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How to Analyze a Potential Conflict of Interest
A portion of a CLE presentation for the Kentucky Bar Association
Benjamin Cowgill, Counselor and Attorney at Law
2333 Alexandria Drive, Lexington, Kentucky 40504
Telephone: (859) 225-5236 • Fax: (859) 225-5237
Web site: cowgill.com
Members of the KBA Ethics Hotline indicate that they receive more inquiries about conflicts of interest than about any other subject. This is not surprising, for three reasons:
1. First, it would be fair to say that the conflict-of-interest rules are among the more complicated provisions in the Rules of Professional Conduct. Compared to other ethical duties – for example, the duty of competence or the duty of diligence – the conflicts rules can sometimes seem like a minefield of rules, sub-rules, exceptions and cross-references. Consequently, many ethical lawyers are not ashamed to admit that they lack a solid working knowledge of the conflicts rules, and are more than happy to seek assistance from a member of the Ethics Hotline when the need arises.
2. Second, lawyers are painfully aware of the fact that a conflict of interest can have be a real problem even if it does not rise to the level of an ethical violation. In particular, an alleged conflict can result in disqualification from a lucrative engagement. Lawyers who would never expect to be the subject of disciplinary proceedings are appropriately concerned about the impact of the conflicts rules on their pocketbooks.
3. Third, most lawyers realize that disqualification proceedings have potential consequences beyond the loss of a fee. The lawyer may suffer injury to his reputation in the business and professional communities once word gets out that he had to withdraw from a case because of a conflict of interest. Even worse, the client may be able to assert a colorable claim for malpractice, if a plausible argument can be advanced that the withdraw or disqualification prejudiced the client’s case. Conflict-of-interest rules are akin to statutes of limitation in the sense that competent lawyers are expected to know how they apply and make sure they are not violated. Thus it is not difficult for an adverse party to place a target on the chest of lawyer who has been disqualified from a case based on the conflict of interest, as compared to a lawyer who has made a debatable error in the exercise of professional judgment.
B. A Quick Refresher Course in Conflicts Analysis
Where conflicts of interest are concerned, the key provisions of the Kentucky Rules of Professional Conduct regarding conflicts of interest are contained in Rules 1.7, 1.8, 1.9 and 1.10 [Supreme Court Rules 3.130(1.7) through Supreme Court Rule 3.130(1.10)].
I will not review all of the provisions of those Rules in this short paper, nor will I mention other Rules which come into play in some situations. Rather, I will focus on the basic principles that must be understood in order to recognize potential conflicts of interest in the real world of legal practice.
Please note that the KBA’s Ethics 2000 Committee is currently in the process of considering proposed revisions to the Kentucky Rules of Professional Conduct. The proposed revisions include a number of changes in the text of conflict rules. However, most of those changes are designed to clarify what the rules already permit or prohibit, not to change the substantive impact of the provisions. Moreover, it appears at this point that the proposed changes will not be adopted by the Supreme Court until later this year, at the earliest.
For those reasons, I have concluded that it would only create confusion to discuss the proposed revisions in this outline. As I have already indicated, the basic steps of a proper conflicts analysis should not change in any event.
1. Underlying Principles
Prohibitions against conflicts of interest are correctly understood as preventive mechanisms. They are designed to prevent violations of two fundamental obligations which a lawyer undertakes whenever he or she agrees to represent a client: the obligations of loyalty and confidentiality.
That pair of obligations are deeply rooted in the common law of fiduciaries, the common law of agency and other legal principles that have existed throughout American legal history. The combined import of those common law principles is, in a nutshell, that a lawyer is a “fiduciary agent” or “professional fiduciary” in relation to his or her client. The duties of loyalty and confidentiality flow directly from that fiduciary status.
Attorney disciplinary codes are of relatively recent vintage. In fact, it was only 35 years ago that the ABA adopted the Model Code of Professional Responsibility [“the ABA Model Code”], which was the first effort to systematically itemize and categorize the types of professional misconduct that could result in the imposition of disciplinary sanctions. The Model Code included prohibitions against conflicts of interest in order to codify ethical obligations that already existed under the law governing lawyers.
In 1983 the ABA replaced the Model Code of Professional Responsibility with the Model Rules of Professional Conduct [“the ABA Model Rules”]. Like the Model Code, the Model Rules articulated many standards of conduct that already existed under the common law.
