October 2011 | Earn one hour of MCLE Credit in Legal Ethics
Conflicts of interest and the First Amendment
A recent Supreme Court decision addressed a lawyer’s duties to former clients
©2011. All rights reserved.
Marty Manager flung himself into the office, throwing himself against the closed door with a wild look in his eye. “I’m going to kill Meryl Terpitude,” he croaked hoarsely.
California Joan eyed the Firm’s managing partner warily. A barely perceptible bit of foam at the corner of his tightly drawn mouth hinted that all was not well. “What’s he done this time?” Cali asked in a soothing tone of voice, scanning for weapons.
Meryl Terpitude picked this extremely inopportune moment to stroll into Cali’s office. As Marty rushed at Meryl, fists clenched, his visage went from a whiter shade of pale to a rather unattractive reddish color. “You idiot!”
“Guess you don’t approve of my campaign against the environmental impact of the Wetlands Hotel project,” Marty snarled. Meryl drew back defensively while trying to remain nonchalant.
“Our former client, Global Development, has just sued you and the Firm for breach of fiduciary duty because of your public support of the grass roots movement against the development,” Marty said through clenched teeth. “Global claims that you have breached your duties of confidentiality and loyalty because you represented Global for two years, obtaining approval of environmental impact reports from various city and local governmental bodies. You argued to the City Council and other governmental officials that Global’s hotel and luxury condominium complex would not affect the Hidden Valley wetlands preserve or affect the quality of Hidden Valley life adversely. Our firm accepted $100,000 for the legal services.”
“But Global terminated our services two years ago, just before the City Council’s tentative approval of the project,” Meryl protested. “I had nothing to do with forming any group against the project. Who knew that the famous ornithologist, Autobahn Birdwatcher, lived in Hidden Valley and would organize and lead a grass roots movement of citizens against further development of the wetlands. Other residents joined the opposition for fear of further traffic congestion generated by the Wetlands project. I am opposed to the project but am not a member of the Citizens Against the Wetlands Development (CAWED). I just popped in to ask Cali if the firm could ethically represent CAWED.”
“No!” Cali and Marty retorted simultaneously as Laura Li, the head of the litigation department and another member of the management committee, walked in with Amy Associate trailing behind her, carrying a litigation file.
“Ah, Marty ― just reviewing this Global case against Meryl and the Firm. It looks like this recent California Supreme Court case called Oasis West Realty LLC v. Goldman (2011) 51 Cal.4th 811 (Oasis) may present some challenges to our defense,” Laura said crisply. “The case seems very close to Meryl’s conduct. Amy, give us some background . . .”
Amy recited the facts: In 2004, Oasis planned to tear down a Hilton hotel on nine acres in Beverly Hills to build a five-star hotel and luxury condominiums (“the Hilton project”) which required the approval of the Beverly Hills City Council. Oasis retained the Reed Smith law firm and attorney Kenneth A. Goldman to assist it with the project. Goldman was then a reputed expert in civic matters; a well-respected, influential leader who was extremely active in Beverly Hills politics and the president of the Southwest Homeowners Association. Oasis hired Goldman because it believed he would be influential in persuading the City Council members and local citizenry to support the Hilton project. (Oasis, p. 816)
Until the representation terminated in April 2006: (1) Goldman assisted Oasis in formulating its development planning, including the overall strategy to secure all necessary approvals and entitlements from the city and its efforts to obtain public support; (2) Goldman was a key Oasis representative in dealing with Beverly Hills city officials, including the Planning Commission and City Council; and (3) Oasis revealed confidential information to Goldman. Oasis paid Reed Smith $60,000 in fees. (Id.)
Thereafter, Oasis presented its development proposal to the City Council and in April 2008, the council conditionally approved the project. Then, some Beverly Hills residents formed a political action group to oppose the project and to put a referendum on the ballot to overturn the City Council’s approval of the Hilton project. (Oasis, pp. 816-817)
It was at this point that Goldman became politically active in opposing the Hilton project. Goldman admitted that (1) he and his wife solicited approximately 20 signatures for the petition to overturn the council’s action; (2) they spoke to 10 neighbors about the opposition; and (3) they left a note at four or five homes where there was no response. Goldman denied that he ever disclosed confidential information acquired while he represented Oasis or disclosed that he had ever represented the developer on the Hilton project. According to Oasis, Goldman lent his support to opponents of the Hilton project, campaigned for and solicited signatures for a referendum to overturn the City Council’s approval of the project, and he distributed a letter for that purpose. (Id., at pp. 817-818)
On May 14, 2008, Oasis sent its written letter of complaint to Reed Smith. Reed Smith and Goldman agreed not to engage in any further actions concerning the referendum. Notwithstanding Goldman’s efforts, Oasis was victorious at the ballot ― a narrow majority of voters ratified the City Council’s approval of the project. (Id., p. 818)
Laura interjected, “Victorious or not, Oasis then sued Goldman and Reed Smith for breach of fiduciary duty and other causes of action seeking damages in excess of $4 million. . .” (Id.)
