Week 5 - Introduction to Conflicts of Interests

Class Notes

Legal Malpractice: mainly focuses on duty and breach

Take personal responsibility: Spot the issue, get help, promptly

Types of Conflicts: Current Client (direct adversity on any matter), Former Client (adversity on same or subst’ly related matter), Material Limitation (punch-pulling) - significant risk, a representation will be materially lmited by law firm’s responsibilites to

Imputation: one lawyer’s conflict = law firm’s conflict

Materially adverse is adversity

1.9c1 cannot use client information, but if it is generally known can use the information but still can’t disclose
1.9c2 cannot reveal client information

Conflict - Rationalies: Loyalty main, independence, non-exploitation, trust, confidentiaility, legal system

Conflict - Costs: Client Expense, Choice of lawyer, Informed consent, lawyer mobility

Gonzalez-Lopez Case: A case involving the right to counsel, where a defendant was denied his chosen attorney due to a conflict of interest, emphasizing clients' rights in legal representation.

Airgas Case: Just because you beat the motion to DQ does not mean you’ve beaten the claim for breach of fiduciary duty

Murphy Case: Pro-admiral, but breach duty on both sides, Admiral entitled to know.

• Siemer “concluded that there was no conflict because both cclients had an identical interest” (The lie we tell ourselves)

Gellene: Lying about the conflict of interest under oath was the reason of jail

• Breached duty to Gellene, because if disclosed to GC would have not gone to jail
  
  Rule 1.3: Diligence: Perhaps no professional shortcoming is more widely resented than procrastination

United States v. Gonzalez-Lopez Background

The Question Presented The Supreme Court had to decide whether a defendant gets his conviction thrown out when a trial court wrongly denies him the lawyer he chose. The case centers on the right to choose one's own lawyer in a criminal case.

The Charges and the Lawyers Gonzalez-Lopez was charged in Missouri with conspiracy to distribute more than 100 kilograms of marijuana, and his family hired lawyer John Fahle. He also contacted California lawyer Joseph Low, who flew in to meet him and was hired.

Low Is Removed From a Hearing A magistrate judge let Low take part in a hearing on the condition that he quickly apply for permission to appear in that court. During the hearing, the judge revoked that permission because Low passed notes to Fahle, breaking a rule that only one lawyer may question a witness.

Low's Applications Denied The defendant then told Fahle he wanted Low to be his only lawyer, and Low applied twice for permission to appear. The district court denied both applications without explanation, and the appeals court dismissed Low's challenge.

Fahle Accuses Low of an Ethics Violation Fahle asked to withdraw and sought sanctions, claiming Low broke a Missouri ethics rule by contacting the defendant while Fahle represented him. The court let Fahle withdraw, and the defendant hired local lawyer Karl Dickhaus for trial.

The Court Finally Explains The court then explained for the first time that it had denied Low's applications mainly because Low had broken the same rule in a separate case. That rule bars a lawyer from talking about a case with someone who already has a lawyer, without that lawyer's consent.

Procedural Posture

Low Kept Away at Trial At trial, the court again refused to admit Low, made him sit in the audience, and barred him from contacting Dickhaus. A U.S. Marshal sat between the two lawyers, and the defendant could meet with Low only once, on the last night of trial.

Conviction and Sanctions The jury found the defendant guilty. The court then sanctioned Low, again saying his contact with the defendant broke the ethics rule.

The Eighth Circuit Reverses The appeals court held that the trial court misread the ethics rule, so denying Low's applications violated the defendant's right to the paid lawyer of his choice. It also held that this violation could not be excused as "harmless," and the Supreme Court agreed to review the case.

Legal Standard

The Right to Choose Counsel The Sixth Amendment guarantees the right to the assistance of counsel, which includes the right of a defendant who can pay to choose his own lawyer. The government agreed that this right exists and that the trial court wrongly denied it here.

The Government's Argument The government argued there is no full violation unless the replacement lawyer was ineffective, meaning he performed poorly and it hurt the defendant. As a backup, it argued the defendant must at least show that his chosen lawyer would likely have gotten a different result.