In 1989, the Supreme Court of Kentucky adopted the Model Rules (with certain variations which are not pertinent to this discussion). In that way, the Kentucky Rules of Professional Conduct came into existence as Supreme Court Rule 3.130, effective in 1990.
Thus, the Kentucky Rules of Professional Conduct have a twin character. They are both a disciplinary code and a codification of preexisting legal principles regarding legal ethics. On the one hand, it is absolutely correct to state that the Rules of Professional Conduct are designed to serve as standards for the imposition of discipline. On the other hand, it is not correct to say that they are “solely” a disciplinary code or to suggest that they have no relevance in other contexts (e.g., disqualification proceedings). To the contrary, the Rules constitute a succinct and elegant statement of a lawyer’s basic ethical obligations, not only for purposes of discipline but in other contexts as well.
2. The Preventive Nature of the Conflict Rules
As indicated above, the most important provisions of the Rules concerning conflicts of interest appear in Rules 1.7 through 1.10. Some of those provisions may seem unnecessary strict and hard-fast, especially in comparison to other Rules which only require “reasonable” conduct.
In order to understand why the conflicts rules are different, one needs to understand that conflicts rules are preventive and, preclusive in nature. Specifically:
a) The rules are designed to prevent violations of the core ethical duties of loyalty and confidentiality;
b) The rules seek to accomplish that goal by precluding situations where loyalty or confidentially might easily be compromised; and
c) For that reason, the rules prohibit certain conduct altogether, regardless of the actual risk it poses.
Thus, for example, the rules generally prohibit a lawyer from representing one client on a claim directly against another current client. As a general proposition, it simply doesn’t matter whether there is any subject-matter relationship between the two matters, or whether any actual prejudice would result from concurrent representation of the two clients. It doesn’t matter because the rules are designed to prevent any such violation from occurring by precluding the situation in which it might occur.
Stated another way, the conflicts rules address potentialities before they become actualities. After all, a conflict of interest is called a conflict of interest because it denotes a situation in which intangible interests are in conflict, even if this conflict has not resulted in a tangible problem.
Lawyers sometimes forget or misunderstand this basic principle about conflict rules; in fact, I have seen it happen time and time again. A lawyer says something like this: “Ben, my partners and I have found ourselves in a situation where there is a potential for a conflict of interest, but the good news is that it hasn’t actually become a conflict yet.” All too often, further conversation reveals that the law firm actually does have a conflict of interest, but the conflict has not yet resulted in an actual breach of loyalty or confidentiality. The lawyer has concluded (understandably but incorrectly) that the situation hasn’t yet become a conflict of interest because he knows that he has not actually breached his duties of loyalty and confidentiality. However, he already has a conflict if he has placed himself in a position that is clearly prohibited by the conflicts rules.
3. How to analyze a situation for the existence of a conflict
As indicated above, the most important conflicts provisions appear in Rules 1.7 through 1.10. There is a logical progression to the content of those four Rules, and that is why they appear in the order they do. Consequently, it is wise to consider all four Rules in order when you are analyzing any conflict situation, even if you are certain as you begin that the situation falls squarely inside the scope of one rule or outside the scope of another. If nothing else, the time spent reviewing all four Rules will satisfy you that you were correct in your original judgment of where your situation “fits” within the framework that is established by the four Rules.
a. First, review Rule 1.8 to determine if there is a per se conflict
Rule 1.8 is titled “Conflict of Interest: Prohibited Transactions”. It can fairly be described as a “laundry list” of situations that have been deemed to constitute per se conflicts of interest. There is really no rhyme or reason to list, no singular idea that can be understood as a shorthand way of remembering the entire list. The “tie that binds” the list together is simply that each and every item in the list has been deemed worthy of specific treatment among the conflict of interest rules. In other words, they were simply “lumped together” in Rule 1.8.
Rule 1.8 is therefore the best place to begin a conflicts analysis, from a practical point of view. If a contemplated representation or course of action is prohibited by Rule 1.8, you simply do not need to consider the general provisions of Rules 1.7, 1.9 and 1.10. In short, Rule 1.8 is ordinarily the end of the analysis if it prohibits the contemplated representation or course of conduct.