“Let them sue us . . . We will prevail on an anti-SLAPP motion,” Meryl boasted. “We can strike the breach of fiduciary duty cause of action in an anti-SLAPP motion, with two steps: (1) we must demonstrate that the challenged cause of action is one ‘arising from’ protected activity, (CCP §425.16, subd. (b)(1)), and (2) we must show that Global cannot demonstrate a probability of prevailing on the claim.” (Id., pp. 819-820; City of Cotati v. Cashman (2002) 29 Cal.4th 69, 76; Navellier v. Sletten (2002) 29 Cal.4th 82, 89.) They can’t get past the first test, since my political activities are clearly protected by the First Amendment.”
“There is just one fly in that ointment, Meryl,” Marty hissed, in his rattlesnake-ready-to-spring mode. “The Court held that Oasis’s breach of fiduciary duty and other claims had ‘at least minimal merit within the meaning of the anti-SLAPP statute’ and reversed the Court of Appeal, reinstating the trial court’s denial of the law firm’s and the attorney’s anti-SLAPP motion.” (Oasis, at pp. 816, 826)
“Let’s see how they got there,” Cali said breezily. “Let’s take the second step first, Meryl, as did the California Supreme Court, in reliance upon its ‘inherent, primary authority over the practice of law.’” (Oasis, p. 820; O’Brien v. Jones (2000) 23 Cal.4th 40, 57)
As Barry Barrister entered Cali’s office and the discussion, he added, “To satisfy the second test, a plaintiff must show that its complaint is legally sufficient and supported by prima facie facts. If a plaintiff shows a probability of prevailing on any part of its claim, it will have established that its cause of action has some merit and the entire cause of action stands.” (Id.; Mann v. Quality Old Time Service Inc. (2004) 120 Cal.App.4th 90, 106)
“And,” Laura added, “in evaluating Oasis’s causes of action, the Court focused on Goldman’s alleged breach of duties as Oasis’s prior lawyer. Goldman, as Oasis’s lawyer, was ‘a fiduciary . . . of the very highest character’ and bound ‘to most conscientious fidelity — uberrima fides.’” (Oasis, p. 821; Cox v. Delmas (1893) 99 Cal. 104, 123)
“The Court focused upon fiduciary duties of loyalty and confidentiality that are required after termination of representation,” Amy said. “It reminded us that the client’s trust and confidence is critical to the effective functioning of the attorney-client fiduciary relationship, requiring courts to protect clients’ legitimate expectations of loyalty to preserve this essential basis for trust and security.” (Id.)
Meryl threw up his hands. “I know! I know! After termination of an attorney-client relationship, an attorney (1) may not do anything that will injuriously affect the former client in any matter in which the attorney formerly represented the client and (2) may not at any time use knowledge or information acquired by virtue of the previous relationship against the former client.” (Wutchumna Water Co. v. Bailey (1932) 216 Cal. 564, 573–574.) “How did the Court find that Oasis showed a prima facie violation of this important principle?”
Carla Counsel zipped into Cali’s office and announced, “Through indirect evidence and an inference! Oasis claimed that Goldman first acquired its confidential and sensitive information and then used this information when he publicly opposed the precise project he had been retained to promote. Acknowledging that Oasis did not prove this with direct evidence, the Court found that indirect evidence and an inference was good enough:
“In light of the undisputed facts that Goldman agreed to represent Oasis in securing approvals for the project, acquired confidential information from Oasis during the course of the representation, and then decided to publicly oppose the very project that was the subject of the prior representation, it is reasonable to infer that he [used confidential information].” (Id., at p. 822)
“But,” Barry butted in, “the Court reached the inference that he used confidential information through an ingenious process. They said, ‘Inasmuch as Goldman was obligated under Rule 3-310(B) [California Rules of Professional Conduct] . . . to disclose to Oasis any personal relationship or interest that he knew or reasonably should have known could substantially affect the exercise of his professional judgment ― he never did so ― it is likewise reasonable to infer that Goldman’s opposition to the project developed over the course of the representation, fueled by the confidential information he gleaned during it.’” (Id.)
“Is no one else troubled by the problem with this inference?” Laura asked. “Goldman stopped representing Oasis in 2006 and the inference relies upon an assumption that he developed his opposition during those two years. However, the alleged misconduct of political vocal opposition did not start until two years later, in 2008, after lots of hearings, studies, hundreds of individuals testifying, etc. An equally reasonable inference is that Goldman was not using confidential information but developed his opposition as a result of the very public debate.”
