Conflict of Interests: “Hot Potato”
A law firm may continue to represent a client, which it has long counseled
on regulatory matters, in an adversary proceeding before the relevant
administrative agency, even after a second client that it represents
on unrelated matters hires separate counsel and unexpectedly initiates
adversary litigation in that administrative agency against the first
client and refuses to waive the conflict.
Where a lawyer-client relationship
is on-going, conflict of interest issues involving that client are governed
by Rule 1.7(b), not Rule 1.9, and thus the lawyer may not take a position
adverse to that client on behalf of another. However, the lawyer may
withdraw from the representation of the client if he may do so in accordance
with the provisions of Rule 1.16, and after he has done so, the lawyer’s
obligations to that client are governed by Rule 1.9.
Applicable Rules
- Rule 1.7 (Conflict of Interest: General Rule)
- Rule 1.9 (Conflict of Interest: Former Client)
- Rule 1.16 (Declining or Terminating Representation)
Inquiry
A law firm has requested our opinion concerning its ability to represent
two clients of the firm who are adverse in an administrative proceeding.
The firm has represented Client A for a considerable period of time
with respect to matters that are regulated by that agency. The firm
successfully represented Client A in a completed, non-adversarial matter
before the agency and thereafter continued to provide advice regarding
matters regulated by that agency. The firm also represents Client B
in unrelated contract matters, but has not done any work for Client
B in some months. Client B represented by separate counsel, has initiated
an adversarial action against Client A before that administrative agency.
Client B refuses to consent to the law firm’s representation of
Client A in the administrative matter.
The question posed is whether and under what
conditions the law firm, consistent with the D.C. Rules of Professional
Conduct, may represent Client A in the administrative proceeding initiated
by Client B. The Committee concludes that the law firm may represent
Client A in that proceeding if the firm is ethically permitted to withdraw
from the separate, unrelated representation of Client B. We find that
in the circumstances presented by this inquiry withdrawal is permitted
under Rule 1.16.
Discussion
The inquiry focuses on the conflict between the firm’s two
clients, A and B, in the regulatory proceeding, a conflict that arose
through no action of the law firm and that was not reasonably foreseeable
at the outset of the firm’s representation of either of the two
clients. Fundamental to the resolution of the questions presented is
the difference in the standards applicable under the Rules where a lawyer
wishes to oppose a present client and where he wishes to oppose a former
client. The first issue to be addressed is whether the lawyer may consider
his representation of Client B as having ended for purposes of the conflict
of interest rules. The second issue, assuming the answer to the first
is in the negative, is whether the lawyer may withdraw as counsel to
Client B in order to be free to litigate against that party under the
less stringent rules governing conflicts of interest with former clients.
Governing Conflict of Interest Rules
Rule 1.7(b)(1) of the D.C. Rules of Professional Conduct provides
that, without the fully informed consent of the affected clients, a
lawyer may not represent a client in a matter if a position to be taken
by that client in that matter is adverse to a position of another client
in the same matter. This rule deals with a situation in which the lawyer
is representing one client in a matter, such as a litigation or an administrative
proceeding, in which another client, which the lawyer represents only
in unrelated matters, takes a position adverse to the first client.
Rule 1.7 is designed to ensure that an attorney will act with undivided
loyalty to all existing clients. Undivided loyalty to a client is, of
course, a fundamental tenet of the attorney-client relationship. See
Wolfram, Modern Legal Ethics 146 (1986).
A lawyer’s duty to a former client is
somewhat different and is governed by Rule 1.9. Under this rule, a lawyer
may sue or otherwise take positions antagonistic to a former client,
without disclosure and without the former client’s consent, if
the new representation is not substantially related to the matter in
which the lawyer had represented the former client. The purpose of this
rule is to assure the preservation of attorney-client confidences gained
in the prior representation and to preserve the reasonable expectations
of the former client that the attorney will not seek to benefit from
the prior representation at the expense of the former client.
