Opinions

Ethics Opinion 356

Absence of Conflict of Interest When Lawyer Cannot Identify Affected Clients and Nature of Conflict; Applicability of “Thrust Upon” Exception Where Lawyer Cannot Seek Informed Consent.

  • Where a lawyer considers representing a client in a specific and discrete matter, and, at the commencement of that matter, knows that an identifiable second client, whether unrepresented or represented by separate counsel, will take a position adverse to the potential client, Rule 1.7(b)(1) requires the lawyer to disclose the conflict of interest and seek the informed consent of all potentially affected clients before undertaking the representation of the potential client. If the lawyer cannot identify the nature of the conflict or a specific client or clients who will take such an adverse position, however, there is no conflict of interest under Rule 1.7(b)(1) and the lawyer may undertake the representation of the potential client without seeking the consent of another client or clients.
  • Where a lawyer is engaged in the confidential representation of a client and a second client thrusts a conflict of interest upon the lawyer that was not reasonably foreseeable, under Rule 1.7(b)(1), the lawyer’s obligation to maintain confidentiality prevents her from obtaining informed consent of the second client under Rule 1.7(d), but she need not withdraw from the representation of the first client, unless there is also a conflict under Rule 1.7(b)(2)-(4).
Applicable Rules
  • Rule 1.6 (Confidentiality of Information)
  • Rule 1.7 (Conflict of Interest: General Rule)

Inquiry
The Committee has received an inquiry from a lawyer practicing in a highly specialized industry. One of her current clients, Client A, sought her advice in connection with its proposed acquisition of Company X. The transaction was subject to regulatory approval, and Client A, which is a foreign company, anticipated that its bid would generate scrutiny and opposition from the business and political communities. As a consequence, Client A asked the lawyer to keep the proposed bid confidential until the bid was formally announced.

The lawyer recognized that it was possible—and even likely—that one or more of her other industry clients might also bid to acquire Company X. The lawyer also believed that once Client A’s bid became public, one or more of her other clients might intervene to oppose regulatory approval of Client A’s bid. Importantly, the lawyer asserts that her industry experience was the only basis for her assumption that other industry companies might seek to acquire Company X or oppose Client A’s bid, although she could not identify which of her clients, if any, might take either position.

As the inquiring lawyer explains, only a few lawyers practice in this specialized industry and those lawyers routinely represent multiple industry clients. Thus, if she had declined to represent Client A, other industry lawyers likely would confront similar dilemmas. Accordingly, the lawyer agreed to represent Client A in connection with its proposed transaction and worked intensely for several weeks to prepare its bid. Shortly before Client A was to announce its bid, another of the lawyer’s industry clients, Client B, announced that it would submit a bid to acquire Company X. Client B uses the inquiring lawyer’s services in other unrelated matters, but retained a different lawyer to represent it in connection with this proposed acquisition. Once Client A’s bid is made public, Clients A and B will either compete directly for the right to acquire Company X, intervene with the regulator to prevent one another from obtaining regulatory approval for their respective bids, or both.

The inquiring lawyer believes that Client A lacks sufficient time to retain another lawyer, given the timing necessary for Client A to submit a successful bid. Further, the lawyer’s representation of Client A remains confidential because Client A’s bid has not yet been made public. Accordingly, she cannot disclose her representation of Client A to Client B.

The lawyer has submitted two inquiries to this Committee. First, the lawyer asks whether her agreement to represent Client A violated Rule 1.7(b)(1) of the District of Columbia Rules of Professional Conduct (“D.C. Rules”). With respect to her second inquiry, the lawyer notes that although Client B’s announcement of a competing bid creates a conflict of interest that can be waived by the informed consent of Clients A and B, the confidential nature of her representation of Client A prevents her from seeking such consent from Client B. The lawyer asks whether the Rules therefore require her to withdraw from her representation of Client A or whether she can continue to represent Client A without seeking Client B’s informed consent.

Discussion
I. Absence of Conflict of Interest When Lawyer Cannot Identify Affected Clients and Nature of Conflict.

The first inquiry is whether a lawyer may undertake the representation of a client in a specific matter when the lawyer has reason to believe that another client will take a position adverse to that client in that matter, but cannot identify the nature of the conflict or the specific clients who might be affected.

