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NEW YORK COUNTY LAWYERS ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 671 (89-5)
TOPIC: CONFLICT OF INTEREST; ACCEPTANCE WITH CONSENT OF PRESENT CORPORATE CLIENT OF RETAINER FROM ANOTHER CLIENT WITH AN ADVERSE INTEREST
DIGEST: Under certain very limited circumstances, with the consent of both parties, it may be proper for a law firm to be retained by a corporate party in a non-litigated matter with a corporate client whom the lawyer represents in unrelated matters, but adverse representation in a litigated matter would be inappropriate.
CODE: DR 5-105(A), DR 5-105(C), EC 5-1, EC 5-15, Canon 7, EC 7-1, Definition 1.
QUESTION: May a lawyer who represents a corporate client in a limited area of the law represent a second client whose interests are adverse to those of the first client, (1) in a negotiation, or (2) in a litigated matter, where the lawyer has obtained the informed consent of both clients?
A law firm (“D&E”) represents Able Corporation (“ACorp”), a manufacturer of computer equipment, solely in ERISA matters. All matters are received from the firm’s personnel department, and D&E’s contacts with the firm are the firm’s senior personnel officers. D&E is a medium-sized law firm whose ERISA department is part of the labor law department. It also has departments that concentrate on corporate law, tax law, trusts and estates, and litigation. D&E’s corporate ‘law department has been asked to represent another corporate client, Baker Corporation (“BCorp”), which is a major user of computers, in negotiating a purchase agreement with ACorp. D&E’s litigation department has been asked to represent a third client, Charles Corporation (“CCorp”), which also purchases computers made by ACorp, in a breach of contract claim against ACorp for failure of a large computer system to meet the agreed-upon specifications. Both the purchase contract and the litigation are unrelated to any work D&E has performed for ACorp. They involve a division of ACorp with which D&E has had no contact. In each matter, ACorp will be represented by its regular computer law firm.
ACorp, BCorp and CCorp, in each case through the General Counsel’s office, have consented to the representation. May D&E ethically undertake all three representations?
Simultaneous Representation in a Non-Litigated Matter
When a lawyer represents a client such as BCorp in a matter against the interests of a person such as ACorp who is a client in a wholly unrelated matter, the confidential information of the second client is usually not involved. On the other hand, the lawyer’s duty of loyalty to the second client may be put to the test.
The lawyer’s duty of loyalty to the client is set forth in EC 5-1:
“The professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of his client and free of compromising influences and loyalties. Neither his personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute his loyalty to his client.”
Consistent with EC 5-1, DR 5-105(A) provides that:
“A lawyer shall decline proffered employment if the exercise of his independent judgment in behalf of the client will be or is likely to be adversely affected . . . or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C).”
“Differing interests” include “every interest that will adversely affect either the judgment or the loyalty of a lawyer to a client, whether it be a conflicting, inconsistent, diverse, or other interest”. Definition 1.
ACorp and BCorp to a certain extent have differing interests in the matter. Although both want the computer sale to be consummated, BCorp has an interest in obtaining the strongest representations, warranties and covenants and ACorp has an interest, in giving up as little as possible. Thus, it is necessary to determine whether representation of ACorp in the ERISA matter is likely to have an adverse effect on D&E’s professional judgment in behalf of BCorp. If the lawyer’s independent judgment may be adversely affected, the lawyer may undertake the representation only to the extent permitted in DR 5-105(C). That is, it must be obvious that the lawyer can adequately represent the interest of each client and each must consent to the representation after full disclosure of the possible effect of the representation on the exercise of the lawyer’s independent professional judgment on behalf of each.
We believe that the factors that should be considered in determining whether the lawyer’s judgment is likely to be adversely affected to such an extent that it is not obvious that the lawyer can provide adequate representation to each client include the following:
The extent and nature of the lawyer’s relationship with ACorp, including the amount of fees paid to the lawyer and the percentage of the lawyer’s billings represented by ACorp.
The extent and nature of the lawyer’s relationship with BCorp, including the amount of fees paid to the lawyer and the percentage of the lawyer’s billings represented by BCorp.
The importance of the matter to ACorp and BCorp.
The likelihood that the negotiation will be contentious.
The extent to which the matter involves legal considerations rather than business considerations that can be handled by BCorp’s executives.