The Fair-Trial Argument The government relied on cases saying the right to counsel exists to ensure a fair trial. So, it argued, there is no violation unless the defendant was actually harmed

Court Reasoning

A Right Is Not Just Its Purpose The Court said a right's purpose may be fairness, but that does not mean the right can be ignored whenever the trial seems fair overall. It compared this to the right to confront witnesses, where the Court rejected the idea that reliable evidence makes cross-examination unnecessary.

The Violation Is Complete When the Choice Is Denied The right to counsel of choice guarantees a specific protection: being defended by the lawyer the accused thinks is best. That right is violated whenever the lawyer is wrongly denied, and no extra showing of harm is needed.

Why Ineffectiveness Claims Require Harm The government's cases involve the right to effective counsel, which came from the goal of a fair trial. A lawyer cannot be "ineffective" unless his mistakes hurt the defense, so harm is part of that right's definition.

Choice of Counsel Is Different The right to choose one's lawyer has never been based on the fair-trial goal and is seen as the core meaning of the right to counsel. It is the right to a particular lawyer no matter how well others perform, unlike the right to effective counsel, which sets a minimum standard of competence.

Two Types of Constitutional Errors Earlier cases divide constitutional errors into "trial errors," whose effect can be measured against the other evidence, and "structural defects". Structural defects affect the whole framework of the trial and cannot be excused as harmless.

Examples of Structural Errors Structural errors include denying counsel altogether, denying self-representation, or denying a public trial. They also include giving the jury a faulty instruction on reasonable doubt.

Denying Chosen Counsel Is Structural The Court held that wrongly denying a defendant his chosen lawyer is a structural error because its effects cannot be measured. Different lawyers choose different strategies on investigation, jury selection, witnesses, and plea deals.

An "Alternate Universe" Inquiry It is impossible to know what the rejected lawyer would have done differently or how much it would have changed the outcome. Many decisions, like plea deals, happen outside trial, so harmless-error review would be pure guesswork.

Why This Differs From Ineffectiveness The government noted that ineffective counsel also affects a whole trial, yet harm must still be shown. The Court replied that ineffectiveness shows up as specific mistakes that can be measured, while a denied choice requires guessing about a different lawyer's style, strategy, and relationships.

Existing Limits on the Right Remain The ruling does not weaken earlier limits on the right or courts' power to set rules for which lawyers may appear before them. Defendants who need appointed lawyers, want a non-lawyer, or want a lawyer with a conflict have no right to insist on that choice.

Courts Keep Their Discretion Trial courts have wide room to balance this right against fairness, their schedules, and the profession's ethics standards. None of those limits applied here, because the government admitted the court's ruling was simply wrong.

In re Violation of Rule 50 (Law Clerk in Pending Case)

A Former Clerk Joins a Law Firm The violation involves a former law clerk who left the court to work for a private firm that often handles cases before this court. When her clerkship ended, she received a spreadsheet, the "Appeals Pending List," showing every case pending while she worked there, including appeal numbers and the matching lower court case numbers.

The Firm's Screening Process The firm says the former clerk gave it her Appeals Pending List before she started. The firm also says it used that list to flag any cases the firm was already handling that had been before the court during her clerkship.

The Case That Caused the Problem A year after she left, the court decided a case that had arrived shortly before her departure and sent it back to the lower court for more work. The firm was not involved in that case at first, but a few years later it was hired to represent a party in the lower court.

The Former Clerk Works on the Case Because she received no internal conflict warning and the case was in a lower court, the former clerk did not realize right away that Rule 50 might apply. The lower court allowed her to appear, and she helped on the case, mainly by doing legal research.

The Mistake Is Caught and Reported Once she realized the case had been before the court during her clerkship, she told her supervisor and the firm's internal ethics lawyers and stopped working on it. The firm quickly reported the violation to the court, and she withdrew from the case.

The Firm's Explanation The firm called the violation accidental, expressed regret, and said it has taken steps to prevent a repeat. It stressed that her judge was not on the case, she never worked on it at the court, and she is certain she never saw or discussed it while there.