Rule 1.7 aims to safeguard the duty of loyalty to one’s client. To that end, Rule 1.7(b)(1) directs that:

Except as permitted by paragraph (c) below, a lawyer shall not represent a client with respect to a matter if:

(1) that matter involves a specific party or parties and a position to be taken by that client in that matter is adverse to a position taken or to be taken by another client in the same matter even though that client is unrepresented or represented by a different lawyer.

The Rules provide an exception to this prohibition, however, when “each potentially affected client provides informed consent to such representation after full disclosure of the existence and nature of the possible conflict and the possible adverse consequences of such representation” and the lawyer reasonably believes that she can provide competent and diligent representation to each potentially affected client. D.C. Rule 1.7(c). Absent such disclosure and informed consent, the lawyer may not undertake the proposed representation.

Generally, the application of Rule 1.7(b)(1) is straightforward. The present inquiry, however, requires us to assess a lawyer’s obligations when the proposed representation of one client (Client A) may lead to taking a position adverse to another client, but the lawyer cannot identify the nature of the conflict or all potentially affected clients. We conclude that under those circumstances, there is no conflict of interest under Rule 1.7(b)(1) and the lawyer may undertake the representation of Client A.

Rule 1.7(b)(1) does not explicitly address this question, but the text of the rule suggests that to be prohibited, a conflict must be clear, specific and not based on mere speculation. To obtain consent to a conflict of interest under Rule 1.7(b)(1), a lawyer must disclose to each potentially affected client “the existence and nature of the possible conflict and the possible adverse consequences of such representation.” D.C. Rule 1.7(c) (1). The first part of this rule— i.e., that the lawyer must disclose the conflict to each potentially affected client – assumes that the lawyer can, in fact, identify a specific client before she has an obligation to disclose the conflict and obtain informed consent from the appropriate parties. The second part of the rule— i.e., that the lawyer must disclose the existence and nature of the conflict and adverse consequences— assumes that the lawyer knows, or reasonably should know, that a specific client will, in fact, take a position adverse to another specific client before any obligation to disclose is triggered. We therefore read Rule 1.7(b)(1) to prohibit only those representations in which the lawyer can identify (i) the nature of the conflict and (ii) the specific client or clients who might be affected.

That the inquiring lawyer’s speculation was ultimately proven correct does not alter our reading of the rule or the basis for our conclusion. In the present inquiry, the lawyer’s industry experience was the only basis for her belief that other industry companies—including, perhaps, one of her clients—might seek to acquire Company X. (For purposes of this opinion, we accept and rely upon the inquiring lawyer’s representation that her belief that one or more of her other clients might also bid to acquire Company X was not based on confidential information from any of her clients but solely on her industry expertise and experience.) The sophisticated industry lawyer may have a more nuanced, specific and detailed view of potential conflicts than the outside objective observer. But Rule 1.7(b)(1)’s prohibition cannot depend upon whether a lawyer’s speculation about specific industry events, which are often based on unpredictable business judgments, is proven correct. Such expertise and instinct may serve clients well in transactional negotiations and litigation strategy, but it does not inform the test of what constitutes a conflict of interest under Rule 1.7(b)(1).

A lawyer’s obligations under Rule 1.7(b)(1) are clear when specific, identifiable clients take or will take adverse positions in a specific matter, but the lawyer’s representation of one client is confidential. Where a lawyer’s “obligation to one or another client … precludes making such full disclosure to [a potential new client]” to obtain a waiver, “that fact alone precludes undertaking [a new] representation.” D.C. Rule 1.7, cmt. [27]; see D.C. Legal Ethics Op. 309 (2001) (noting, in the context of advance waivers, that “if the lawyer cannot disclose the adversity to one client because of her duty to maintain the confidentiality of another party’s information, the lawyer cannot seek a waiver and hence may not accept the second representation”); D.C. Legal Ethics Op. 276, n. 5 (1997) (noting that situations may arise in which the lawyer’s confidentiality obligations preclude disclosure of relevant results of a conflicts check to the parties to a mediation and finding that in such cases, “the lawyer/mediator would have no choice but to resolve the problem by withdrawing as mediator without further comment”).[1]