If the fact situation presented by the inquiry
were governed by Rule 1.7(b), it is clear that the law firm could not
undertake the representation of Client A in the regulatory proceeding
in which the firm’s Client B was a party with separate representation,
without the informed consent of both Clients A and B. On the other hand,
if the firm’s representation of Client B were at an end at the
time Client A sought the firm’s assistance against B, the situation
would be governed by Rule 1.9 instead of Rule 1.7. In that situation,
there would be no impediment to the firm’s representing Client
A against former Client B as long as the regulatory proceeding was unrelated
to the firm’s prior representation of former Client B.
Whether Client B Should Be Regarded as a Current Client
In light of the difference in the conflict of interest rules governing
present and former clients, it is important to determine at the outset
whether B should be regarded as a current or a former client. In many
instances, such a question can be easily answered from objective facts.
If the lawyer had previously withdrawn from the representation of Client
B under Rule 1.16, the withdrawal would have terminated the relationship
and converted the client into a former client. Or, if the firm had completed
the single discrete task for which it had been retained, the client
is a former one. Such is the situation envisioned in Comment [8] to
Rule 1.3: “If a lawyer’s employment is limited to a specific
matter, the relationship terminates when the matter has been resolved.”
That could be the situation presented to us in this inquiry, as the
law firm completed all tasks for Client B and there has been no communication
between them for some months.
On the other hand, certain facts are presented
which suggest that the attorney/client relationship is continuing in
this situation with respect to Client B. We are informed that the inquiring
law firm is from time to time consulted by B on contract matters, which
may indicate a continuing relationship punctuated by periods of inactivity.
B appears to have a subjective belief that it continues to be a client
of the firm. Since a reasonable subjective belief can be the basis for
the formation of an attorney/client relationship (see Westinghouse Elec.
Corp. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir. 1978)), it may also
be the basis for the continuation of the relationship. The inquirer,
moreover, refers to B as a client in its inquiry, and the inquirer sought
B’s consent to the representation of A in the administrative proceeding.
With additional facts which may or may not be present here, another
sentence of Comment [8] to Rule 1.3 could apply and lead to the conclusion
that B remains a client:
If a lawyer has served a client over a substantial period in a variety of matters, the client sometimes may assume that the lawyer will continue to serve on a continuing basis unless the lawyer gives notice of withdrawal. Doubt about whether a client-lawyer relationship still exists should be eliminated by the lawyer, preferably in writing, so that the client will not mistakenly suppose the lawyer is looking after the client’s affairs when the lawyer has ceased to do so.
While additional facts might affect our determination, we assume, on the facts presented and for purposes of this analysis, that B is a current client of the inquiring law firm.
Whether the Lawyer May Withdraw From Representing Client B
If B is a current client, the question then arises whether the lawyer
may withdraw from representing Client B and invoke the more lenient
conflict of interest provisions of Rule 1.9 to determine his obligations
to his former client. Rule 1.16(b) provides, in relevant part, that
a lawyer may withdraw from representing a client only if withdrawal
can be accomplished without “material adverse effect” on
the interests of the client.
Under the facts presented here, we conclude
that the firm may withdraw under Rule 1.16(b) because it appears that
withdrawal as counsel from Client B can be accomplished without “material
adverse effect” on Client B. All projects for Client B have apparently
been completed; no work had been done on the unrelated contract matters
for several months; no outstanding projects appear to be contemplated
imminently; and Client B was able to obtain different counsel, as reflected
by the fact that B retained other counsel to represent it in connection
with the administrative proceeding.
Relevance of Rule 1.7(d)
Our conclusion respecting the permissibility of the firm’s
representation of Client A against Client B is consistent with newly
promulgated D.C. Rule 1.7(d). While this provision does not in terms
apply in this situation, we believe it provides guidance and support
for our resolution of this matter under Rule 1.16.