The Rule and What It Requires Rule 50 bars former court employees from helping in any way with a case that was pending while they worked at the court. Court precedent requires strict compliance, and any violation must be promptly explained through sworn statements, after which discipline may follow.

Firms Must Use the List They Have The court recently explained that firms hiring former clerks already have the Appeals Pending List needed to avoid these conflicts. The court expects firms to use that list when assigning work so former clerks are kept off prohibited cases.

The Firm Was Negligent The firm had the former clerk's list yet never sent her a conflict warning, which the court said proves the firm was careless. Its screening only checked cases the firm was already handling, so it missed cases the firm joined later, which it would have caught by screening every appeal number and lower court case number on the list.

No Discipline Now, but a Warning The court chose not to impose discipline because this was a first violation, no one was harmed, the clerk never worked on the case at the court, nothing substantive was filed during her clerkship, and the problem was handled properly once found. But it stressed that former clerks must stay alert and firms have their own duty to keep former clerks off barred cases, so future violations like this may be disciplined.

Conflict Prevalence Today

Why Conflicts Now Matter So Much Conflicts of interest used to be seen as a minor issue for law firms, but they are now one of the most common ethics problems lawyers face. Bigger firms, more motions to disqualify opposing lawyers, and more detailed conflict rules have all pushed the issue forward, so most firms now use software to track clients and spot conflicts.

Loyalty and Confidentiality at the Core All conflict situations come down to the loyalty a lawyer owes to clients and would-be clients. Conflict rules also protect client secrets, which is one reason the rules are often read broadly.

When a Firm Has More Than One Client Once a firm has several clients, it must check whether its current or past work keeps it from taking a new case. Some cases are obvious, like one lawyer representing both prosecution and defense, but it is less clear whether different lawyers in the same firm may take opposite sides, or whether a lawyer may oppose a former client in an unrelated matter.

Loyalty Cuts Both Ways Being loyal to one client can mean turning another client away, and that client may have spent a lot of time and money teaching the lawyer about its affairs. Conflict rules must also weigh other values, such as letting clients choose their own lawyers and keeping legal services affordable.

Conflicts Are Also a Business Problem Scholars usually discuss conflicts in terms of legal rules, but practicing lawyers see them mainly as business and client-relations problems. In one study of more than one hundred conflict stories, only seven involved hard legal questions, and the rest involved clashing interests that caused business strain or upset colleagues.

What Shapiro's Findings Mean Most conflict problems happen not because the rules are unclear but because lawyers and clients do not want to follow clear rules. Lawyers do not want to send clients elsewhere, and clients do not want to lose their lawyers.

The Supreme Court's Approach A court must look into a possible conflict only when it knows, or should know, that one exists, and a defendant who did not object at trial must show that an actual conflict hurt the lawyer's work. Even if a defendant gives up the right to a conflict-free lawyer, the court may still refuse to allow the shared representation.

Murphy & Demory, Ltd. v. Admiral Daniel J. Murphy Background

The Murphy & Demory Lawsuit Murphy & Demory sued the Pillsbury, Madison & Sutro firm, partner Deanne Siemer, and senior associate Keith Mendelson for malpractice. The judge relied on the District of Columbia's ethics rules and the testimony of the company's expert witness, David Epstein.

Court Reasoning

How the Lawyers Committed Malpractice The court found that the lawyers secretly represented Admiral Murphy in his efforts to take control of the company or start a competing business, while also serving as the company's own lawyers. Among other things, they helped employees resign, used confidential information against the company, and later sued to dissolve their former client.

Ignoring the Associates' Warnings The firm ignored junior associates who warned that the dual representation was full of conflicts. The judge was troubled that Siemer, the partner in charge, was left to decide on her own whether a conflict existed, and he found that she willfully ignored ethics rules she knew well.

Mendelson Also Responsible Although the judge sympathized with Mendelson's position, he found Mendelson equally responsible. As a senior lawyer, Mendelson should have disclosed the conflict and gotten consent, or else withdrawn from the case.

Causation and Damages The court found that the company's harm would not have happened "but for" the lawyers' misconduct, so it did not need to use the looser test from another case. For example, the lawyers used confidential information from company employees to help Admiral Murphy.

