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By Timothy D. Reuben and Teri T. Pham
Edited by Peg Healy
Category: Special Credit--Legal Ethics
A litigator's world is a miasma of conflicts. Sometimes the adversarial dispute we are hired to resolve seems rather mild in terms of risk and contentiousness in comparison to the ethics conflicts that whirl around us while we litigate. This article describes some of the recent case law and offers a few helpful hints to navigate what we perceive as three of the most common ethics pitfalls for litigators.
Representing an Adverse Interest
A surprisingly common ethics trap occurs when a litigator accepts employment that he or she later discovers to be adverse to the interests of a former client. Rule 3-310(E) of the California Rules of Professional Conduct provides that a member of the State Bar "shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment."
Significantly, the law imputes confidential knowledge to all the lawyers of the same firm, no matter how large or how many offices that firm has. Flatt v Superior Court (1994) 9 C4th 275, 283. That is true even if one of the lawyers is of counsel and effectively has a separate practice. People v SpeeDee Oil Change Systems, Inc. (1999) 20 C4th 1135, 1146.
Once the past representation is discovered, the law will presume that the litigator has a conflict, regardless of whether the litigator actually knows any confidential information. The courts have formulated a "substantial relationship" test: If the "matters embraced within the pending suit" are "substantially related" to the previous suit, then California law will presume that the attorney possesses confidential information, and the lawyer will be disqualified. Flatt, 9 C4th at 283. As recently reenunciated in City Nat'l Bank v Adams (2002) 96 CA4th 315, 327, "if the nature of the representation is such that confidences could have been exchanged between the lawyer and the client, courts will conclusively presume that they were exchanged, and disqualification will be required" [emphasis in original].
In City Nat'l Bank v Adams, a borrower recommended to the bank an attorney he had frequently worked with, for the purpose of providing an opinion letter regarding the salability of stock that was collateral for his loan. Later, when the stock became worthless and litigation ensued between the bank and the borrower, the borrower substituted in the same attorney as counsel. The bank claimed that the lawyer should be disqualified from representing the borrower because he had acted as the bank's lawyer when providing the opinion letter in the same matter. The appellate court affirmed the trial court's presumption that the lawyer had received confidential information from the bank, despite the fact that the letter was routine and the lawyer had had virtually no contact and no prior relationship with the bank. The court acknowledged that "there is a limited exception to this conclusive presumption in the rare instance where the lawyer can show that there was no opportunity for confidential information to be divulged," but the court also quickly pointed out that this exception is "not available when the lawyer's former and current employment are on the opposite sides of the very same matter." 96 CA4th at 328.
If a lawyer is not completely scrupulous about following these conflict-of-interest rules, as recently noted in American Airlines, Inc. v Sheppard, Mullin, Richter & Hampton (2002) 96 CA4th 1017, the lawyer can face malpractice liability. In that case, even when there was no actual breach of confidence or adverse representation, an attorney was deemed to have breached his duty to a former client by undertaking to act as a corporation's witness in a somewhat related matter-against his former client's wishes-because of the potential for the disclosure of confidential information. The court reasoned that as a witness under rule 30 of the Federal Rules of Civil Procedure, the attorney owed a fiduciary duty to his new client to act in that client's best interest, which could conceivably include disclosing confidential information obtained from the former client. 96 CA4th at 1034-1035.
However, not all courts automatically disqualify lawyers at the scent of a potential conflict. As noted by one court recently, disqualification can impose a substantial hardship on a disqualified attorney's innocent client. McPhearson v The Michaels Co. (2002) 96 CA4th 843. In that case, the appellate court determined that the trial court abused its discretion by disqualifying a plaintiff's lawyer who had settled one
lawsuit, which contained a confidentiality clause as to its existence and terms, and then proceeded to represent additional plaintiffs on similar claims against the same defendant. The defendant claimed that the plaintiff's lawyer had an unwaivable conflict of interest because of his knowledge of confidential information relating to the first settlement. In denying disqualification, the court pointed out that the confidentiality provision did not prevent the first plaintiff from testifying in the second suit as a percipient witness. In addition, the court recognized that motions to disqualify "can be used to harass opposing counsel, to delay the litigation, to intimidate an adversary into accepting a settlement on otherwise unacceptable terms, or for other strategic purposes." 96 CA4th at 850. The fact that the clients themselves were not adversarial and had filed waivers of the alleged conflict was also significant.
