January 2016 | Earn one hour of MCLE Credit in Legal Ethics
By Drew Dilworth
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As lawyers migrate between firms, the
propensity for conflicts of interest grows. With this propensity, firms are
placing increasing emphasis on managing conflicts before they occur. The use of
advance waivers as a tool to manage such conflicts has increased over the last
decade. Advance waivers are now common across all sizes of firms. Case law in
California recognizes the enforceability of such waivers, but only in limited
circumstances. This article looks at three decisions involving advance waivers
that highlight key factors in their enforceability.
In Zador Corp. v. Kwan (1995) 31
Cal.App.4th 1285, the law firm Heller Ehrman represented Zador, a
corporation, in a real property dispute. Kwan, an agent of Zador, requested
indemnity from Zador. Heller agreed to jointly represent Zador, Kwan and
related entities as defendants in the real property dispute. The firm presented
Kwan with a waiver which provided that “[i]n the event of a dispute or
conflict between you and the Co-defendants, there is a risk that we may be
disqualified from representing all of you absent written consent from all of
you at that time. We anticipate that if such a conflict or dispute were to
arise, we would continue to represent the subsidiary companies … whose legal
interests in this matter are aligned, notwithstanding any adversity between you
and the Companies’ interests. Among the Companies are Zador … Accordingly, we
are now asking that you consent to our continued and future representation of
the Companies and agree not to assert any such conflict of interest or to seek
to disqualify us from representing the Companies, notwithstanding any
adversity that may develop.” (Id. at 1290.) (emphasis added). Kwan
signed the form.
A conflict subsequently arose between
Zador and Kwan with respect to the subject matter of the pending action. Heller
advised Kwan to obtain separate counsel, which he did. It also requested that
Kwan reaffirm his consent to Heller’s continued representation of Zador, which
he also did. Zador, represented by Heller, then sued Kwan, who moved to
disqualify Heller. The trial court concluded there was a “substantial
relationship” between Heller’s prior representation of Kwan and the current
litigation and that confidences were exchanged between Zador and Kwan and thus
granted disqualification. The court of appeal reversed.
The appellate court explained that the
substantial relationship test was not determinative (Id. at 1295). Where
the current dispute is between parties that were previously jointly represented
and relates to the same matter as the prior joint representation, a substantial
relationship between the cases will always occur (Id. at 1294). Moreover,
an exchange of confidences was also not determinative because confidences are
necessarily disclosed among joint clients (Id.; Cal. Evid. Code § 962). Rather,
the propriety of disqualification in such circumstances will generally turn
’informed consent (Id. at 1295).
Kwan argued that although he signed a
waiver agreeing not to assert any conflict of interest “notwithstanding
any adversity that may develop,” he did not believe the waiver included
the possibility of a lawsuit by his former co-defendant Zador (Id. at
1301). The court noted that California law does not require every possible
consequence of a conflict to be disclosed for consent to be valid (id.) and cited Cal. State Bar Formal Opinion No. 1989-115, which concludes that a
blanket waiver of a client’s right to disqualify is not per se improper. Like Zador,
Formal Opinion No. 1989-115 posits a situation in which an attorney starts with
joint clients and obtains a waiver acknowledging that if conflicts develop
between the joint clients, the attorney can withdraw from representing one of
the joint clients and continue representing the other clients provided the
waiver was sufficiently informed and detailed.
The court in Zador found that
the phrase “any adversity” naturally included litigation and the
consent form was sufficiently “detailed” (Zador, supra,
31 Cal.App.4th at 1301). Although the court mentioned that Kwan had
reaffirmed his consent after Heller told him to obtain separate counsel, the
court did not ascribe any specific weight to that fact in determining whether
the consent was sufficient.
In 2003, the Northern District of
California, applying California law, addressed the enforceability of an advance
waiver outside the context of joint representation. In Visa U.S.A., Inc. v.
First Data Corp. (N.D. Cal. 2003) 241 F.Supp.2d 1100, the Heller firm was
approached by First Data to represent it in a patent infringement action. Heller
informed First Data that it had a longstanding relationship with Visa, and
while it did not see any current conflicts between the two parties, Heller
would not represent First Data unless it agreed to permit Heller to represent
Visa in any future disputes, including litigation, which might arise between
First Data and Visa.
First Data consented to those terms,
executing an engagement letter that stated, “[o]ur engagement by you is
also understood as entailing your consent to our representation of our other
present or future clients in ‘transactions,’ including litigation in which we
have not been engaged to represent you and in which you have other counsel, and
in which one of our other clients would be adverse to you in matters unrelated
to those that we are handling for you. In this regard, we discussed [Heller’s]
past and on-going representation of Visa U.S.A. and Visa International (the
latter mainly with respect to trademarks) (collectively, ’Visa’) in matters
which are not currently adverse to First Data. Moreover, as we discussed, we
are not aware of any current adversity between Visa and First Data.” (Id.
Approximately a year later Visa sued
First Data in a separate trademark infringement action (Id. at 1102). First
Data moved to disqualify Heller, arguing that when it signed the waiver it was
not adequately informed of the possibility that Heller could sue it (Id.
at 1103). Further, First Data contended that under the California Rules of
Professional Conduct Heller was required to reaffirm First Data’s prospective
consent when an actual conflict arose. It also argued that disqualification was
necessary because Heller’s lawyers had access to confidential information that
could be used against First Data.