Rule 1.7(d) deals with the situation in which
a law firm is representing two clients simultaneously in unrelated matters,
and thereafter adversity between the clients’ positions in a particular
matter develops or for the first time becomes apparent.1
Thus, under this Rule, if the law firm had been representing Client
A in an ongoing administrative proceeding and Client B, represented
by separate counsel, unexpectedly intervened in the administrative proceeding
taking positions adverse to Client A, then the law firm would be able
to continue both representations so long as it reasonably concluded
that neither representation would interfere with the other.2
If the lawyer is currently representing both
Client A and Client B, why then does Rule 1.7(d) not control in this
situation, since one client has retained other counsel and preemptively
sued the other? The answer is that when Rule 1.7(d) speaks in terms
of a conflict not foreseeable “at the outset of a representation,”
we believe that this means representation in a particular discrete matter,
as contemplated in Rule 1.7(b).
While it would not be unreasonable to interpret
the phrase “outset of a representation” to mean the client’s
initial retention of the lawyer on any matter, it is clear from the
context of Rule 1.7(d) that the drafters had in mind the outset of representation
in the discrete matter in which the unforeseen conflict arises. The
narrow exception to Rule 1.7(b) carved out by the new subsection (d)
addresses the situation in which one client potentially has the power
to disable the law firm from its ongoing representation of another client
in a particular matter already in progress, simply by intervening in
the proceeding with separate counsel, which would of course result in
substantial prejudice to the client deprived in midstream of its lawyer.3
It would be a considerable step beyond this
narrow class of “thrust upon” conflicts to extend Rule 1.7(d)
to situations where, as here, there is a current general “representation”
of a client but the matter in which adversity develops has not yet begun.
Such an expansive reading of Rule 1.7(d) would, we believe, make a larger
inroad into the protections of Rule 1.7(b) than the drafters of Rule
1.7(d) intended. Thus, we believe that Rule 1.7(d) does not apply where
a law firm represents two clients on unrelated matters and thereafter
one client decides to sue the second client in a new matter. In this
situation, the law firm may represent one of the clients in the new
matter only with the informed consent of both clients.
We believe the facts of the instant inquiry
take it outside the terms of Rule 1.7(d), since there was no discrete
matter in existence prior to the time that Client B initiated the proceeding
against Client A. On the other hand, the concerns underlying the enactment
of Rule 1.7(d) are clearly implicated here, since Client B’s initiation
of an action against Client A in a forum in which Client A would reasonably
have expected to be able to avail itself of the services of its long-standing
lawyers, would work precisely the same sort of “substantial prejudice”
towards Client A about which the drafters of the “thrust upon”
rule were concerned. We are thus reassured that our conclusion in this
situation, that the firm should be able to represent Client A by withdrawing
from its representation of Client B if allowed by Rule 1.16, is consistent
with the overall policies of the rules.
In sum, we believe that the law firm should
be able, under the circumstances presented, (i) to withdraw as counsel
to Client B, rendering it a former client; and (ii) to continue thereafter,
consistent with Rule 1.9, to represent A in the administrative proceeding,
taking positions adverse to former Client B provided that the matter
is not substantially related to the work that the law firm did for Client
B.
Analysis of Precedents
In reaching our conclusion, we are mindful of a line of judicial
authority and opinions of Bar committees in other jurisdictions that
severely limit a lawyer’s ability to terminate a client once a
potential conflict arises in order to be able to take positions adverse
to the erstwhile client. See, e.g., Picker Intl., Inc. v. Varian Assoc.,
Inc., 869 F.2d 578 (Fed. Cir. 1989); Unified Sewerage Agency v. Jelco,
Inc., 646 F.2d 1339 (9th Cir. 1981); Penn Mutual Life Ins. Co. v. Cleveland
Mall Associates, 841 F. Supp. 815 (E.D. Tenn. 1993); Harte Biltmore
Ltd. v. First Pennsylvania Bank, 655 F. Supp. 419 (S.D. Fla. 1987).
These cases have been cited for the broad proposition that “a
law firm may not withdraw from a representation where the purpose is
to undertake a new representation adverse to the first client, even
in an unrelated matter, and apparently even if the withdrawal would
not have an adverse impact on the client.” Hazard & Hodes,
The Law of Lawyering: A Handbook on the Model Rules of Professional
Conduct, p. 480.1 (1996). As noted in the Hazard & Hodes handbook,
this rule has come to be called the “hot potato” rule as
a result of the colorful statement by District Court Judge Aldrich in
Picker Intl., Inc. v. Varian Assoc., Inc., 670 F. Supp. 1363, 1365 (N.D.
