Am I the only one being driven to the conclusion that the ethics
and jurisprudence surrounding "conflicts" are insane? After
reading about the tortured
machinations firms go through as part
of their pre- and post-merger due diligence, it’s clear to me that
this system has become detached from economic reality. Don’t
get me wrong: If two firms’ clients are on actual or potential
opposite sides in litigation, we have a hard-core conflict and
Firm A or Firm B has to recuse themselves.
But particularly
if niche practices are involved, the world quickly becomes a very
small place (patents and trademarks, e.g.), with less than six
degrees of separation between almost any two companies you
can name.
Let’s go back to fundamental principles for a moment: An
economically cognizable "conflict" exists where a firm has (legitimately)
obtained confidential information from Client A in the course of
representing them, and then proposes to represent Client B who
could be materially advantaged or prejudiced if the confidential
information were disclosed. To resolve this problem
we have no need to resort to "conflicts" analysis at all: The
case is squarely covered by the duty to keep privileged client
disclosures confidential.
Or, consider two clients who compete with each other in the XYZ
marketplace. Why should a law firm be disabled from representing
both? Across the rest of the span of their vendor relationships,
the two clients surely have substantial overlaps: From
the certainty that both buy PC’s running Windows with Intel chips
to the likelihood that they recruit skilled professionals from
each other. So long as client confidentiality is rigorously
maintained, I fail to see the ethical impediment to dual representation.
I propose putting the discretion entirely back in the hands of
clients (excepting only cases that would call for mandatory recusal). Why
put the onus on the clients? I start from the presumption
that any client should be permitted to hire any law firm of their
choice. And, if Coke knows that Pepsi uses (hypothetically)
Davis-Polk, why should Pepsi be in a position to thwart Coke if
it wants Davis-Polk’s counsel as well?
At the extreme, the
existing conflicts rules invite the moral hazard of a large company
signing retainer agreements with all the top law firms serving
its industry, relegating its competitors to hiring second-tier
firms. (Think this is implausible? How many New York
firms do almost all the work for the bulge bracket investment banks? Only
a handful. Could Goldman-Sachs afford to sign $100,000/year
retainer agreements with all those firms? I rest my case.)
Realistically, conflicts are always in the eye
of the client, after all. The most preposterous example of
this occurred years ago before federal law banned smoking on airplanes. Northwest
Airlines, in a bid to stand out, announced it was prohibiting smoking
on all its flights. Northwest and Philip Morris, as it happens,
both used the same ad agency. Philip Morris pulled its account
from the poor, side-swiped agency; and nothing can prevent this
kind of irrational eruption.
Would this proposed change accelerate the merger wave? Perhaps;
but either way, that is surely an unintended consequence.
I have been thinking about commenting on this post for a while because I strongly disagree with it. I’ll admit that part of my resistance derives from my own personal interest – as a small firm attorney, I stand to benefit when firms merge and are precluded from handling matters by virtue of conflict. However, I also think that giving clients full autonomy to determine whether there’s a conflict will harm the profession.
At the time that potentially conflicting clients agree to be represented by one firm, there’s generally no problem. The problem arises down the line when the interests become adverse. In the past year alone, I’ve read of at least a dozen cases where a large firm was sued for legal malpractice by a client based on conflict of interest. The firm’s carriers wind up paying out millions for these claims – which impacts my malpractice insurance and the rates that I charge to my smaller clients.
Second, at present, when large firms merge, they aren’t subject to any kind of anticompetive scrutiny, in part, I’m guessing because they are regulated by the state bars. The conflicts analysis is one of the few bars to firms gobbling each other up and forming one huge conglomerate. And a firm that size can charge whatever rates it wants which puts pressure on the entire profession to increase rates. Do firms want to trade their ability to avoid antitrust review in order to merge with whomever they want without regard to conflict? Because that’s where your analysis will take us.
Hi, Carolyn:
Thanks for your thoughtful comment; I really appreciate it.
In terms of malpractice claims, while I’m not familiar with any of the cases you have in mind, I would imagine the premise for liability for the law firm would be that they somehow mis-handled one client’s confidential information to that client’s detriment or to a “competing” client’s benefit. In my original post I tried to draw a distinction (perhaps not strongly enough) between the classic “conflicts” analysis, which I still do not find very helpful in terms of figuring out what one should actually do, vs. breaching client confidentiality. I tried to make the point that I think most of what we think of as “conflicts” is really a potential breach of attorney/client privilege, and that “Chinese walls” within a law firm could solve the problem (in theory, that is).
Also, if your malpractice carrier raises rates for little tiny firms based on bad experience with (by hypothesis) really big firms, they’re behaving irrationally. Doesn’t mean they can’t do it, it just means there’s no economic justification.
Your point about antitrust review is, frankly, one that had never occurred to me. Thanks!
As somebody who allegedly practiced antitrust law years ago, I’m mystified why law firm mergers would be exempt from review–in other words, I see no LEGAL reason for an exemption per se. They’re in interstate commerce, and that’s about all it takes. Specific exemptions for an industry (baseball, insurance) generally have to be created by Congress. Realistically, however, the legal market is so atomized that even if (say) Clifford-Chance merged with Skadden, their market share would barely be above 2% of the AmLaw 200, so it’s hard to say that reduces competition.
Anyway, thanks.
[Posted on behalf of Carolyn Elefante]
Bruce:
Most the cases I’ve seen (and have posted at MYSHingle – if I could get to
my archives) are traditional conflicts cases like this one:
http://www.nylawyer.com/news/05/03/030205x.html I guess they evolve when
one client gets the short end of a deal and then blames the firm for
having done more for the competitor.
Based on my (limited) experience in this area, I believe that juries are
extremely sensitive to conflicts – and will assume impropriety and
negligence or malpractice when they learn of one. Years ago, I
represented an engineer on appeal in an engineering malpractice case. The
engineer was a joint venturer with an investor and also worked at the
company doing the engineering work for the project. As a joint venturer,
one would assume that the engineer had incentive to make the project
succeed. But the jury found that because the engineer “wore 2 hats” – as
an employee of the consulting firm and the joint venturer, that his
judgment was compromised and he exaggerated the promise of an energy
project and then mismanaged construction. So the jury awarded an
unprecedented verdict of professional malpractice.
Now, it would be interesting to see in the case I linked to whether
there’d been the type of disclosure and consent you suggested.
I’m enjoying your blog,
Carolyn