This does not mean, however, that Rule 1.8 is the end of the analysis where it does not prohibit the contemplated representation or course of conduct. A situation may be unacceptable under one of the other Rules even if it does not violate a specific provision of Rule 1.8. In other words, Rule 1.8 can be dispositive of the issue only to the extent it provides a dispositive prohibition.
b. Second, analyze the situation for any “concurrent” conflict under Rule 1.7
Rule 1.7 is titled “Conflict of Interest: General Rule.” That title is somewhat misleading because it implies that Rule 1.7 is a “general rule” for all conflicts questions. It actually concerns the issue of concurrent conflicts – that is, any situation that involves one or more interests that are “alive” at the same time, such as the interests of two current clients. As discussed further below, Rule 1.9 is actually the “general rule” for to be considered in situations that only raise questions about duties to former clients.
Because of that confusion, ABA Model Rule 1.7 has been amended and now bears the title “Conflict of Interest: Current Clients.” The same revision will probably be made to the Kentucky rules as part of the recommendations by the Ethics 2000 Committee.
The first thing one must understand about Rule 1.7 is that actually contains two rules. Paragraphs (a) and (b) of the Rule are actually two independent, free-standing rules that prohibit a lawyer from representing a client under particular circumstances. They have been placed together in Rule 1.7 because they both establish ethical restrictions on a lawyer’s ability to represent any given client.
The first restriction relates to any representation that is “directly adverse” to current client; it appears in paragraph (a). The second restriction concerns any situation which may “materially limit” a lawyer’s performance of his obligations to a current client. While they are separate and independent restrictions, they appear in that order as a way of suggesting the appropriate sequence of the analysis that needs to be made.
Thus, the first question is whether the contemplated representation would be directly adverse to another client; this is what ethics wonks call a “paragraph (a) analysis.” But even if the contemplated representation survives a paragraph (a) analysis, you must then proceed to paragraph (b) because it establishes a separate prohibition which supplements and complements the prohibition contained in paragraph (a).
(1) Paragraph (a) – The prohibition against any representation that is “directly adverse” to another client.
Paragraph (a) begins by stating that “A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless . . .”. (The words which follow “unless” will be addressed separately below.)
The first thing to be noted about paragraph (a) is that it constitutes a mandatory prohibition on representation that is directly adverse to another client (“a lawyer shall not…”). That prohibition is not tempered or diluted by the kind of qualifying language one would ordinarily expect to find in a rule of law (for example, “if the matters are substantially related” or “if there is a significant risk that confidentiality or loyalty will be compromised”). The explanation lies in the underlying principles of the conflicts rules as discussed above. In a nutshell, paragraph (a) reflects a philosophy that representation of one client directly adverse to another is a per se violation of the lawyer’s core duty of loyalty – or, more accurately, that it presents such a significant, inherent risk of a loyalty violation that it should not be countenanced at all.
There is a large body of case law concerning the question of what constitutes representation “directly adverse” to an existing client. In the context of litigation, most courts hold that representation of a client on virtually any claim against an existing client is a “directly adverse” representation in violation of Rule 1.7(a).
Not surprisingly, lawyers and law firms who find themselves on the receiving end of motions to disqualify sometimes argue (with occasional success) that a subrogation claim, an insurance defense, or an agreement to defend and indemnify a co-defendant is materially different than conventional employment by a named party, and therefore should not trigger the harsh application of Rule 1.7(a). However, most courts hold that the Rule is triggered whenever the lawyer or firm enters an appearance as counsel of record for any party that has any adverse claim adverse against another client of that lawyer or firm.
(2) Paragraph (b) – The prohibition against representation that is “materially limited” by other responsibilities or by the lawyer’s own interests.
Paragraph (b) begins by stating that “A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless. . .” (The words that follow “unless” will be addressed separately below.) As indicated above, paragraph (b) is a separate and independent limitation on a lawyer’s ethical availability to represent any given client. It supplements and complements the limitation established by the prohibition on “directly adverse” representation that appears in paragraph (a).
Paragraph (b) is triggered in any situation where the lawyer’s ability to represent a client ethically and zealously may be materially limited by the lawyer’s responsibilities to someone else or by the lawyer’s own interests. Consequently, paragraph (b) has been relied upon in disciplinary proceedings to address a wide variety of “unseemly” situations where it appears that the lawyer’s independent professional judgment is compromised by personal interests or by responsibilities to other clients or third persons. For example, paragraph (b) has been relied upon to prosecute a lawyer who represents a person with whom the lawyer has a sexual relationship, on the ground that the lawyer’s interest in maintaining the relationship constitutes a material limitation on the lawyer’s ability to exercise independent professional judgment in accordance with his ethical obligation to the client.