In addition, we believe that a significant factor in determining the degree to which the lawyer’s judgment will be affected is whether the matter involves litigation or is likely to result in litigation (e.g. negotiation involving a dispute between two clients). See City Council v. Sakai, 58 Hawaii 390, 570 P.2d 565 (1977); Financial Bankshares v. Metzger, 523 F. Supp. 744, 770 n. 79 (D.D.C. 1981)(whether representation involves litigation is not determinative but it is a factor in assessing the extent of the adverse influence).
Any doubts as to the effect on D&E’s independent judgment should be resolved against the representation. EC 5-15. See N.Y. State 350 (1974) and N.Y. County 597 (1972). In the former opinion, it was held that it could be proper for an attorney who represented one branch of a bank to represent a borrower in connection with a loan from another branch.
Simultaneous Representation in Litigated Matter
The same result does not apply to the representation of CCorp, which involves litigation. Courts and ethics committees have been far less willing to discount the lawyer’s duty of loyalty in the litigation context. Fund of Funds v. Arthur Andersen & Co., 567 F.2d 225, 232-33 (2d Cir. 1977)(client has “absolute right to firm’s undivided loyalty”), ABA Inf. Opin. 1495 (1982)(loyalty is “an indispensable element of a lawyer’s relationship with a client”).
It has long been held that a law firm may represent one client in a litigation against a former client where the subject matter of the current and former representations are not substantially related. T.C. Theatre Corp. v. Warner Bros. Pictures, Inc., 113 F. Supp. 265 (S.D.N.Y. 1953). This conclusion is based on considerations under Canons 4, 5 and 9. With respect to Canon 4, where the matters are not substantially related, there is no presumption that the lawyer possesses confidences or secrets of the client. Under Canon 5, the duty of loyalty ends upon the termination of the representation. And there is not deemed to be an appearance of impropriety under Canon 9.
The same principle, however, does not generally apply to litigation between current. See Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384 (2d Cir. 1976) (in a litigation context, the court holds that the propriety of the second representation must be measured not so much against the similarities between the matters, as against the duty of undivided loyalty which an attorney owes to each client), N.Y. County 620 (1974)(“An attorney representing a client in litigation may not accept employment from an adverse party even though both matters are unrelated and full disclosure has been made to both clients.”)
EC 5-15 states:
“A lawyer should never represent in litigation multiple clients with differing interests; and there are few situations in which he would be justified in representing in litigation multiple clients with potentially differing interests.”
See also DR 5-105(A), quoted above, which prohibits representation of differing interests except to the extent permitted under DR 5- 105(C). The latter rule allows the representation only if “it is obvious that [the lawyer] can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each”.
In litigated matters where both clients have consented, some courts have found that it was “obvious” that the lawyer could adequately represent both parties. For example, this was the finding in Unified Sewerage Agency v. Jelco, Inc., 646 F.2d 1339 (9th Cir. 1981), in which a lawyer brought suit on behalf of a subcontractor against the prime contractor, with the consent of the prime contractor, whom the lawyer represented in another matter. However, it is clear that consent cannot cure all conflicts. The Code requires not only that the parties consent, but also that it be “obvious” that the lawyer can represent the interests of each client. Sapienza v. New York News, 481 F. Supp. 676 (S.D.N.Y. 1979). Moreover, the lawyer who seeks to show such obviousness has a high burden of proof. For example, although the court in Cinema 5, supra, noted the significance of client consent to simultaneous representation, it stated:
“Where the relationship is a continued one [as opposed to being against a former client], adverse representation is prima facie improper . . . and the attorney must be prepared to show, at the very least, that there will be no actual or apparent conflict in loyalties or diminution in the vigor of his representation.”
We believe that it is very unlikely that a lawyer who is suing a current client can exercise the kind of zeal demanded by Canon 7 and EC 7-1. Indeed, we believe it likely that ACorp consents to the representation precisely because it believes that D&E will temper its zealousness in order to maintain the good will of ACorp. Accordingly, we believe it would be inappropriate for D&E to accept the representation of CCorp, even with the consent of CCorp. As the court stated in Estate Theatres. Inc. v. Columbia Pictures Industries, Inc., 345 F. Supp. 93, 98-99 (S.D.N.Y. 1972):
“[C]oncern about the ‘confidence and respect of the community towards its bench and bar” supports disqualification in some cases, even where the parties have consented to the multiple representation.”
In summary, while under certain very limited circumstances, with the consent of both parties, it may be proper for a law firm to be retained by a corporate party in a non-litigated matter with a corporate client whom the lawyer represents in unrelated matters, adverse representation in a litigated matter would be inappropriate.
May 22, 1989