Ohio 1987), aff’d, 869 F.2d 578 (Fed. Cir. 1989): “A firm
may not drop a client like a hot potato, especially if it is in order
to keep happy a far more lucrative client.”
We believe this line of authority does not
govern the instant inquiry, for several reasons. In the first place,
none of these cases was decided by a District of Columbia court; none
was interpreting the D.C. Rules; and none of the cases arose in the
District of Columbia. We are not aware of a District of Columbia court
decision that addresses the issue. Second, and more important, we believe
that the cases and bar opinions from the other jurisdictions are distinguishable
on the facts presented by this inquiry, as well as by differences in
the applicable rules. We believe that the facts presented here make
clear that the broadest statement of the so-called “hot potato
rule” is too categorical to apply in all circumstances and is
inconsistent with the optional withdrawal provisions of the D.C. Rules.
As Professors Hazard and Hodes noted: “The [‘hot potato’]
rule will not wash if applied uncritically, whenever a lawyer drops
a client for the purpose of suing that client on behalf of someone else.”
Id. at 480.2 (emphasis in original). These noted ethics professors further
observe that the approach is “certainly inconsistent with the
permissive withdrawal scheme of Rule 1.16(b)” and that a definition
of loyalty broad enough to encompass the mere act of dropping a client
“would convert the client-lawyer relationship into one of perpetual
servitude.” Id.
In each of the cited cases in which a lawyer
was disqualified from continuing a representation of a client, the lawyer
had affirmatively undertaken action — such as initiating a law
firm merger — which created the potential conflict. In each of
the cases, the representation of the client, whose termination was proposed,
was active. Further, each jurisdiction involved had adopted Canon 9,
of the former Code of Professional Responsibility, which provides that
in all matters an attorney must avoid even the “appearance of
impropriety.” The D.C. Rules deliberately do not include any provision
focusing on the appearance of impropriety. See Paragraph [32] Explanation
of Committee and Board Revisions, Rule 1.7 of Proposed Rules of Professional
Conduct submitted to the District of Columbia Court of Appeals, Nov.
19, 1986, by the Board of Governors of the District of Columbia Bar.
Finally, none of the jurisdictions had a “thrust-upon” conflicts
rule like D.C.’s Rule 1.7(d), which allows an attorney to remain
in a matter after an unforeseeable conflict has arisen. In all of these
respects, these cases from other jurisdictions are distinguishable.
It does not appear from the facts of this Inquiry
that the law firm had any role in creating the conflict between the
two clients, and indeed it had no reason to anticipate that such a conflict
would develop when it undertook the representation of A in the administrative
agency matters. Nor was the firm currently actively engaged in representing
Client B in any particular matter, such that its withdrawal might work
some prejudice to Client B.
We believe that the approach taken by the Alabama
Supreme Court in AmSouth Bank v. Drummond Company, Inc., 589 So. 2d 715
(Ala. 1991) is instructive. In that case, a firm represented Client
A in a litigation and Client B, a bank, in unrelated securities matters.
During the course of the litigation, Client B, in its fiduciary capacity
as a trustee, retained separate counsel and joined the lawsuit against
Client A. Client A agreed to waive the conflict, but Client B refused.
The law firm promptly withdrew as counsel for Client B and continued
to represent Client A in the lawsuit. Former Client B then moved to
disqualify the law firm. The Alabama Supreme Court held that the law
firm had acted properly in withdrawing as counsel to Client B in the
suit because the litigation was not related to the matters on which
the firm had represented Client B.
