A Conflict of Interest Story

I would like to thank John for inviting me to guest blog and for his mention of my recent article: The Sophisticates: Conflicted Representation and the Lehman Bankruptcy.  I hope to blog on a variety of topics during my guest stint, but I will begin by explaining the genesis of my article, which is part of a larger project concerning the role of lawyers in the financial crisis, and attempt to answer the concern raised by John's post.   

To the extent that conflicted representation under MR 1.7 is perceived to be a problem, I expect that most lawyers assume it is because unscrupulous attorneys sometimes dupe unsophisticated clients to accept ill-advised representations.  As a number of scholars have suggested, regardless of MR 1.7, sophisticated clients may be able to determine whether a lawyer's duty to some other client or interest is likely to impact the representation and can dismiss the attorney if this is the case.  Whether sophisticated clients should be able to opt out entirely from the protections of MR 1.7 and other rules was recently the subject of an interesting debate in the Yale Law Journal Online. 

Whatever one's views on the capabilities of sophisticated clients generally, it is very hard for those of us who are interested in legal ethics to discern how conflicts actually affect individual representations.  We are not privy to the day-to-day work that goes into a particular matter or whether that work is being impeded because of a lawyer's duty to some other client or the lawyer's own personal interest.  Consequently, it is difficult to test the hypothesis that sophisticated clients are generally able to protect themselves from the effect of their lawyers' conflicts.  

At the heart of my article is an account of the representation that Lehman Brothers received from a prominent New York law firm during the financial crisis.  Because of the highly public nature of this representation, we know far more about this representation than the typical engagement (although there is certainly a great deal we do not know).  Relying on publicly available sources, I claim that the representation was undermined by three distinct conflicts of interest.   I then seek to answer why a sophisticated client like Lehman Bros. was unable to protect itself from these conflicts.  I do not claim that there was any ethical wrongdoing, but I do believe we should be skeptical about the effectiveness of MR 1.7 and the alleged capacity of sophisticated clients to effectively gauge their attorneys' conflicts.  At the very least, my hope is that the article sets out an interesting cautionary tale.  

One possible objection to the case study is to point out, as John has, that many corporate clients want more flexibility to contract around default conflict of interest rules.  Surely their views should be afforded great weight, regardless of what may have happened in a given representation. 

I do not know to what extent in-house corporate counsel are dissatisfied with MR 1.7 or are seeking to lobby the ABA for more flexible conflict of interest rules. But I do worry that conflicts of interest are increasingly viewed by many lawyers only as an impediment to a client receiving the counsel of his or her choice (and the lawyer receiving a fee) as opposed to a potential threat to a lawyer's loyalty to his or her client.  I explore some of the reasons that this may be in my article.  

In addition, not all sophisticated clients are similarly situated.  If MR 1.7(a)(1) were abolished tomorrow, it would not make a difference for a company such as Google or Microsoft that spends millions of dollars a year on legal fees and can, through sheer economic might, indirectly or directly dictate which representations its outside firm may take.  Conversely, a relatively small company may need the protection of MR 1.7(a)(1) to ensure that its firm does not take a directly adverse representation against it when Microsoft or Google comes calling.  In other words, I think we need to proceed carefully when considering proposals by groups claiming to speak on behalf of all in-house corporate counsel.

 

Comments

[John Steele]

In my experience, debating the issue about granting corporate clients flexibility to grant waivers of potential conflicts of interest can be an exercise of overheated rhetoric in which the two parties adopt the rhetoric of principled disagreement even thought it’s not all clear that there really is any disagreement. So, at the outset, I want to specify the position for which I am arguing.

First, sophisticated clients can not only be defined in the rules, but already are.

Second, sophisticated clients should have the right to grant the following sorts of waivers:

1. The right to define which corporate affiliates are clients (or will be treated as clients for purposes of the conflicts rules) and which are not, thus potentially leaving the lawyers free to be adverse to some corporate affiliates. Note that this shouldn’t even be treated as a conflicts waiver; it should be treated as a definition of who is, and who is not, the client.

2. The right to grant waivers in advance about specific adverse matters by specific opponents that may be undertaken by the firm.

3. The right to grant waivers in advance about categories of adversities by categories of opponents in non-litigation matters in advance.

4. The right to grant waivers in advance about specific adverse matters by specific opponents in specific litigation matters adverse to the client.

5. The right to grant waivers in advance about categories of adverse matters by categories of opponents in litigation matters adverse to the client.

6. The right to agree in advance about the choice of conflict of interest law that will apply in the relationship between the client and the law firm.

7. The right to agree with the law firm about the use of screens to prevent imputation of former client conflicts within the firm as they would otherwise apply to the client.

I also want to argue that courts have already recognized the ability of sophisticated clients to enter into binding agreements of these sorts. In other words, I'm not arguing that there is a status quo against these propositions and that the organized bar needs to enact rules that will enable the source of conflict waivers. To the contrary, the courts have been steadily liberalizing the ability of sophisticated clients to enter into these sorts of arrangements. My argument, then, is that the organized bar should do nothing to impede the progress the courts are making, or, alternatively, the organized bar should enact rules that accommodate these changes.

My next comment will deal with certain kinds of arguments that in my view should be ignored.

[Discount Marc Jacobs]

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