United States v. Gellene Background

Overview of the Case John Gellene, a partner at the New York firm Milbank Tweed, represented Bucyrus-Erie in its bankruptcy and filed a sworn statement that was supposed to list all of his firm's ties to the parties. The statement left out the company's top secured lender and related parties, so he was charged with two counts of bankruptcy fraud and one count of using a false document under oath.

Bucyrus's Debt Problems Bucyrus, a mining equipment maker in Wisconsin, was a longtime Milbank client and took on more than $200 million in debt after a leveraged buyout. Lawrence Lederman managed the account and brought in Gellene, a bankruptcy lawyer, in 1993 to help restructure the company.

The Major Players The main parties with a stake in Bucyrus were Goldman Sachs, its largest shareholder; Jackson National Life (JNL), its largest creditor; and South Street Funds, which held about $35 million in secured debt. South Street was run by Greycliff Partners, which was made up of Mikael Salovaara and Alfred Eckert, two former Goldman Sachs employees.

The First Sworn Disclosure When Bucyrus filed for bankruptcy in 1994, court rules required Gellene to swear to every connection Milbank had with the company and its creditors. He disclosed work for Goldman Sachs and JNL, but he left out Milbank's work for South Street, Greycliff, and Salovaara.

Objections and a Court Hearing The US Trustee and JNL objected and asked whether Milbank's ties to Goldman Sachs created a conflict. The court held a hearing and asked Gellene for a second, more detailed statement about possible conflicts.

The Second Sworn Disclosure Gellene's second statement described the Goldman Sachs work, a "Chinese wall" to separate it, and two more creditors, and it said he knew of no other such representations. Once again, he did not mention South Street, Greycliff, or Salovaara, even though Milbank was doing their legal work at the time.

Warnings Inside the Firm Milbank partner Toni Lichstein twice raised a possible conflict, but Gellene and Lederman said it was not a problem. Milbank's work for Salovaara later wound down, and the firm wrote off more than $300,000 in related bills, but Gellene never told Bucyrus about the other clients.

The Fee Hearing After a reorganization plan was approved, Milbank asked for more than $2 million in fees, and Gellene testified using his sworn statements to show that the Goldman Sachs tie had been disclosed. He did not reveal the South Street and Greycliff work, and the court awarded about $1.8 million.

The Cover-Up Unravels In late 1996, JNL learned about the Salovaara work and asked the court to make Milbank give back its fees. Gellene lied to his partners about the response deadline and altered a court filing, but he later admitted the lie and took "full personal responsibility" in a third statement.

The Criminal Charges In December 1997, a grand jury charged Gellene with two counts of bankruptcy fraud and one count of perjury. The charges were based on the two false sworn statements and his use of the second one while testifying under oath.

Evidence of Other Lies At trial, the government showed that Gellene had falsely claimed for years to be a member of the New York bar and of a federal court's bar. It also showed that he hid his partners' ownership of a cab company he billed for, and that he gave a false excuse to a Colorado bankruptcy court.

Arguments By Gellene

Gellene's Defense Gellene testified that he did not think Salovaara was a creditor and saw the other matters as unrelated, so he did not believe he had to disclose them. He called his choices "stupid, but not criminal," but the jury disagreed and convicted him on all counts.

His Argument About "Fraudulent" Gellene argued that the jury was wrongly told that "fraudulent" means intending to deceive, when it should mean intending to take someone's money or property. In his view, the crime covers only lies meant to change how a debtor's assets are divided.

His Argument About "Material" Gellene argued that a lie is "material," or important, only if it affects how assets are divided. He said hiding his work for a major creditor did not meet that test.

Gellene's Three Challenges Gellene argued that he did not "use" the false part of the document, that the statement was literally true, and that he should have been acquitted. He said the hearing focused only on Goldman Sachs, not on the paragraph cited in the charges.

The "Literally True" Argument Gellene argued that the government never proved his hidden clients were "institutional creditors," so his statement was technically true. He relied on Bronston, but the court said that case concerns tricky answers to an opponent's questions, not false evidence a witness sets up himself.