Meryl’s befuddlement was extreme. “I am having a difficult time with this CRPC 3-310(B) reference. What does it mean? Should I have told Global that I have a home in Hidden Valley, that I am a community activist about city and wetlands development and that I have a voice in these matters?”
“Actually, Meryl, I read it another way,” Carla said. “The fact that Goldman didn’t make such an initial disclosure meant that he did not have any personal interest at the outset. Therefore his adverse personal interest regarding the project must have developed over time based on things that he learned in the representation. The Court inferred that he must have used confidential information to reach the conclusion that the project was a bad idea, and it was thus improper for him to thereafter take action based on that conclusion.”
“Even more curious,” Cali added, “after reinforcing and reinvigorating the universally accepted principle of loyalty that an actual conflict of interest occurs when one attacks one’s own work product (the very same Wutchumna doctrine Meryl has just recited), the Court then grounded its decision on the use of confidentiality and not loyalty or the Wutchumna principles.”
“Some of us,” Marty started, glaring at Meryl, “were actually hoping that the Court would say that in these narrow circumstances, which are not a positional conflict at all but direct adversity to the very purpose of the lawyer’s representation of the former client, loyalty prevents the speech equally with confidentiality.”
“Back to the actual analysis, and away from what might have been!” Laura’s crispness brought them back on track. “Oasis demonstrated a prima facie case of causation and damages. Because of Goldman’s opposition to the project, Oasis was forced to investigate Goldman’s conduct and prepare a letter demanding defendants’ adherence to their legal and fiduciary duties, incurring over $3,000 in legal fees.” (Oasis, pp. 822, 826)
“Lawyers are not indentured servants!” Meryl protested. “Just because a client pays for my work does not mean I should have to ‘join their team’ even as to my personal opinion. Global may have paid for my work but not for my soul.”
“Yes, I imagine your soul costs a great deal more even than your unconscionable hourly rate,” Marty said sardonically. “You could just say ‘no’ to any engagement that would muzzle your personal or political views.”
“The point is . . .” Meryl continued, unabashed, “the Wutchumna doctrine is overbroad. It should be limited to a lawyer’s undertaking a concurrent or successive representation that is substantially related to the prior representation and is adverse to the former client.”
“You lost that one, Meryl,” Laura said. “Remarkably, the Court extended this principle beyond representing another client to a lawyer acting on his own behalf.” Laura pointed out that the duties of loyalty and confidentiality bar an attorney not only from using a former client’s confidential information in the course of “making decisions when representing another client,” but also from “taking the information significantly into account in framing a course of action” such as “deciding whether to make a personal investment.” (Oasis at p. 823; Rest.3d, Law Governing Lawyers, § 60, com. c(i), p. 464)
“Well, California has not adopted ABA Model Rule 1.8(b), which prohibits a lawyer from using information relating to the representation of a client to the disadvantage of a client.” Meryl tried a different tack. “Therefore, Wutchumna should be limited to a lawyer’s actual disclosure of confidential information, since Business and Professions Code §6068(e) and CRPC 3-100(A) prohibit only disclosure of confidential information.”
“Oasis overruled that limitation, too,” said Jaime Justicia, as he too entered Cali’s office for the discussion. “The Court indicated that disclosure and use were both part of the duty of confidentiality, noting that the harm to the client is the same whether confidential information is disclosed or used adversely to the client.” (Id., p. 823)
“What about my First Amendment rights?” Meryl cried. “If lawyers are prohibited from speaking on a matter of common interest because of prior engagements then that debate is neither fully complete nor entirely representative. The First Amendment doesn’t exist just to protect the speaker. It also exists to protect the union by fostering the exchange of ideas. Should Goldman and I be muzzled because we represented a client in a matter that becomes the subject of public debate?”
“Yes!” announced Darla Defender, the Firm’s specialist on constitutional law. “Oasis showed a prima facie case that Goldman used confidential information to the detriment of a former client regarding the exact subject of the prior representation. As officers of the court, ethical standards may constitutionally be imposed to keep them from engaging in otherwise constitutionally protected activity. A ban against unlawful use of confidential information is therefore not a ‘broad categorical bar on attorney speech’ which would support the first prong of an anti-SLAPP motion.” (Oasis, at p. 825; see generally Gentile v. State Bar of Nevada (1991) 501 U.S. 1030, 1081–1082.)
Cali’s office was now alarmingly full of the Firm’s members, milling about, wanting to “get at” something. “So, Darla, after Oasis, what can lawyers do in the First Amendment arena?”
