thoughtful engagement letter

Martiran Case: Why it is confusing

• No cause of action for 1.7, but can be evidence for breach of fiduciary duty

• Facts are very hard

• Mere economic adversity is not direct adversity

Ohio Board of Professional Conduct Advisory Opinion 2020-10, Why "Law Firm Concurrent Representation of Adverse Clients in the Same Transaction" entail conflicts

The Question Presented The question is whether a firm's lawyers may represent two opposing clients in the same deal by splitting into separate, walled-off teams. The plan also depends on both clients giving informed, written consent.

The Firm's Proposal A firm wants to represent two longtime clients on opposite sides of a deal, using a separate team of lawyers for each. Both clients are sophisticated, have their own in-house lawyers, know they share the firm, and understand that their interests conflict in the deal.

The Proposed Screen Each team would be loyal only to its own client, and neither team could work for, see information about, or discuss the work with the other side. Files would be secured and marked confidential, and the firm would not represent either client if the deal led to a lawsuit or arbitration.

Two Types of Conflict Exist The board agreed with the firm that representing both sides of the same deal creates a conflict, and found two types: "direct adversity" and "material limitation". Direct adversity means the lawyer is on both sides, which requires written consent and the ability to serve both clients well, while material limitation means there is a serious risk that duties to one client will hold back the lawyer's work for the other.

What Could Weaken the Lawyers' Judgment The lawyers might feel loyalty to both clients, want to keep good relations with their colleagues on the other team, or be unevenly matched in skill and experience. The firm's goal of keeping both clients long-term could also get in the way if the negotiation turns hostile.

The Whole Firm Shares the Conflict Under Ohio's rules, if one lawyer in a firm cannot take on a client because of a conflict, no lawyer in the firm can. For conflict purposes, the whole firm is treated as one lawyer.

Screens Do Not Fix This Conflict Screens are meant to keep one disqualified lawyer from seeing a client's confidential information, not to cure a conflict where the firm is on both sides of a deal. Setting up two teams in one firm to negotiate against each other is very different, and the rules do not allow screening plus consent to fix it.

The Board Will Not Bend the Rules Accepting the firm's plan would require departing from the rules on shared conflicts, which the board is unwilling to do. The firm's approach is simply not recognized under Ohio's ethics rules.

Even One Lawyer Could Not Do This It would be extremely difficult, if not impossible, for even a single lawyer to represent both sides when key deal terms must be negotiated. New disagreements could leave the lawyer negotiating for each side while owing loyalty to both, which would compromise the lawyer's judgment.

The Same Problems Apply to the Whole Firm Because the conflict is shared across the firm, separate teams face the same problems, and consent plus screening cannot solve them. The firm's loyalties may be so divided that it cannot reasonably believe it can serve both clients well, which makes the conflict impossible to waive.

Conflicts Outside of Lawsuits

Conflicts Outside of Lawsuits Conflicts from representing several clients at once are even harder to sort out when no lawsuit is involved, though Model Rule 1.7 applies either way. Courts have dealt with these conflicts less often and tend to allow joint representation when the clients agree.

The Kamp Rule for Buyers and Sellers In In re Kamp (1963), the New Jersey Supreme Court said that buyers and sellers naturally have opposing interests, so the conflict rules apply whenever one lawyer represents both sides of a sale. The lawyer must explain the relationship with the seller, the risks, and the benefits of hiring a separate lawyer, so the buyer can make an informed choice before agreeing.

Questions About the Kamp Approach The authors ask whether the court should have flatly banned representing both buyer and seller instead of relying on disclosure. They also ask whether practical and economic concerns, like the cost of hiring several lawyers, should openly count in the balance.

In re Dolan Rejects a Total Ban In In re Dolan (1978), the court kept its case-by-case approach and declined to adopt an absolute ban on one lawyer representing both buyer and seller. It reasoned that a strict ban would leave many buyers of modest means without any lawyer, but warned lawyers not to take advantage of clients who agree out of financial necessity.

Baldasarre v. Butler Draws a Bright Line In 1993, the court held that one lawyer may not represent both buyer and seller in a complex commercial real estate deal, even if both agree. The court pointed to the large sums of money, complicated contingencies, and many options in such deals as creating too much risk of conflict.

Why Courts Hesitate to Discipline The authors ask why the bright-line rule covers only complex deals with sophisticated clients and not ordinary home purchases. They note that these cases arose in disciplinary proceedings, which may quietly push courts away from finding violations and toward announcing rules for the future instead.