Evidence of Past Lies Gellene objected to evidence that he practiced law for about nine years while falsely claiming bar memberships, and to evidence of his other false statements. He said this evidence only painted him as a liar, but the trial judge admitted it because he had made his intent the central issue.

Challenge to the Fine Gellene said he could not pay the $15,000 fine and claimed he was insolvent, with three daughters to support. Under the sentencing rules, a fine is required unless the defendant proves he cannot pay, and the burden is on him.

Legal Reasoning

The Court Rejects That Narrow Reading The court said Congress did not mean to limit the law that way, and the everyday meaning of "fraudulently" includes intent to deceive. Earlier cases also held that the law covers lies meant to fool the bankruptcy court itself.

Protecting an Honest Bankruptcy System Leaving out important facts harms the bankruptcy court just as much as an outright lie, and the law exists to protect the honesty of the whole process. Bankruptcy crimes therefore do not require that anyone lose money or that the liar gain anything.

What Counts as Material The court agreed that a lie must be about something important, but it said the lie does not have to concern the debtor's assets. A lie is material if it relates to any significant part of the case, and creditors do not need to have been hurt.

Lawyer Disclosures Are Always Important Lawyers for a debtor must disclose every connection, and they "cannot pick and choose" which ones seem unimportant. The rule makes sure the debtor's lawyer is neutral, which goes "to the heart" of a fair bankruptcy.

Enough Evidence of Fraud The record showed that Gellene was a bankruptcy expert, had been warned by the judge, and was questioned several times by his partner, yet he kept hiding the information for two years. Together with his other lies and the jury's chance to judge his explanations, this was enough for a reasonable jury to convict.

The Jury Instruction Was Fair The court found that defining "fraudulent" as known to be untrue and meant to deceive was adequate on these facts. As the debtor's lawyer, Gellene's lies cheated the whole bankruptcy process, so the instruction was upheld.

The Perjury Charge The perjury count came from the 1995 fee hearing, where Gellene relied on his sworn statements to answer JNL's conflict concerns. The second statement said he knew of no other representations, even though Milbank was actively working for South Street and Greycliff at the time.

The Perjury Law This law punishes anyone who knowingly makes or uses a false, important statement under oath in court. A statement is important if it could influence the decision maker, and the jury must find this beyond a reasonable doubt.

He Did "Use" the False Statement The court said JNL's real concern was divided loyalty, and the statement assured the court there were no other conflicts to worry about. By relying on the document, Gellene showed both that he had disclosed Goldman Sachs and that he had supposedly found nothing else.

The Statement Was Important His partner testified that the document was offered to persuade the court to award fees, which showed it mattered. The jury could find that Gellene planned the testimony to lull the court into approving the $2 million request.

South Street Was a Creditor Eckert testified that South Street lent Bucyrus $35 million, backed by all of the company's assets. The court found South Street was a party that had to be disclosed, and the jury reasonably found it was an "institutional creditor," so the statement was false.

The Test for Other Bad Acts Evidence of other wrongs is allowed if it proves something like intent, is similar and recent enough, is well supported, and is not unfairly harmful. When a crime requires a specific intent, as this one did, prosecutors may use such evidence to prove intent.

The Evidence Was Properly Admitted Both the charged crimes and the past lies involved deliberately misleading courts, which showed dishonesty rather than mistake. Because the jury was told to use the evidence only to judge intent, the trial judge did not abuse his discretion.

: Longer Sentence for Abusing Trust Gellene argued that he held no position of trust, but the court said a lead bankruptcy lawyer for a large company has great professional discretion. He abused that trust by hiding his work for the top secured creditor and using a false sworn document to back up his testimony, so the longer sentence was proper.

The Fine Is Upheld The judge reviewed Gellene's finances in detail, gave him a chance to prove he could not pay, and chose $15,000 from a range of $4,000 to $40,000. The appeals court found no error, noting that Gellene had earned $2,720,000 from Milbank between 1992 and 1996.

IBM v. Levin Background

Introduction to the Levin Case The next case shows how a conflict can arise in the normal course of a busy law practice, and how ignoring it leads to trouble. It covers key questions such as who counts as a "current" client and what counts as consent, and it warns lawyers to be careful that taking a new client does not hurt an old one.