Similarly, in Frazier v Superior Court (2002) 97 CA4th 23, a court refused to extend the range of imputation of knowledge of confidential information beyond lawyers in the same firm. In that case,
an insurance company's lawyer initially attended some depositions but then withdrew because he discovered that one of his partners in another office had been solicited to represent the plaintiff, so that therefore he had imputed knowledge of confidential information and a presumed conflict of interest. Both the insurance company lawyer and the Cumis counsel (a defense attorney representing the insured but paid for by the insurance company) submitted declarations that they had shared no actual confidential information. The plaintiff unsuccessfully argued that the Cumis counsel should be disqualified because the lawyers were engaged in a joint defense, and imputation of confidential information should be presumed.
So how does a lawyer avoid such conflicts? Obviously, a firm's conflicts-tracking system is critical and must be updated regularly-even to include contacts with potential clients that ultimately do not retain the firm. Firms with multiple offices must take special care to review a master conflicts list. Circulating an email inquiry can also uncover hidden conflicts.
The rule does allow an attorney to seek informed written consent from successive and concurrent clients. See Zador Corp. v Kwan (1995) 31 CA4th 1285 (disqualification turns on scope of joint clients' consent); Johnson v Superior Court (1995) 38 CA4th 463 (lawyer representing partnership had duty to obtain waivers from partners when conflicts arose). However, referral to another reputable firm (hoping that it won't permanently steal your client!) is usually preferable to proceeding when there is a potential for a claim of conflict and a malpractice claim. Bear in mind that a firm to which you refer a client is likely to return the favor at a later time.
Your Partner as Your Witness
Lawyers in the same firm can have ethics conflicts with each other that create nightmares. Perhaps the most common example is when one of the litigator's partners has been intimately involved in a matter and now needs to serve as a material, or even the primary, witness.
Many states do not allow an attorney to be a witness in the same case. Rule 5-210 of the California Rules of Professional Conduct states in part: "A member shall not act as an advocate before a jury which will hear testimony from the member unless (A) The testimony relates to an uncontested matter; or (B) The testimony relates to the nature and value of legal services rendered in the case; or (C) The member has the informed written consent of the client." In its present form, this rule permits a litigator to become a witness after obtaining informed and written client consent. However, case law appears to support disqualification when the lawyer's testimony appears to be prejudicial to the client or injurious to the judicial process. See Reynolds v Superior Court (1986) 177 CA3d 1021 (construing earlier version of rule); Smith, Smith & King v Superior Court (1997) 60 CA4th 573; see also ABA Model Rule 3.7. Prosecutors may testify under extraordinary circumstances but then must withdraw as counsel. People v Donaldson (2001) 93 CA4th 916, 930.
There is no ethics rule directly requiring disqualification when the litigator's partner is a material witness. That does not necessarily make such testimony a good idea, or one without potential ethics pitfalls. There may be inherent conflicts involved in representing a client in litigation concerning a matter that the attorney's own law firm previously handled.
Rule 3-310(B) of the California Rules of Professional Conduct requires written disclosure to a client or prospective client when, among other things, the member has or had a legal, business, financial, professional, or personal relationship with a party or witness in the same matter or in the subject matter of the representation. Notably, this rule only requires disclosure, and arguably the client knows that the law firm previously represented him or her in connection with the same matter. However, it is still best practice to send a letter to the client disclosing the litigator's partnership with the witness, so that there is no doubt about compliance.
More conflicts arise if the litigator discovers that the partner either committed malpractice previously or is a lousy witness who will hurt the client's current case. To whom should the litigator pay allegiance? The litigator must tell the client of a potential malpractice claim and the poor utility of the witness. The litigator also has an obligation to inform the other law partners of the problem, which will certainly not create warm and fuzzy feelings between the litigator and the witness partner.
An act of malpractice may not amount to a breach of fiduciary duty. Many simple mistakes can be fixed. (The firm should not, of course, bill a client for the costs of remediation of mistakes, such as for a motion for relief under Code of Civil Procedure section 473.) The client should certainly get full disclosure of any problem that can't be fixed. The law firm may have to put its malpractice insurance carrier on notice of a potential claim. It might offer the client a settlement in the vicinity of its malpractice insurance deductible for independent counsel to evaluate. See Cal Rules of Prof Cond 3-300.
This conflict problem will always be faced by lawyers who work together, since each partner is jointly and severally liable for the others' mistakes, so that damage to or by one partner results in damage to the others' own financial positions. Thus, although a case can be litigated by the partner of a material witness, great care must be taken to ensure that written disclosure is provided to the client and also to maintain candor among partners. Again, it is better practice to refer cases like this to a friendly but different law firm that does not have direct financial conflicts.