The Oregon Example and the Burden of Proof Oregon shows that courts can strictly discipline lawyers outside litigation; its Supreme Court did so in 43 cases of improper joint representation between 1980 and 2015. Because discipline requires clear and convincing proof, the authors ask whether lawyers should be punished for conduct close to the line in states with unclear rules.

Unsophisticated Clients The authors ask whether it matters that the parties may lack legal sophistication and whether extra limits are needed. They point to Problem 4-9, in which a firm wanted to represent both sides of a large friendly merger.

The Lawyer's Own Interests Model Rule 1.7(b) treats conflicts between a client and the lawyer's personal interests the same way as conflicts among several clients. This issue has grown as law firms buy shares in companies they represent or take stock as payment for legal work.

Specific Transactions Under Rule 1.8 Model Rule 1.8 goes beyond Rule 1.7 by regulating particular business dealings between lawyers and clients, and client consent removes only some of these bans. Under Rule 1.8(k), a conflict that arises because a lawyer's relative represents the other side is personal and does not spread to the rest of the firm.

Opposing a Former Client

How Duties to Former Clients Arise When a lawyer opposes a former client, the duties come only from the past relationship and center mainly on confidential information the lawyer received. Problems can also arise when the new work attacks a result the lawyer previously won for the former client.

Analytica, Inc. v. NPD Research Background

The Stock-Transfer Facts NPD, a closely held market-research company, agreed to give its executive Malec more shares, and attorney Richard Fine of Schwartz & Freeman designed a tax-efficient way to structure the transfer. NPD gave Fine confidential financial information to value the stock and paid his bill of about $850.

The Firm Switches Sides After Malec left NPD and formed the competing company Analytica, Schwartz & Freeman filed a complaint with the FTC accusing NPD of anticompetitive conduct. When the FTC did nothing, Analytica sued NPD in 1979, and in 1981 the judge disqualified both of Analytica's law firms and ordered Schwartz & Freeman to pay NPD's fees and expenses.

Legal Standard

The "Substantial Relationship" Test A lawyer may not represent a former client's opponent if the two matters are "substantially related," meaning the lawyer could have learned confidential information in the first matter that would matter in the second. It doesn't matter whether the lawyer actually got that information or whether different people in the firm handled the two matters.

The Exception for Lawyers Who Change Firms There is an exception when a lawyer moves to a new firm and the new firm shows it took effective steps to keep the former client's confidences away from the team on the new matter. The exception didn't apply here, because the firm itself switched sides.

Legal Reasoning

Applying the Test Fine received NPD's confidential data on profits, sales prospects, and market strength, all of which could matter in an antitrust case against NPD. The two matters were therefore substantially related, even though no one knew whether the information was actually used.

Who Was the Client? Schwartz & Freeman argued that only Malec was its client, but Judge Posner called that both wrong and beside the point. Fine was effectively counsel to the company and all its owners, NPD paid the bill, and no one else had a lawyer in the deal.

The Westinghouse Precedent In the Westinghouse case, Kirkland & Ellis was disqualified because Kerr-McGee had given it confidential information through a trade group, even though Kerr-McGee was never its direct client. The court said Analytica was a much stronger case for disqualification, since NPD gave its data directly to a lawyer it believed it had hired.

Disqualification Is Still Warranted The court acknowledged growing frustration with disqualification because it delays lawsuits and may be too strict, especially for large firms. Still, it found no basis to withhold the remedy here, and said a gap of a few months after NPD shared its data shouldn't change the result.

Why Not Investigate Actual Leaks? Checking in every case whether secrets were actually shared would not work, because the only witnesses would be the lawyers trying to avoid disqualification. Switching sides in a closely related matter also looks improper to the public, and clients won't confide in firms they can't trust.

Other Possible Conflict Situations

Client Relationships Without Formal Hiring A law firm can owe client-like duties to a party that never formally hired it, as the investment-banking case Jack Eckerd Corp. v. Dart Group also held. That court distinguished In re John Doe Corp., where an underwriter's lawyer did not become the company's lawyer just by asking for an internal report.

The Government-Lawyer Case In Production Credit Assn. v. Buckentin, a former government agency lawyer became, in effect, the attorney for local farm-lending associations he advised. He was therefore disqualified from representing farmers against those associations.

Unexpected Relationships These cases warn lawyers that their dealings can create a client relationship they didn't intend, as when a lawyer promises to refer a case and then lets the filing deadline pass. To protect themselves, many law firms now state on their websites that online contact doesn't create a lawyer-client relationship.