The court acknowledged the presumption
that when a firm concurrently represents two clients with adverse interests,
the duty of loyalty has been breached and disqualification usually follows (Id.
at 1104). That presumption, however, may be rebutted and a law firm may
simultaneously represent two adverse clients if full disclosure of the
situation is made to both clients and they agree in writing to waive the
conflict (Id. at 1105). The court further confirmed that an advance
waiver of potential future conflicts is permitted under California law even if
the waiver does not specifically state the exact nature of the future conflict. Id. It noted that in some circumstances a second, reaffirming waiver
will be warranted, but only if the client was insufficiently informed when it
signed the first waiver. Id.; see also California Formal Opinion
1989-115. Heller’s burden in establishing sufficient disclosure therefore
required it to demonstrate that it communicated enough information of the
future risks to permit the client to appreciate the significance of the matter
in question (241 F.Supp.2d 1100 at 1106).
The court articulated several factors
to be considered in evaluating whether full disclosure was made and the client
signed an informed waiver, including: (1) the breadth of the waiver, (2) the temporal
scope of the waiver, (3) the quality of the conflict discussion between the
attorney and the client, (4) the specificity of the waiver, (5) the nature of
the actual conflict, (6) the sophistication of the client, and (7) the
interests of justice. Id. The court found “most significantly”
that the waiver itself demonstrated that Heller had fully explained the nature
of the conflict waiver at issue as it described the significant risk of future
adversity due to Visa and First Data being major competitors in the processing
side of the credit card business and that Heller would not undertake
representation of First Data unless it waived any conflicts that might arise
out of Heller’s work for Visa, including litigation (Id. at 1107).
The court further found that First
Data, a Fortune 500 company with a legal department of about 50 attorneys, was
a knowledgeable and sophisticated user of legal services and therefore could
and should be expected to understand the full extent of what it waived when it
signed Heller’s explicit waiver letter. (Id. at 1110; see also ABA Model Rule 1.7, cmt. 22 (2002); Restatement (Third) of the Law Governing
lawyers § 122, cmt. d.)
With regard to First Data’s claim that
its confidential information was at risk, the court held that although
information First Data shared with its Heller lawyers is presumed to be imputed
to all Heller attorneys, such a presumption could be rebutted by a showing that
effective screening procedures were timely implemented to prevent the passing
of information between the tainted lawyers and other members of the firm (241
F.Supp.2d at 1110). Heller established that it put an ethical wall in place as
soon as it was retained by Visa, and since First Data offered no evidence
beyond the presumption of imputation, no breach of confidentiality justifying
disqualification occurred (Id).
Western Sugar Coop. v.
Archer-Daniels-Midland Co., 98 F.Supp.3d 1074 (C.D. Cal. 2015), revisited
the issue of enforceability of an advance waiver, this time in the context of a
future conflict that arose following the merger of two firms. In 2014 Patton
Boggs LLP and Squire Sanders combined to form Squire, Patton Boggs. Prior to
the merger, Squire, Sanders & Dempsey LLP represented plaintiffs in a false
advertising action against Tate & Lyle, but Patton Boggs was providing
legal services to Tate & Lyle at the time of the merger as well. Following
the merger, Tate & Lyle sought to disqualify the new firm from proceeding
with representation of the plaintiffs in the false advertising action.
Sixteen years earlier, Tate & Lyle
signed an engagement agreement with Patton Boggs containing a prospective
waiver stating, “It is possible that some of our current or future clients
will have disputes with you during the time we are representing you. We
therefore also ask each of our clients to agree that we may continue to
represent or may undertake in the future to represent existing or new clients
in any matter that is not substantially related to our work for you, even if
the interest of such clients in those unrelated matters are directly adverse to
yours….“ (Id. at 1083.) Looking to the factors in Visa, the
court explained that the breadth and temporal scope of the advanced waiver was
too open-ended, purporting to waive conflicts in any matter not substantially
related indefinitely (Id. at 1083). The court further concluded the
waiver lacked specificity. It did not identify a potentially adverse client,
the type of potential conflict, or the nature of the representative matters (Id).
Responding to the argument that the waiver had been knowledgably signed by Tate
& Lyle’s general counsel, the court noted that the former general counsel who
signed the waiver submitted a declaration stating that no one from Patton Boggs
discussed the waiver with him, and that if they had, and if he had understood
that it was meant to waive future conflicts without further disclosure and
consent, he would never have signed it.
The court further opined that it was
difficult to imagine that in 1998 Patton Boggs could contemplate conflicts that
could surface 16 years later and disclose them sufficiently to Tate & Lyle,
and that Tate & Lyle, as sophisticated as it was, fully appreciated the
risks and made a knowledgeable waiver 16 years previously. Accordingly, to
defeat disqualification, a second more specific waiver was required because the
advance waiver did not sufficiently disclose the nature of the conflict and the
material risks of the merged firm’s pursuing the false advertising claim
against Tate & Lyle.
Given this continually evolving area of
the law, lawyers seeking to utilize advance waivers would be well advised to
consider the issues raised in these cases and to conform the provisions of
their advance waivers accordingly.
Drew Dilworth is a litigation
partner with Cooper, White & Cooper LLP in San Francisco, where he focuses
his practice on laws governing lawyers. He is a member of the State Bar’s
Committee on Professional Responsibility and Conduct (COPRAC) and an
adjunct professor with the University of San Francisco School of Law. The views
expressed herein are his own. This article appears in the California Bar
Journal as part of COPRAC’s outreach and educational efforts.
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