The Order Under Review The trial court ordered the law firm Carpenter, Bennett & Morrissey (CBM) to stop representing Howard Levin and his company in their antitrust lawsuit against IBM. The court allowed CBM to hand over its past work to new lawyers and to consult with them for 60 days.

Why Levin Sued IBM Levin formed Levin Computer Corporation (LCC) to buy and lease IBM computer equipment. When IBM refused to offer credit on terms Levin thought were fair, he sued IBM under the antitrust laws.

CBM's History With Levin CBM had represented Levin and his earlier company from 1965 to 1969, including in disputes with IBM. In late 1971, CBM became Levin's active lawyer again, set up LCC, and handled LCC's efforts to get credit from IBM.

The Lawsuit Is Filed As IBM kept turning down LCC's credit requests, Levin became more determined to sue, and in February 1972 his lawyers warned IBM that a suit was coming. CBM filed the lawsuit on June 23, 1972, and handled it from then on.

CBM Starts Working for IBM Starting in April 1970, IBM in-house lawyer Robert Troup hired CBM partner Edward Ryan to write opinion letters on labor matters. CBM considered whether this created a conflict because of its past work for Levin's old company, decided it did not, and took several labor assignments from IBM.

Ryan's Concern About a Conflict When Ryan took a fourth IBM assignment in April 1972, he worried because he knew CBM was representing LCC in its credit fight with IBM. A CBM partner told him about the planned antitrust suit and advised him to get IBM's consent to the firm representing both sides.

The Disputed Phone Call Ryan said he called Troup and, in a call of about three minutes, told him about the planned suit, and that Troup said it was not significant to IBM. Troup denied ever being told about the suit.

CBM Keeps Working for IBM While it was suing IBM for Levin, CBM accepted four more labor assignments from IBM without discussing the conflict again. A CBM partner said he mentioned the firm's IBM labor work to IBM's antitrust lawyer on a train, but that lawyer denied it.

IBM Finds Out In 1977, a CBM partner told an IBM lawyer at a law school lunch about the firm's role in the suit, and the IBM lawyer was surprised because CBM also did IBM's labor work. This led IBM to look into the matter and to file a motion in June 1977 to disqualify CBM.

Legal Reasoning

CBM's Main Argument CBM argued that a lawyer suing a client for one person may keep working for that client on unrelated matters without telling it or getting its consent. The textbook notes that the case was decided under the old Code, but the same arguments could be made under today's Model Rule 1.7.

Harm Is Likely Even If Not Proven The court said that suing a client is likely to affect a lawyer's judgment, for example by making the lawyer less vigorous in the client's other matters. The fact that no harm can be pointed to later does not mean there was no risk of harm when the lawyer took on the case.

Lawyers Must Resolve Doubts by Telling the Client A client may lose trust in its lawyer if it learns from someone else that the lawyer is suing it. Lawyers must therefore resolve every doubt in favor of fully telling the client, and CBM itself seemed to think the rules applied.

IBM Was a Current Client The trial court found that CBM had an ongoing relationship with both IBM and Levin the whole time, and the appeals court agreed. Even though CBM had no IBM assignment on the day the suit was filed and was paid per job, IBM kept hiring it before and after, which made IBM a continuing client.

No Confidential Information, But Only by Luck CBM's work for IBM involved only labor matters, but that was not because of any special arrangement. IBM could have asked CBM for help on matters closer to the lawsuit at any time, so it was partly luck that CBM never learned useful secrets.

CBM Had to Disclose and Get Consent The court agreed that CBM had to at least tell IBM all the facts and get its consent. Because CBM did not get IBM's informed consent to representing both sides, it broke the ethics rule.

IBM's Knowledge Was Not Enough CBM argued that IBM already knew the facts because its labor and antitrust lawyers each knew part of the story, but the court said the lawyer must make the disclosure. The disclosure must give the client enough facts to decide for itself, though the court noted IBM's legal department should have coordinated better.

The Disputed Testimony Did Not Matter The trial court did not decide who was telling the truth about the phone call and the train conversation. Even if CBM's version were true, a brief mention was not full and adequate disclosure.