But the mere possibility, or even likelihood, of adversity between two clients does not create a conflict of interest under Rule 1.7(b)(1). “A conflict of interest is involved if there is a substantial risk that the lawyer’s representation of the client would be materially and adversely affected by the lawyer’s … duties to another current client … .” Restatement (Third) of the Law Governing Lawyers § 121 (2000). As the Restatement notes, however, “[t]here is no conflict of interest … unless there is a ‘substantial risk’ that a material adverse effect will occur… . The standard requires more than a mere possibility of adverse effect.” Id. cmt. c(iii).[2] Cf. D.C. Legal Ethics Op. 265 (concluding, in context of positional conflicts under Rules 1.7(b)(2) – (4), that “[t]he mere possibility that a result in one representation will affect the outcome of another is not enough to trigger a conflict as to which waiver must be sought”). Simply put, if the lawyer cannot know which clients to talk to and what conflicts to disclose, then there is no conflict of interest under Rule 1.7(b)(1).

Our reading of Rule 1.7(b)(1) is also in accord with our policy of protecting the ability of clients to obtain lawyers of their own choosing. See, e.g., D.C. Legal Ethics Ops. 241; 181 (“[W]e are hesitant to announce views that … prevent or unduly hinder clients from obtaining legal representation from attorneys of their own choosing who may have formed new associations.”); D.C. Rule 5.6, cmt. [1] (noting that “[a]n agreement restricting the right of partners or associates to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer”). In a specialized industry served by few lawyers, those lawyers will often represent multiple business competitors. Such representations increase the likelihood that a lawyer may undertake a representation for one client that later turns out to be adverse to plans of another client that had not been disclosed or perhaps not even formulated when the representation began. Sophisticated clients retaining their counsel of choice may be aware that such issues are likely to arise and, nevertheless, accept the risks of such issues in exchange for the benefits of her expertise. We do not read the rules to discourage that freedom of choice by clients. Accord D.C. Legal Ethics Op. 181.

The inquiring lawyer in this case did not obtain advance waivers from either Client A or B. As a general matter, it would have been prudent to do so, although her failure to do so did not violate the Rules. Where lawyers anticipate frequent conflicts between their clients, it is advisable to seek advance waivers. See D.C. Rule 1.7, cmts. [31] – [32]. Such waivers are particularly apt in a specialized industry, generally populated by sophisticated clients. See D.C. Legal Ethics Op. 309 (2001); see also Lauren Nicole Morgan, Note, Finding Their Niche: Advance Conflicts Waivers Facilitate Industry-Based Lawyering, 21 Geo. J. Legal Ethics 963, 980 (2008) (noting public policy considerations favoring the use of prospective waivers).

II. Applicability of “Thrust-Upon” Exception When Lawyer Cannot Obtain Informed Consent.

The second inquiry is whether the lawyer must withdraw from the representation of Client A if the confidential nature of that representation precludes her from seeking the informed consent of Client B. In addressing this question, we assume that the conflict of interest at issue was not reasonably foreseeable, as explicitly required by Rule 1.7(d).

Rule 1.7(c) articulates an exception to the prohibition in Rule 1.7(b)(1) if a lawyer has obtained the informed consent of each potentially affected client after full disclosure of the existence and nature of the conflict. See D.C. Rule 1.7 & cmt. [27]. In the present case, however, the lawyer cannot disclose the conflict because her representation of Client A must remain confidential until after Client A has announced its bid. Rule 1.6 governs the confidentiality of a client’s information, and identifies limited exceptions to the “fundamental principle … that the lawyer holds inviolate the client’s secrets and confidences.” See D.C. Rule 1.6, cmt. [4]. For purposes of this opinion, we assume that none of these exceptions applies and so the lawyer is prohibited from disclosing the fact of her representation of Client A.

Rule 1.7(d) addresses situations in which a lawyer represents multiple clients in unrelated matters and an unforeseen adversity—commonly referred to as a “thrust–upon” conflict—arises between the clients. The rule states:

If a conflict not reasonably foreseeable at the outset of representation arises under paragraph (b)(1) after the representation commences, and is not waived under paragraph (c), a lawyer need not withdraw from any representation unless the conflict also arises under paragraphs (b)(2), (b)(3), or (b)(4).