The Rules of Professional Conduct require lawyers to keep clients informed at all stages. Rule 3-500 states: "A member shall keep a client reasonably informed about significant developments relating to the employment or representation, including promptly complying with reasonable requests for information and copies of significant documents when necessary to keep the client so informed."
Similarly, Rule 3-510(A) states in part: "A member shall promptly communicate to the member's client: (1) All terms and conditions of any offer made to the client in a criminal matter; and (2) All amounts, terms, and conditions of any written offer of settlement made to the client in all other matters."
Failure to adequately communicate with a client may constitute incompetent representation resulting in discipline and malpractice liability. See, for example, Calvert v State Bar (1991) 54 C3d 765; Harford v State Bar (1990) 52 C3d 93, 97-98.
Frequently a litigator is forced to give a client hard advice or bad news that will make the client unhappy with the law firm. The lawyers must cooperate internally in order to meet their obligations of full and candid disclosure to the client, as well as assuring good client relations-which may mean a fee concession. Although it puts the client relationship at risk to give hard advice, we must remember that this is part of our job.
Conflicts occur with clients on a regular basis over litigation management regarding whether to settle; at what amount to settle; whether to pursue a particular course of action; and, of course, fees. The authority to settle belongs solely to the client, and a provision in a fee agreement prohibiting a client from settling a claim without the attorney's consent is void as a matter of public policy, absent a statutory exception. Calvert v Stoner (1948) 33 C2d 97, 103 (dicta); Skelly v Richman (1970) 10 CA3d 844, 863 (dicta). Likewise, a client's refusal to settle is not an appropriate ground for withdrawal from representation. Estate of Falco v Decker (1987) 188 CA3d 1004.
In many cases, the lawyer's interest in getting paid will conflict with the client's interest in either minimizing or maximizing the settlement (depending on whether the client is a defendant or a plaintiff). In contingency cases, there can be a conflict of interest when the lawyer believes that settlement is appropriate but the client wants an unrealistic amount and will not compromise, and all the out-of-pocket expenses are being advanced by the attorney.
To a limited extent, a lawyer can control this reluctance by placing in the fee agreement a settlement amount, reasonably related to the value of the case, that the client is willing to accept. However, the lawyer's actions may be scrutinized by the court if the lawyer appears later not to have tried to get the best result for the client. In addition, a contingency agreement may become a hybrid, with, for example, the client agreeing to pay a monthly amount, and costs, on appeal. Ramirez v Sturdevant (1994) 21 CA4th 904.
Sometimes a client simply gets angry when he or she has not heard from the lawyer for a while, except to receive a six-figure bill for legal services. Here are a number of what seem like obvious suggestions that will help you avoid communication breakdowns:
1. At the outset of your relationship, make sure that your written fee agreement fully describes all the fees, costs, and billing procedures, and also go over these points orally with the client. If there is a contingency interest, try to obtain a commitment from the client (which, of course, is nonbinding) regarding what the client will accept in settlement, and discuss it so that at the beginning of the lawsuit there is at least a clear understanding between the lawyer and the client about expected results. Then confirm that understanding in a memo or a letter.
2. Send the client a blind copy of all correspondence, unless the client directs you otherwise. That way, when the client receives the bill and sees the large amount of work done by the lawyer, the client has been informed along the way.
3. When a substantial expense is expected to occur in the near term, call the client beforehand to confirm that the client is prepared to pay for it. Do not be afraid to ask for an additional retainer. If out-of-pocket expenses are necessary, try to get the client to pay those directly. Never believe a client who suggests that cost is no object, because that is never true.
4. When discovery requests are received, send them immediately to the client and promptly schedule a phone call to discuss them. This uses the opponent's work product to facilitate valuable substantive discussion and also establishes the litigator as the client's protector.
5. Call the client back promptly, always within 24 hours. If you can't do it, have someone do it for you. Nothing annoys a client more than not getting phone calls promptly returned. Also, don't ever leave a client on hold for an extended period of time.
6. Take your client to lunch once in a while-and pick up the check! And don't bill the time either.
Timothy D. Reuben is managing principal and Teri T. Pham is an associate at Reuben & Novicoff, a trial and litigation firm in Beverly Hills. (c) 2002 Timothy D. Reuben and Teri T. Pham.
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