Is Disqualification Too Harsh? CBM and Levin argued that removing CBM was too harsh because the firm had stopped working for IBM and had learned nothing useful. The court noted that clients have no absolute right to a particular lawyer.

Protecting Public Trust in Lawyers A lawyer who is not fully loyal to a client harms the profession's reputation, and public trust is an important factor in deciding the penalty. Courts may even disqualify a lawyer for the appearance of impropriety, so the court upheld CBM's removal.

Handing Over Work Was Allowed The court recognized that Levin would be hurt by losing longtime lawyers, so the trial court softened the blow by letting CBM hand over its work to new lawyers. IBM objected, but the court said that disqualification here was mainly about protecting the integrity of the bar, and the turnover order was a proper use of the trial court's discretion.

Defining Terms under 1.7

Unrelated Matters Still Count Comment 6 to Model Rule 1.7 rejects the idea that suing a client on an unrelated matter is not "directly adverse". In other words, opposing a current client is a conflict even if the two cases have nothing to do with each other.

Who Is a Current Client? The court treated IBM as a current client based on a pattern of repeated work, even though CBM had no IBM matter open at that moment. This makes it harder for firms to track their current clients, and the note asks whether CBM could have dropped IBM if IBM had refused consent.

What Counts as Consent The court held that briefly mentioning the suit to a client's lawyer and then going ahead is not enough. Today's rules require "informed consent," meaning the client is told the risks and the alternatives, and the note asks whether a letter from IBM saying it did not mind would have saved CBM.

Strategem Devel. Corp. v. Heron Int’l Background

The Stratagem Dispute Epstein Becker represented Stratagem in a lawsuit against Heron over a failed real estate deal in Manhattan. At the same time, the firm was representing Fidelity Services Corporation (FSC), a wholly owned Heron subsidiary, in unrelated labor matters.

The Firm Raises the Conflict After Heron ended its deal with Stratagem in June 1990, an Epstein Becker lawyer wrote to Heron "rais[ing] the question" of continuing the labor work. A later letter said the firm would soon sue Heron and planned to resign from the labor case on the day it filed, unless it heard otherwise.

Heron Objects and the Firm Withdraws FSC's chief executive wrote back that he was surprised and that suing Heron would break New York's ethics rules. Epstein Becker replied that it had always represented Stratagem in its dealings with Heron, saw no conflict, and would withdraw from the labor case because Heron seemed "uncomfortable".

The Delayed Handoff A new firm agreed to take over the labor case in September 1990, but files and paperwork were not exchanged right away. Epstein Becker filed the Stratagem suit on October 2, 1990, and on the same day still called itself FSC's lawyer in a letter to a federal appeals court.

Legal Standard

The Duty of Undivided Loyalty A lawyer owes each client undivided loyalty, and this duty applies even when the client is a subsidiary of the company being sued. Because a subsidiary's losses directly affect its parent, the duty applies with even more force here, and doubts are resolved in favor of disqualification.

Two Tests for Disqualification If a firm represents both parties at the same time, courts apply an automatic ban, but if the client is a former client, they ask whether the two matters are "substantially related". Heron argued the automatic ban applied, while Stratagem argued that FSC was a former client.

Legal Reasoning

FSC Was Still a Current Client To be treated as a former client, the relationship must have clearly ended before the new case. Epstein Becker admitted it represented FSC until at least September 4, 1990, while it was already planning to sue FSC's parent, so the automatic ban applied.

No Real Consent Even if consent could have cured the problem, FSC never gave it. The firm's letters asked only about continuing the labor work, read "more like a threat," and finally just announced the withdrawal, which is not the "knowledge and consent" the rules require.

The "Hot Potato" Holding Once Epstein Becker took on FSC, it owed FSC full duties, and it could not drop FSC "like a hot potato" to keep a more favored client. Without prior consent, a firm must stay with the client in the existing case and the other client must find new lawyers.

Similarity to Levin As in Levin, a firm took on a client doing business with its major client, and the problem arose when the two clients fell out. The court's refusal to let the firm drop Heron gave the "hot potato" rule its name.