(3) The two conditions that must be satisfied to overcome the prohibitions set forth in paragraphs (a) and (b)
The prohibitions summarized in the preceding paragraphs are not absolute. As indicated, they both end with the word “unless”. The words that follow the word “unless” establish two conditions that must be satisfied to overcome the prohibition against the representation, regardless of whether the prohibition arises under paragraph (a) or (b). Those two conditions are:
(a) An objectively reasonable belief that the attorney-client relationship(s) will not be adversely affected.
The first condition is that “the lawyer reasonably believes the representation will not adversely affect the relationship with the other client” [in the case of “directly adverse” representation under paragraph (a)] or that “the lawyer reasonably believes the representation will not be adversely affected” [in the case of “materially limited” representation under paragraph (b)].
(b) Informed consent.
The second condition is that “each client
consents after consultation” [in the case of “directly adverse”
representation under paragraph (a)] or that “the client consents after
consultation” [in the case of “materially limited” representation under
(4) What it means to hold a reasonable belief that the representation will not be adversely affected.
The first condition is often overlooked or ignored, with perilous consequences. It is not merely “pretty language” that can be satisfied through a self-serving declaration that the lawyer honestly didn’t think there would be any adverse effect on the representation of the client [or, more accurately, on the representation of either client, in the case of a directly adverse representation under paragraph (a)]. Rather, it establishes an objective standard of reasonableness which must be satisfied in order for client consent to be effective.
That is because the Rules of Professional Conduct define “reasonable belief” as meaning that “that the lawyer believes the matter in question and that the circumstances are such that the belief is reasonable.” (Emphasis added). If it is objectively unreasonable to believe that the representation will not adversely affect the lawyer’s relationship with another client [under paragraph (a)] or the lawyer’s ability to discharge his duties to the client in question [under paragraph (a) or (b)], the conflict cannot be cured even by obtaining client consent.
In this way, the first condition places a professional duty upon the lawyer to do several things before consulting the client about consent. Specifically, the lawyer must (a) actually think about the issue whether the relationship with the other client will be adversely affected; (b) actually form a belief that the relationship with the other client will not be adversely affected; and (c) satisfy himself or herself that the belief is a reasonable belief under all of the circumstances (which obviously requires that the lawyer also study and evaluate those circumstances). Until the lawyer has done all of those things, he or she has not satisfied the first condition and is not in a position to seek consent. Moreover, even if the lawyer does those things and proceeds to obtain client consent, that consent is ineffective it if is later shown that the lawyer could not reasonably believe that the representation with the other client would not be adversely affected.
(5) What it means to obtain “consent after consultation” (i.e., informed consent).
The second condition is “consent after consultation”. Such consent must be obtained from “the client” in the case of a paragraph (b) conflict, or from “each client” in the case of a paragraph (a) conflict.
The Rules define “consultation” as “communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.” For all practical purposes, a lawyer who intends to rely on client consent to overcome a conflict of interest should regard “consent after consultation” as the equivalent of “informed consent” as that concept appears elsewhere in the law. That means that the lawyer should not merely provide the client(s) with enough information “to appreciate the significance of the matter in question” but should instead provide the client(s) with sufficient information to weigh the advantages and risks of the proposed representation.
Likewise, although the Rule does not presently require consent to be confirmed in writing, it is clearly good practice for a lawyer to issue a letter documenting the communications and confirming that consent has been obtained. In fact, ABA Model Rule 1.7 was recently amended with language that replaces “consent after consultation” with “informed consent confirmed in writing”. The amended Model Rule is not yet the law in Kentucky, but has been favorably received by the KBA’s Ethics 2000 Committee.
Consent is ineffective if the two foregoing conditions have not been satisfied. Thus, it is not enough for a lawyer to simply “touch base” with a client and mention the “possibility” of a conflict in order to avoid a problem under the Rule. The various provisions of the Rule are designed to place a fiduciary burden upon the lawyer to analyze the proposed representation for circumstances that fall within the scope of the Rule; to evaluate those circumstances carefully and objectively before making any overture to the client(s) about consent; and to provide the client(s) with information sufficient for them to appreciate the gravity of the issue.
c. Third, determine whether there is a former client conflict under Rule 1.9
Rule 1.9 is titled “Conflict of Interest: Former Client.” It is designed and intended to specifically address situations that raise issues about a lawyer’s continuing ethical duties to a former client. It should be noted, however, you cannot limit your analysis to Rule 1.9 just because your situation involves a former client. Your situation may also raise issues under other Rules; for example, there may be an issue of whether you are able to accept a new engagement despite “material limitations” under Rule 1.7(b), even if you have satisfied yourself that there is not a conflicts problem relating to a former client under Rule 1.9. Thus, Rule 1.9 should be understood as a Rule that specifically addresses “former client” issues but is not the only Rule that needs to be considered when such issues are involved. To clarify this point, ABA Model Rule 1.9 was recently amended and given a new name, “Duties to Former Clients.”