In considering the interplay among Rules 1.7,
1.9 and 1.16 of the Alabama Rules of Professional Conduct—which
are similar, but not identical, to the provisions under which we operate
in the District of Columbia—the AmSouth Court stated that the
Rules of Professional Conduct are “rules of reason,” and
that it had always employed a “common sense” approach to
questions concerning the professional conduct of lawyers. The Court
emphasized four factors in reaching its conclusion that the law firm
acted properly in withdrawing as counsel to Client B and thereby treating
Client B as a former client for purposes of the conflict rules:
- The law firm did not by its actions create the conflict of interest; rather, Client B had taken the initiative;
- Client A would be substantially prejudiced by the withdrawal of the law firm, which had already devoted hundreds of hours to the defense of A in the litigation
- The law firm, after failing to obtain consent, promptly withdrew from representing Client B; and
- Client B would not be materially prejudiced by the withdrawal of the firm as its counsel on the unrelated matters which had consumed very few hours to that point.
While the fact patterns are diverse,
a number of other courts have taken a common sense approach to conflict
issues in analogous circumstances, permitting the matter to be resolved
by withdrawal from representation of a client, where little or no prejudice
will result to that client. See, e.g., Monaghan v. S2S 33 Associates,
L.P., 1994 WL 623185 (S.D.N.Y. Nov. 9, 1994); In re Wingspread Corp.,
152 B.R. 861 (Bankr. S.D.N.Y. 1993); Pearson v. Singing River Medical
Center Inc., 757 F. Supp. 768 (S.D. Miss. 1991); Gould, Inc. v. Mitsui
Min. & Smelting Co., 738 F. Supp. 1121 (N.D. Ohio 1990); Hartford
Accident & Indemnity Co. v. RJR Nabisco, Inc., 721 F. Supp. 534
(S.D.N.Y. 1989); Penwalt Corp. v. Plough, Inc., 85 F.R.D. 264 (D. Del.
1980).
In responding to the instant inquiry, we adopt
the “common sense” approach of the Alabama Supreme Court
in AmSouth, encouraged in this course by the recent adoption of D.C.
Rule 1.7(d). We believe that the same four factors used by the AmSouth
Court should be analyzed and balanced in cases when the conflict between
two clients is unforeseen and does not arise during the course of a
discrete ongoing matter.
On the other hand, we also strongly agree that
the important values of client loyalty and confidence of the public
in the bar preclude an interpretation of the rules that would enable
a lawyer or a law firm to abandon a client during an active representation
in anticipation of pursuing another, perhaps more lucrative, conflicting
representation. If, for example, a lawyer were in the midst of representing
a client when a prospective client came along seeking the lawyer’s
assistance in bringing a potentially rewarding lawsuit against the existing
client in an unrelated matter, we believe that withdrawal from the existing
representation under those circumstances would not be permissible under
Rule 1.16. Our analysis of such a situation would be that virtually
by definition the existing client would suffer material adverse harm
by the withdrawal.
Thus we would view the situation quite differently
if A were a prospective new client who had approached the law firm to
seek the firm’s services in a suit against B, an existing client
of the firm. In that situation, there is the specter that the law firm
was chosen precisely because it had represented the prospective defendant
and thus the firm may presumptively be aware of certain facts or attitudes
of the prospective defendant that could be useful to the potential new
client. Second, in such a situation there is by definition no prior
relationship between the prospective client and the law firm and thus
there would be no apparent prejudice in requiring the prospective client
to find other counsel. Third, the withdrawal of the firm from providing
ongoing services for the existing client would almost certainly result
in some prejudice, disruption or additional expense for the existing
client. Each situation must be analyzed on its facts. In general, we
suggest that the more the potential conflict was caused by the actions
of the attorney for the benefit of the attorney and/or a prospective
or other client, the less justifiable will be the firm’s effort
to withdraw and to treat the conflict under the principles applying
to former clients. If, as a result, the firm is unable to withdraw,
the conflict will have to be analyzed under Rule 1.7. Where, however,
as here, A is an existing client with a legitimate and longstanding
claim to his lawyer’s loyalty and services; where the unrelated
matters for Client B had been completed, and the withdrawal can be made
without material adverse effect on Client B; where the conflict was
precipitated by Client B without any participation by the law firm;
and where Client A would suffer material adverse effect by withdrawal,
we believe a common sense reconciliation of the competing principles
of professional responsibility permits the lawyer to terminate representation
of Client B and to treat B as a former client under Rule 1.9. Of course,
the withdrawal would have to be effected in a manner conforming to Rule
1.16, which includes a clear communication to the former client. It
is also assumed that no confidential information obtained from Client
B would be used in any way in the representation of Client A.