D.C. Rule 1.7(d).

For the inquiring lawyer, the principle of confidentiality prohibits disclosure of her representation of Client A, but without full disclosure, she cannot obtain informed consent to continue that representation. See D.C. Rules 1.6, 1.7(c). Under these circumstances, does Rule 1.7(d) require the lawyer to withdraw from the representation of Client A? We conclude that it does not. Where a conflict is thrust upon a lawyer, pursuant to Rule 1.7(d), and the confidential nature of a representation precludes the lawyer from seeking informed consent for that representation pursuant to Rule 1.7(c), the lawyer need not withdraw from the representation at issue unless the conflict also arises under Rule 1.7(b)(2)-(4).

The structure of Rule 1.7(d) informs our reading of the rule. The key requirement in that Rule is that the thrust-upon conflict was “not reasonably foreseeable at the outset of the representation.” D.C. Rule 1.7(d). This element, set forth in the first phrase of Rule 1.7(d), establishes a predicate for application of the thrust–upon exception. If this predicate has been established, the lawyer must make a full disclosure to each potentially affected client, but the clients’ waiver of the thrust-upon conflict is not determinative. Even if Client B (who has created the thrust-upon conflict) will not waive the conflict, Rule 1.7(d) does not require the lawyer to withdraw from the representation. The structure of Rule 1.7(d) therefore reflects that although the lawyer generally must seek the informed consent of the second client (Client B, in this case), the result of her efforts— i.e., whether the second client (Client B) agrees to waive the conflict—does not, standing alone, preclude her continued representation of the first client (Client A). In our view, this approach reflects a considered policy judgment underlying Rule 1.7(d). Consistent with that policy, we believe that Rule 1.7(d) does not require withdrawal where a lawyer cannot seek the second client’s waiver.

“The Rules of Professional Conduct … are rules of reason,” D.C. Rules, Scope [1], and we employ a “common sense” approach to questions concerning the professional conduct of lawyers. See D.C. Legal Ethics Op. 272 (1997); AmSouth Bank v. Drummond Company, Inc., 589 So.2d 715 (Ala. 1991). Rule 1.7(d) provides that the lawyer need not withdraw from any representation if the thrust-upon conflict “is not waived.” A common sense reading of the phrase “is not waived” necessarily includes those circumstances in which the conflict is not waived because a waiver cannot be sought without violation of the Rules. Our conclusion assumes that the inquiring lawyer does not have a conflict under Rule 1.7(b)(2) – (4). If there is a conflict under Rule 1.7(b)(2) – (4), however, the thrust-upon exception does not apply and the lawyer must withdraw from at least one of the representations. See D.C. Rule 1.7(d).[3]


[1] The inquiring lawyer must, of course, consider any other prohibitions to undertaking the representation, including the prohibitions in Rule 1.7(b)(2) – (4).

[2] “In the modern view, a conflict of interest exists whenever the attorney–client relationship or the quality of the representation is ‘at risk,’ even if no substantive impropriety – such as a breach of confidentiality or less than zealous representation— in fact eventuates. The law of lawyering then proceeds by assessing the risk and providing an appropriate response.” GEOFFREY A. HAZARD, JR. & W. WILLIAM HODES, THE LAW OF LAWYERING § 10.4 (3d ed. 2001) (emphasis in original). See also MONROE H. FREEDMAN & ABBE SMITH, UNDERSTANDING LAWYERS’ ETHICS at 269 (3d ed. 2004) (noting that “the term conflict of interest refers to a situation where there is a reasonable possibility that you will not be able to fulfill all of the legitimate demands on your time, attention, and loyalty”) (emphasis in original).

[3] In this regard, we emphasize that throughout her representation of Client A, the lawyer has an ongoing obligation not to disclose or use Client B’s confidential information. See D.C. Rule 1.6. If the preservation of that confidentiality would adversely affect her representation of Client A, she cannot continue the representation of Client A unless Client A consents. See D.C. Rule 1.7(b)(2) – (4).

 

November 2010