In order to understand the following discussion of Rule 1.9, it will be helpful to have the text of the Rule in front of you. Here is the text of the Rule (without the comments):
“A lawyer who has formerly represented a client in a matter shall not thereafter:
(a) Represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation;
(b) Represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client
(1) whose interests are materially adverse to that person; and
(2) about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter; unless the former client consents after consultation.
(c) A lawyer who has formerly represented a client in a matter of whose present or former firm has formerly represented a client in a matter shall not thereafter:
(1) use information relating to the representation to the disadvantage of the former client except as Rule 1.6 or Rule 3.3 would permit or require with respect to a client or when the information has become generally known; or
(2) reveal information relating to the
representation except as Rule 1.6 or Rule 3.3 would permit or require with
respect to a client.”
The first thing that needs to be understood about Rule 1.9 is that it really consists of two parts – not three, as the unwise labeling of paragraphs [(a), (b) and (c)] seem to indicate.
The first part is a prohibition against representation. It begins with the words “A lawyer who has formerly represented a client in a matter shall not …” Paragraphs (a) and (b) then proceed to identify circumstances in which that lawyer shall not represent a person or entity because of conflict issues that arise from the lawyer’s duties to the former client.
The second part of Rule 1.9 is a prohibition against the improper use or disclosure of information acquired during a prior representation. It is labeled paragraph “c” which might suggest that it is part of the conflict analysis set forth in paragraphs (a) and (b). This is unfortunate, because paragraph (c) is actually a separate, independent command that applies to all lawyers all of the time, not just to a case that is “substantially related” to a former representation. Thus, even when a lawyer is able to take a case for a new client without violating any conflicts rules, Rule 1.9(c) commands him or her to respect the confidentiality of any information gained in the course of representing a former client, by prohibiting the lawyer from using or disclosing that information except under limited circumstances.
What constitutes a “substantially related” matter for purposes of Rule 1.9. Paragraphs (a) and (b) of Rule 1.9 limit a lawyer’s ability to accept new employment in a matter that is “substantially related” to a matter involving a former client. Many lawyers make the mistake of assuming that two matters are not “substantially related” for purposes of Rule 1.9 simply because the two matters do not involve the same subject matter. For example, a lawyer who has previously defended a corporation against tort claims might assume that he can represent a plaintiff on a tort claim against that corporation, on the ground that the new case arises from an accident that is different from any accident involved in the cases he defended. However, if that lawyer acquired special knowledge of the policies, procedures and practices of the corporation during the course of the prior representation, a court (or disciplinary tribunal) might easily find that the two matters are “substantially related” for ethical purposes even though they do not arise from the same subject matter for civil litigation purposes.
In other words, the “substantial relationship” test contained in Rule 1.9 must be understood in the context of the ethical and fiduciary duties which the Rule is designed to serve and protect including, in particular, the duties of loyalty and confidentiality. For this reason, most courts hold that the issue of “substantial relationship” should be decided on the basis of whether there is a significant risk that the lawyer will take advantage of knowledge or insight that he or she acquired in the course of the prior representation. If so, the two matters are “substantially related” for purposes of Rule 1.9.
d. How to analyze “imputed disqualification” issues under Rule 1.10
The key provision of Rule 1.10 is paragraph (a), which states that:
“While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7, 1.8(c), 1.9 or 2.2.”
The net effect of that simple statement is, in essence, that a lawyer’s conflicts are shared by all of his partners, associates and other colleagues, subject to the exceptions that appear in the remainder of Rule 1.10.
Paragraphs (b) and (d) of the Rule address imputation issues that arise when lawyers move between firms, and should be studied carefully when the conflict issue arises because of the conflict “baggage” that is brought to the firm by a lawyer who has represented other clients in a previous practice setting (paragraph (d)) or by a lawyer who has left the firm for other pastures (paragraph (b)).
© 2006 Benjamin Cowgill • All rights reserved