Dealing with Outside Counsel’s Conflict of Interest (Part I)

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In her many years as corporate counsel, Alice had never received a demand letter for $2 million from her company’s primary outside counsel.

“What are they thinking?” Alice pondered as she picked up the phone to call the relationship partner. “No,” she caught herself, “the managing partner wanted to know how his firm could expand our relationship. I think he deserves this call . . . .”

Corporate counsel often observe their outside counsel in conflicted representations. Yet few resources help corporate counsel analyze and respond to conflicted outside counsel. This article and a companion in the next issue, Part II – Relationship Over, Let’s Litigate, offer eight considerations for corporate counsel (Part I) working through the conflict with outside counsel or, if such cooperate efforts do not reach a suitable outcome, (Part II) terminating the representation and seeking remedies such as disqualification of disciplinary sanctions.

The eight considerations discussed in these articles are intended as a menu, not a mandatory set of steps. Often corporate counsel will decide not to pursue a conflict, or can resolve the conflict without outside counsel in fewer than the eight considerations discussed here. Only the rare, serious conflict will likely cause corporate counsel to exercise and exhaust all of these considerations.

Also, corporate counsel should be mindful that sometimes swift action may be required. Courts are often skeptical of claims that conflicts should result in serious sanctions if the record shows the client apparently knew of the conflict for a substantial period of time but undertook no remedial action.

Consideration I – Evaluate the Conflict. The first task, and sometimes among the most challenging, is to evaluate the nature of the conflict. For corporate counsel, this evaluation may occur on three separate levels. Corporate counsel may conduct this analysis or simply notify outside counsel of a conflict and let outside counsel analyze the situation and offer a resolution.

1. The Ethical Conflict. Analyzing a conflict under the Rules of Professional Conduct is important because it may help corporate counsel decide how serious a conflict is. It may also establish possible solutions that may be available to mitigate or resolve the conflict.

When assessing the ethical conflict, often three major concerns will help guide the analysis:

a. Is the firm the current outside counsel or former outside counsel? This is important because current outside counsel cannot be “directly adverse” to the corporate client on any matter, even wholly unrelated matters (Mo. S. Ct. R. 4-1.7(a)(1)); former counsel can be “materially adverse” to the former client so long as the matters are not the same or substantially related (Mo. S. Ct. R. 4-1.9(a)). The existence or termination of the lawyer-client relationship is therefore a major issue. Also, although it may be necessary to terminate the conflicted firm (Consideration IV), it may also be easier to disqualify that firm from doing work for an adversary (Consideration V).

b. Is the conflict waivable? This determination will help the corporate client determine the likelihood it will obtain serious sanctions against the conflicted firm. A nonwaivable conflict will also severely limit the law firm’s and corporate client’s options to mitigate or resolve the conflict.

Rule 4-1.8 establishes a number of nonwaivable conflicts. For corporate clients, however, the most common nonwaivable conflicts are Rule 4-1.7(b)(1). These conflicts arise when a law firm cannot provide competent, diligent representation to each affected client. The law firm may be attempting to represent both the buyer and seller in an arm’s length business deal, or both the plaintiff and defendant in contested litigation. Often such representations create conflicts that cannot be waived.

When a conflict is nonwaivable, the conflicted law firm cannot and should not request a waiver to mitigate the conflict. Thus, a client should not be pressured to waive a nonwaivable conflict.

2. Contractual Provisions. In addition to the ethical rules governing conflicts of interest, corporate clients and law firms often enter contractual provisions relating to conflicts of interest. Sometimes these provisions relate to and ask a corporate client to waive a specific existing conflict. When permitted under Rule 4-1.7(b), such waivers may essentially allow the outside counsel to carry on a conflicted representation.

Sometimes, however, a conflict waiver was obtained without adequate disclosure of the circumstances giving rise to the conflict, the risks created by those circumstances, or available alternatives. Or circumstances may materially change. Either case may provide corporate counsel with justification to withdraw a conflict waiver.

Read more: http://newsmanager.commpartners.com/accstl/issues/2012-03-01.html#4

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Published In: Business Organization Updates, Professional Malpractice Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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