Staff Who Switch Firms Courts disagree about whether a secretary or other staff member who moves to an opposing firm makes that firm ineligible to stay on the case. Some courts presume that confidences were shared but allow firms to rebut it, while others apply the same strict rule used for lawyers.

Summer Associates and Spouses Summer associates who move between firms and spouses who practice in different settings in the same town also face hard conflict problems. There is not much case law on these situations.

Clients Who "Shop" for Lawyers A client who interviews many lawyers can, on purpose or by accident, disqualify many firms from representing the other side. In Poly Software v. Su, the court found that the interviewing lawyer had limited the risk, so the firm was not disqualified

Maritrans v. Pepper, Hamilton & Scheetz Background

The Court's Main Holding The Pennsylvania Supreme Court agreed that breaking the ethics code does not, by itself, give a client the right to sue. It nonetheless held that the lawyers breached their legal duty of loyalty to their client and that the injunction against them should have been upheld.

Maritrans' Business and Its Lawyers Maritrans is a Philadelphia company that ships petroleum along the East and Gulf coasts by tug and barge, competing with New York companies. For over a decade, Pepper handled its labor and major corporate work and was paid roughly $1 million for each.

Confidential Information the Lawyers Learned Pepper and Messina became "intimately familiar" with Maritrans' operations, finances, labor costs, and long-term plans. Maritrans also shared detailed assessments of each competitor's strengths and weaknesses, especially on the sensitive issue of labor costs.

Representing the Competitors With that knowledge, Pepper and Messina began representing several of Maritrans' New York competitors. In labor talks, those competitors sought wage cuts so they could win business away from Maritrans.

Maritrans Objects In September 1987, Maritrans learned that Pepper was representing four New York competitors and objected. Pepper called it a "business conflict," not a legal one, and denied any duty to stop.

The "Chinese Wall" Deal Maritrans agreed that Pepper could keep the four competitors if it took on no more, especially the largest competitor, Bouchard. Messina would represent the competitors while two other Pepper lawyers handled Maritrans, with neither side discussing its work with the other.

"Parking" Clients and Dropping Maritrans Without telling Maritrans, Messina "parked" Bouchard and another competitor with outside lawyer Vincent Pentima while still effectively representing them. Pepper dropped Maritrans on December 2, 1987, took on the New York companies on December 28, and brought in Pentima with Bouchard and Eklof as clients on January 4, 1988.

Evidence From Discovery Executives of the competitors testified that the information Pepper held was confidential in the industry and that they wanted it. They added that labor costs can make or break a company, and the Labor Department confirmed that, contrary to Messina's sworn testimony, Maritrans' contracts were not publicly available.

Procedural Posture

The Parties and the Lawsuit Maritrans sued its lawyers of more than ten years, the Pepper firm and partner J. Anthony Messina, seeking both an injunction and money damages. The claim was that they had represented Maritrans' competitors in matters closely related to their earlier work for Maritrans.

The Lower Court Rulings In May 1989, the trial court ordered Pepper and Messina to stop acting as labor counsel for seven New York competitors, finding a substantial relationship with their earlier work for Maritrans. The Superior Court, an intermediate appeals court, reversed that order.

The Trial Court Changes Its Mind The trial court first denied the injunction, then reconsidered on its own, finding it had wrongly treated the case as an ordinary business dispute. It found a substantial relationship between the matters and that Pepper broke its promise to keep information away from Messina.

The Superior Court's Reversal The Superior Court said the trial court wrongly relied on the ethics rules without finding that Pepper's conduct could be sued over. It held that this kind of former-client conflict is not "actionable," meaning not a basis for a lawsuit, in Pennsylvania.

The Supreme Court Corrects the Confusion The Supreme Court agreed that breaking an ethics rule does not automatically allow a lawsuit, but said the Superior Court then turned that idea upside down. Long before the ethics rules existed, the common law, meaning judge-made law, already barred lawyers from acting against former clients in substantially related matters.

Legal Standard

Courts Impose Civil Penalties Courts across the country have made disloyal lawyers give back their fees and have awarded damages, such as a $350,000 judgment in David Welch Co. v. Erskine & Tulley. These civil penalties exist separately from professional discipline

No Blanket Rule; Case by Case The court refused to adopt a blanket ban on representing a former client's competitors and said each case depends on its own facts. The more deeply the lawyer was involved in the former client's affairs, the greater the danger of leaks, and here that involvement was extensive.