It is important to emphasize that in the question
presented by the inquiry it is clear that the law firm was required
to withdraw from at least one representation. The law firm either had
to forego representing Client A in the administrative proceeding or
cease representing Client B in the unrelated matters. Because the firm
faced that choice and because at least one client was going to lose
the firm’s services for some purposes, it is pertinent to consider
the competing equities, including the relative potential prejudice to
each client from withdrawal of the representation of that client.
Practical Considerations
The inquiry highlights the importance of distinguishing between
existing and former clients. We are aware that in many situations the
relationship between an entity and a lawyer or law firm is ambiguous.
For example, a corporation, not providing a retainer, may call upon
a law firm from time to time for legal advice, paying on a per hour
basis for services rendered. During the hiatus between the last call
and before another possible request for advice, it may be unclear whether
the corporation is an existing client or simply a former and prospective
client. Absent an express termination, a court will likely examine the
subjective expectations of both parties, as evidenced by their relevant
conduct, to determine whether the attorney-client relationship continues.
See, e.g., Manoir-Electroalloys Corp. v. Amalloy Corp., 711 F. Supp.
188 (D.N.J. 1989); Derrickson v. Derrickson, 541 A.2d 149 (D.C. App.
1988).
For a variety of reasons, including but not
limited to the differing conflict rules applicable to existing and former
clients, lawyers would be well advised to take steps to delineate the
relationship clearly. This may be addressed in part by clearly defining
in writing the project or services to be rendered at the outset of the
retention. A termination clause may be included in the engagement letter,
providing that upon completion of the described services and payment,
the attorney-client relationship will be concluded. Alternatively, a
law firm may deem it advisable to send close-out letters, politely concluding
the relationship, when the assignment is completed. Similarly, it may
be prudent for a law firm to comb its client list periodically and advise
in writing entities or individuals for whom it has not performed legal
work for a substantial period of time that the law firm deems the person
or entity to be a former client. While such clarity, even if diplomatically
communicated, may not always serve the best business interests of the
law firm, an unambiguous statement of the relationship prior to the
development of a potential conflict will serve both parties’ interests
better when a potential conflict is raised in the courts or before an
ethics committee.
Conclusion
For the reasons discussed above, we believe that after Client B
initiated an administrative proceeding with separate counsel against
Client A, the law firm was entitled to withdraw from the unrelated representation
of Client B, to treat Client B as a former client under the conflict
rules and to continue to represent Client A, which it had long counseled
in this area of the law, in the administrative proceeding.
Inquiry No. 96-5-14
Adopted: May 21, 1997
- Made effective by the D.C Court of Appeals
as of November, 1996, Rule 1.7(d) provides:
If a conflict not reasonably foreseeable at the outset of a 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).
- Under new Rule 1.7(d) and its commentary,
the law firm should promptly inform both clients of the situation
and seek their informed consent. Comment [22] to the Rule states:
“Where a conflict is not foreseeable at the outset of the representation
and arises only under Rule 1.7(b)(1), a lawyer should seek consent
to the conflict at the time that the conflict becomes evident, but
if such consent is not given by the opposing party in the matter,
the lawyer need not withdraw.”
Accordingly, even if the client/opposing party does not consent, the law firm may continue both representations if it concludes that neither representation will be adversely affected by the simultaneous representation of the clients in the separate matters. Of course, either client is free to terminate the representation. - The prototypical situation covered by Rule 1.7(d) is where a lawyer represents a client in a litigation in which a second client, represented on unrelated matters, is at the outset neither a party nor a contemplated party. If, without any reasonable foreseeability, the second client takes an adverse position in that litigation, it would be quite unfair to disqualify the lawyer from representing the client that he had been representing in the ongoing litigation. Thus, under Rule 1.7(d), even if the second client refuses to consent, the lawyer may continue to represent the first client in the litigation.
