March 2017 | Earn one hour of MCLE Credit in Legal Ethics
Successive representation: A conflicts trap for the unwary
In the simplest lawsuit, A sues B. The case resolves and everyone goes their own way. But some litigation is not that simple. Maybe A has a dispute with her lawyers after she settles with B, and another suit is filed. And maybe thereafter a consultant for A, call him C, asserts a claim against A arising out of A vs. B. These types of cases may present a "successive representation" situation.
If A, B, C, and A's lawyers all have their own, separate counsel, the successive cases do not present particular ethics concerns. But where one set of lawyers represents multiple parties in the successive cases, potential conflict of interest issues can arise. This is what happened in Acacia Patent Acquisition, LLC v. Superior Court, (2015) 234 Cal.App.4th 1091, where the court found a disqualifying conflict by a law firm versus a party it had never represented due to the law firm's acquisition of confidential information about the non-client along the way in a successive representation situation.
Acacia involved three separate matters. In Matter No. 1, Client A sued Samsung for patent infringement. A had earlier hired a consultant, C, to advise it on certain of the patents at issue, promising C a percentage of the amounts earned on those patents. In A vs. Samsung, A retained Attorney to represent it. The case settled, and the settlement proceeds were allocated among patents involved in the lawsuit.
In Matter No. 2, Attorney sued A over his fees. Attorney hired Law Firm to represent it in Matter No. 2. That case also settled.
In Matter No. 3, C, the consultant, sued A, claiming the allocation of the settlement proceeds in A vs. Samsung was done to unfairly minimize C's earnings. That is, C claimed too much of the settlement went to patents in which C had no financial interest. The ethical issue arose when C hired Law Firm to represent him in his dispute against A. Recall Law Firm had never represented A in either Matter No. 1 or Matter No. 2. Indeed, all it had done is represent Attorney against A in Matter No. 2. Nevertheless A moved to disqualify Law Firm on the grounds of conflict of interest based on the confidential information about A it asserted Law Firm must have acquired during Matter No. 2.
Lessons from Acacia
Under Bus. & Prof. Code section 6068(e), lawyers must "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." CRPC 3-310(E) prohibits a lawyer from accepting, without informed written consent, "employment adverse to [a] . . . former client where, by reason of the representation of the . . . former client, the [lawyer] has obtained confidential information material to the employment." Violation of these provisions can serve as the basis for a disqualification motion, but on their face, it would seem they should not apply if the party seeking disqualification had never been "a client" of the lawyer whose disqualification is sought.
However, as Acacia demonstrated, it is possible for a lawyer to obtain disqualifying confidential information about a non-client in a successive representation situation. Acacia demonstrated: (1) how the lawyer can obtain that information from a non-client; (2) how the non-client who moves for disqualification can establish the lawyer's receipt of its confidential information; and (3) why the lawyer's receipt of that information can become a disqualifying conflict of interest.
It is difficult for a party seeking disqualification to establish actual receipt of confidential information without publicly disclosing the very confidential information it wants to keep secret. Yet actual receipt, and therefore the potential improper use, of that confidential information must be somehow established. While not codified in the disciplinary rules, the courts have fashioned a "substantial relationship" test as a "rule of necessity," under which receipt of confidential information is presumed if "confidential information material to the current dispute would normally have been imparted to the attorney by virtue of the nature of the former representation." H. F. Ahmanson & Co. v. Salomon Bros. (1991) 229 Cal.App.3d 1445, 1454. Thus, the "substantial relationship" test takes a pragmatic approach to the issue by surmising what most likely took place during the former representation in terms of access to confidential information by focusing "on the similarities between the two factual situations, the legal questions posed, and the nature and extent of the attorney's involvement with the cases." Id. at 1455.
The "substantial relationship" test avoids having the client disclose what it shared with its lawyer, but there are downsides as well. Courts recognize that if the disqualification motion is granted, current clients are being deprived of a lawyer of their choosing, and lawyers' employment opportunities are also necessarily limited, an issue of particular consequence in specialized practice areas with smaller number of practitioners. And, of course, disqualification motions can be abused to "delay the litigation, harass the opposing party or pressure for a more favorable settlement." H. F. Ahmanson, 229 Cal.App.3d at 1454. Nevertheless, the "substantial relationship" test has been broadly adopted and routinely applied in conflicts cases, and it properly captures the threat posed by conflicts: to prevent a lawyer from using confidential information the lawyer learned about a client in a prior matter against that former client, now an adversary in a current matter, and thus giving the lawyer an advantage in the current matter that he or she would not otherwise have had, in violation of CRPC 3-301(E).
Duties to non-clients
The party moving for disqualification is typically a former client. Whether a non-client has "standing" to assert a disqualifying conflict of interest is a more perplexing question because lawyers do not generally owe a duty of confidentiality to non-clients. This was the threshold question in Acacia. There, the court held that in successive representation situations, it is entirely possible for a law firm to learn disqualifying confidences about a non-client, and when that occurs, a motion to disqualify the law firm should be granted. 234 Cal.App.4th at 1103-05.
In Acacia, the court started its analysis by noting: "There are exceptions, however, to the general rule that an attorney has no duty to preserve the confidences of non-clients. ‘A conflict of interest is involved if there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the . . . lawyer's duties to another current client, a former client, or a third person.' (Rest.3d Law Governing Lawyers, § 121, italics added.) ‘A conflict of interest can . . . arise because of specific obligations, such as the obligation to hold information confidential, that the lawyer has assumed to a non-client.' (Rest.3d Law Governing Lawyers, § 121, com. d, p. 253.)" Id. at 1098-99. The key question followed: "When do these obligations and duties to non-clients arise?" Id.