“Understandably, the Court declined to catalog a list of when ethical standards might trump constitutionally protected activity,” Darla declared, adding that the Court left a few clues about what is permissible:
1. Voting against a client’s project in the privacy of the voting booth, even if a lawyer handled that precise project, appears to be permissible, on the ground that a single vote in a secret ballot would not offer a ‘reasonable prospect’ of adversely affecting a material interest of the client. (Oasis, p. 825)
2. Attorneys employed in the public sector, who exercise their statutory right to sue their public agency employer to resolve disputes regarding wages or other conditions of employment, do not thereby violate their duty of loyalty by engaging in such activity. (Oasis, at pp. 823-824)
3. A lawyer may publicly take personal positions on controversial issues without regard to whether the positions are consistent with those of some or all of the lawyer’s clients, provided it is not on the exact same issue on which the lawyer represented the client. (Oasis, p. 824; Rest. 3rd, Law Governing Lawyers, §125, com. e, illus.6, p. 316)
4. A lawyer who represents a client on a particular subject matter but holds the opposite view personally can attend a governmental hearing on that subject matter as long as the lawyer does not divulge client confidential information or communicate personal views contrary to the client’s position. (Oasis, p. 826 citing Johnston v. Koppes (9th Cir.1988) 850 F.2d 594)
“State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opn. No. 2003-162 also discusses the effect of ethical standards upon the expression of political views,” Cali added.
“What I want to know,” Marty mumbled, “is if I am vicariously liable for Meryl’s mouth when he is acting in a purely personal context, as was Goldman in Oasis.”
A sort of chill fell on the room. The kind of chill, thought Cali, comes from the alarming thought that the arm of the law might just descend on your personal shoulder or worse yet, your personal bank account. Everyone fell silent.
“Well,” Laura cleared her throat, “the Court dodged that question, saying ‘nor are we presented with a situation requiring us to articulate how imputed disqualification rules would apply in this context.’” (Oasis, p. 825)
“Yet, the judgment of the court of appeal was reversed not only against Goldman but also against his law firm. At many places in the opinion, there is reference to what ‘defendants’ did, but all those references appear to be to Goldman’s personal conduct. I read the holding of the case as meaning that a law firm cannot act ― presumably through any of its actors, i.e., its lawyers ― against the interests of a former client on a subject where the firm once represented the client, even privately.” Marty, his finger on the juggler of vicarious liability, pressed on.
Kurt Mercury, the Firm’s resident genius, entered the room and asked: “Aren’t the two most troubling, unanswered questions: (1) Is this a prohibition against any lawyer in a firm taking a public position on any subject where someone else in the firm may have once represented a party with respect to that subject and where the firm had then taken a different position? (2) Is that so, regardless of the time elapsed, the contact or knowledge, if any, between the engagement and the time of the position, and whether the current actor would ever have had any exposure to the firm’s prior engagement?”
A roar of conversation erupted. Every member wondered aloud whether they were free to speak out on issues on which the Firm may have taken a different past position for a former client; why the Firm should be on the hook for Meryl’s personal conduct; whether Meryl’s acts fell within the course and scope of his agency such that the Firm can or should be held liable and whether individual members might escape liability because the Firm is a Limited Liability Partnership.
Finally, Marty announced: “We will not know for some time how the Oasis case can be squared with imputed disqualification and vicarious liability principles. Therefore, the management committee, with input from all of you, will be looking at the following risk management principles:
1. It is unworkable, and probably impossible, for a firm to police the private and personal acts of all of its members.
2. However, the Firm will consider policies that prohibit significant personal/private advocacy positions by attorneys on issues contrary and/or adverse to those on which those attorneys have or had represented clients. In other words, our members can’t advocate positions, even personally, that are against the very position for which they have advocated on behalf of clients.
3. Because of the potential free speech restraints that this involves, the Firm needs to explore additional policies and procedures to ensure that they accommodate attorneys’ refusals to work on matters about which they have strong adverse personal positions and/or interests and wish to retain the right to take public positions with respect thereto.
4. In the interim, before you crusade against a cause publicly, please voluntarily check the conflicts database to determine that the Firm is not representing a client on the other side of that matter.”
“After having this discussion, I want to assure all of you that I will not be making any more public statements against my former client, Global,” Meryl announced.
Laura then chimed in, “I will be working with the Firm’s management committee and Meryl to see if we can resolve this litigation with Global, since its damages are speculative at this point.”
Everyone suddenly remembered that they had a jam-packed day and filtered out of Cali’s office, her reminder to “Be careful out there!” ringing in their ears.
Only Jaime remained. As he too got up to leave, he winked and with a malicious twinkle in his eye, said, “Very clever. I predict that not knowing whether you will be liable for the personal political statements of a fellow firm member will act as a far greater muzzle than actually drawing a clear line in the sand. Fear of the unknown has a profound chilling effect.”
• Ellen R. Peck, a former State Bar Court judge, is a sole practitioner in Escondido and a co-author of The Rutter Group California Practice Guide: Professional Responsibility.
This self-study activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of one hour of legal ethics.
The State Bar of California certifies that this activity conforms to the standards for approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.