Legal Reasoning

Why the Injunction Was Proper The trial court acted within its discretion, because Maritrans' competitive position could be seriously harmed and later damages would be hard to prove. A narrower order just forbidding disclosure would be nearly impossible to enforce, so a complete ban was justified.

Lawyers Are Not Exempt From Fiduciary Law Pennsylvania law already forbids anyone in a position of trust from engaging in conflicts of interest, and lawyers are not exempt. Just as a client can sue a lawyer who steals client funds, a client can sue a lawyer with an improper conflict.

Why Dissent believed Ethical Screening was possible

Chief Justice Nix's Dissent Chief Justice Nix argued that the majority ignored a large body of case law in this area. He said the majority also overlooked a key fact that made its conclusion unreasonable.

How the "Chinese Wall" Defense Works When a former client shows that the matters are substantially related, it is presumed that confidences were shared, and the firm can try to overcome that presumption by showing it built an effective internal barrier, often called a "Chinese wall". Courts weigh factors like firm size, timing, and the lawyer's involvement, plus features like limits on file access and penalties for breaches.

Consent as a Waiver Nix agreed the wall here was probably flawed, because it came late and the conflict sat within one lawyer, Messina. But Maritrans knowingly agreed to the arrangement and no actual leak occurred, so he concluded it had given up its objection.

Justice Flaherty's Dissent Justice Flaherty joined Nix's dissent because Maritrans consented and no confidences were actually leaked. He added that the "Chinese wall" defense is full of problems and deserves close scrutiny from courts.

Ohio Advisory Opinion Regarding Adverse Clients

Syllabus (Summary of the Holding) A conflict of interest arises when one lawyer represents two clients on opposite sides of the same deal. A law firm can't get around that conflict by walling off separate groups of its lawyers for each client.

Question Presented The Board was asked whether a firm may represent two opposing clients in the same deal by using separate, walled-off lawyer teams. The proposal also depended on both clients giving informed, written consent.

Legal Arguments

The Firm's Proposal A law firm wanted to represent two long-term clients on opposite sides of a deal, with a separate team of the firm's lawyers for each client. Both clients are sophisticated and have their own in-house lawyers, and they know they share the firm and that their interests in the deal are opposed.

The Proposed Screen Each team would owe loyalty only to its own client, and the firm would set up an agreed screen limiting work, information sharing, and communication between the teams. Files would be locked down and labeled confidential, and the firm promised not to represent either client in any later litigation or arbitration over the deal.

Legal Reasoning

Two Types of Conflict Exist The Board agreed that representing both sides of one deal creates a built-in conflict, and found both a "direct adversity" conflict and a "material limitation" conflict. A direct adversity conflict, where the two clients are on opposite sides, bars representing both unless the clients give informed, written consent and the lawyer can still serve each one competently and diligently.

The Material Limitation Conflict A material limitation conflict exists when there is a real risk that duties to someone else, or the lawyer's own interests, will hold back the lawyer's advice or actions for a client. Here, the risks include loyalty to one client, the wish to keep good relations with colleagues, uneven skill between the two teams, and the firm's desire to keep both clients even if talks turn hostile.

Conflicts Spread Across the Firm Under Rule 1.10(a), a firm is treated as one lawyer, so if one of its lawyers would be barred from a matter, every lawyer in the firm is barred. The firm offered the screen plus client consent as a way to avoid having the conflict spread to all its lawyers.

Screening Doesn't Fix This Conflict The ethics rules use screens to keep a disqualified lawyer away from confidential information, not to cure conflicts between current clients in a situation like this. Walling off one lawyer is very different from setting up two firm teams to fight each other, and the Board refused to approve that departure from the rules.

Even One Lawyer Couldn't Do It It would be extremely hard, if not impossible, for even a single lawyer to competently represent both sides when key terms must be negotiated. New disagreements could leave the lawyer bargaining against one client while still owing loyalty to both, which would compromise the lawyer's judgment.

The Same Problem Applies to a Firm Because conflicts spread across the firm, separate teams face the same problems, and consent plus screening can't solve them. The firm's loyalties could become so divided that it couldn't reasonably believe it could serve both clients well, which makes the conflict one that client consent can't cure.

Other States Agree New York's ethics guidance says one firm can't represent both corporate sides in the sale of a subsidiary if its lawyers must negotiate business terms against each other, even with consent. Illinois and New York have also barred one firm, or separate lawyers in one firm, from representing both buyer and seller even in simple real estate sales.

This Deal Is Even Riskier The deal here is more complicated than a simple real estate sale. That makes problems during negotiation more likely, and those problems would keep the firm from serving both clients loyally and competently.