The court applied a two-prong inquiry: "(1) whether the first representation resulted in a broad disclosure of the non-client's privileged information (i.e., something beyond the attorney-client retainer agreement and the number of hours worked) and (2) whether a substantial relationship exists between the two matters." Id. at 1104.
Addressing the first prong, the court held that Law Firm "had access to numerous privileged documents [containing A's confidential information] in Matter No. 2 because the nature of the litigation in Matter No. 2 required it." Id. at 1104. Using the "presumption" approach found in the "substantial relationship" test to establish what Law Firm must have found out about A during Matter No.2, the court reasoned that Attorney (the client in Matter No. 2) must have learned detailed information about A's business in the course of Matter No. 1, where Attorney represented A against Samsung. It went on to find that because Law Firm, in Matter No. 2, received all of Attorney's files from Matter No. 1, more than likely it learned much of that confidential information about A and its business. Id. at 1100-02. The court specifically mentioned, as an example of confidential information, a "valuation of the claims against Samsung," id. at 1004.
Having satisfied the first prong of the test, the court turned to the second prong and found that Matters 2 and 3 were substantially related. As the court put it, the factual differences between the matters "pale in comparison with the essential similarities" between them. Id. at 1105. For example, "relevant issues in both matters include defendants' intent in structuring the contingency agreements . . . and in dividing the proceeds of the Samsung settlement between various affiliates. . . ." Id. at 1106. Disqualification was therefore warranted.
Another unusual feature of Acacia is that the appellate court reversed the trial court's order denying the motion to disqualify, finding that it was an abuse of discretion. Most disputes over disqualification motions effectively end at the trial court level because reviewing courts should not substitute their own judgments for a trial court's express or implied findings that are supported by substantial evidence. Id. at 1096-7. Thus, the court's reversal here underscored the court's staunch protection of a party's confidential information.
California precedent involving successive conflicts with non-clients is sparse and, as the Acacia decision noted, is distinguishable factually, although these cases endorse "use of the successive representation framework." Id. at 1099. For example, in Kennedy v. Eldridge (2011) 201 Cal.App.4th1197, lawyer Eldridge represented Alan in a child custody dispute [Matter No. 1]. While Matter No. 1 was pending, Alan's daughter, Kayla, submitted a declaration on her father's behalf. This matter was ultimately resolved. Sometime later, Kayla sued her husband, Tyler, for divorce, sole custody of their infant daughter, etc. [Matter No. 2]. Tyler discussed the situation with Eldridge, his father, and Eldridge agreed to represent him. As soon as he made an appearance, Kayla's lawyer filed a motion to disqualify Eldridge based on an impermissible conflict due to the confidential information Eldridge had received about Kyla in Matter No. 1, even though Eldridge had never had a lawyer-client relationship with Kayla. The court upheld the trial court's disqualification order on two theories: (1) because of his prior representation, he learned Kayla's confidential information and thus had a disqualifying conflict; and, (2) alternatively, Eldridge would be called to testify on the family dynamics and the "'strong appearance of impropriety' caused by the 'multiple and interconnected family entanglements'" justified the order. Id. at 1100. Kennedy may be weak direct precedent for Acacia, but the court nevertheless relied on a number of sister state opinions with similar facts, none of which blanched at the notion that lawyers can owe a duty to preserve the confidences of and avoid conflicts with non-clients, especially in successive representation situations.
The primary purpose of the successive client conflict rule is to preserve the former non-client's confidential information, thus serving the larger interest in securing clients' trust in and willingness to safely disclose possibly damaging information to their lawyers. There are two potential "cures" for an otherwise disqualifying successive client conflict. The first is suggested by the wording of CRPC 3-310(E) itself, "A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client . . ." (emphasis added). Hence, the lawyer could seek the informed written consent of the non-client to allow the representation or might have obtained it with an adequate advance waiver. Of course, the former route is likely foreclosed when the former client is seeking disqualification. The latter route is possible but only if the advance waiver is detailed enough to warn the client what conflicts are being waived. See, e.g., Western Sugar Coop v. Archer-Daniels-Midland (CD Cal. 2015) 98 F.Supp.3d 1074 (broad advance waiver inoperative). Alternatively, the other potential solution may be to screen the lawyers in the law firm with the disqualifying information, if a court will allow it. See, e.g., Kirk v. First American Title Ins. Co. (2010) 183 Cal.App.4th 776 (allowing screening to avoid a conflict of interest but under narrow circumstances).
In conclusion, lawyers must be careful in successive representation situations. The consequences are serious when the lawyer seeks to represent a client adverse to a non-client where the lawyer has learned confidential information about that non-client during a successive representation. In addition to disqualification, painful enough, the lawyer might also face professional discipline and the loss of fees earned while the conflict existed. See, e.g.,Mardirossian & Assocs., Inc. v. Ersoff, (2007) 153 Cal.App.4th 257, 278 (noting that, "in certain circumstances, a violation of the Rules of Professional Conduct may result in a forfeiture of an attorney's right to fees.")
Richard C. Solomon is a retired law professor, a member of the State Bar Committee on Professional Responsibility and Conduct, a consultant to lawyers, law firms and legal departments on ethics issues, and an arbitrator. The views expressed here are his own. This article appears in the California Bar Journal as part of COPRAC's outreach and educational efforts. For more information on COPRAC, go to www.calbar.ca.gov/ethics.