TOPIC: Limiting the scope of an attorney’s representation
to avoid client conflicts.
DIGEST: The scope of a lawyer's representation of a client
may be limited in order to avoid a conflict that might otherwise result
with a present or former client of the lawyer. The lawyer must remain
cognizant, however, of her duty of undivided loyalty to both clients
and her duty to maintain the confidences and secrets of both clients.
CODE PROVISIONS: DR 5-105.
QUESTION: May a conflict of interest be avoided by limiting
the scope of a lawyer's representation of a client?
OPINION:
Over the last two decades, the client rosters of many law firms have
grown dramatically, spurred on by a burgeoning demand for legal services,
a market shift where clients that once turned to a single law firm for
all their legal needs now routinely retain several law firms, and an
increase in law firm size, resulting both from mergers and internally
generated expansion. Although this growth may be a bellwether of the
economic health of the legal profession, it also heralds the likelihood
that law firms will increasingly encounter situations where one client
will be adverse to another client of the firm. Given the broad reach
in New York of the duty of loyalty imposed by Canon 5, this can, and
often does, result in clients being deprived of one of the most important
rights accorded by our judicial system — the right to select the
attorney of their choice. See, e.g., Richardson-Merrel, Inc.
v. Koller, 472 U.S. 424, 441 (1985) (Brennan, J., concurring) ("A
fundamental premise of the adversary system is that individuals have
the right to retain the attorney of their choice to represent their
interests in judicial proceedings.").
In New York and almost all jurisdictions except Texas, a lawyer is
precluded, at least prima facie, from representing one client
in a matter directly adverse to another current client, even though
the representation of the other client is in an entirely unrelated matter.
As a result of the strict application of this rule, a client may confront
many situations where a lawyer, who does not have a conflict at the
inception of an engagement, subsequently develops a conflict with another
client. Situations where this can occur abound, in both litigation and
transactional contexts.
In one common litigation situation, a law firm may agree to defend
a corporate client in a lawsuit which does not appear to pose a conflict
with any other client of the law firm. As fact development proceeds,
an amendment to the complaint is filed adding as a defendant an additional
party, such as the company’s accounting firm, which is also a client
of the attorney’s firm in unrelated matters. At this juncture,
an actual conflict still may not exist if the positions of the client
company and its accounting firm appear to be united in interest or are
not directly adverse. But if facts develop that suggest the client company
may possess a cross-claim against the accounting firm, or vice versa,
a conflict may emerge that could impact the lawyer’s ability ethically
to continue its representation of the corporate client. In this context,
the question arises whether the law firm can ethically avoid the conflict
by limiting the scope of the engagement for the corporate client to
exclude any involvement in the aspect of the matter that is adverse
to the accounting firm. Absent the ability of the lawyer to limit the
engagement, the Code requires the attorney to withdraw from her representation
of the corporate defendant. See DR 5-105(B) [22 N.Y.C.R.R. § 1200.24].
Of course, conflicts are by no means limited to the litigation realm.
"Adversity of position in litigation is not a necessary precondition
for the existence of a direct conflict. If, for example, two businesses
were competing for the same Government contract, and each engaged the
same lawyer to prepare bids, Rule 1.7(a) would surely be applicable."
In this same vein, an attorney representing a client in mergers and
acquisitions practice also may face conflicts that are not foreseen
— or even foreseeable — at the time the engagement commences.
Such an attorney may be representing a company in an auction in which
the company itself or one of its subsidiaries is to be sold. Only after
the auction is commenced does another client of the attorney (or her
firm) emerge as a potential buyer of the auctioned company. Continuing
to represent the auctioned company could place the attorney in a position
of direct adversity to the interests of the newly emerged bidder if
the attorney were required to negotiate with her own client. Absent
consent or the ability to unilaterally limit the scope of the attorney’s
representation of the target, the attorney could be required to withdraw
from her representation of the target. See DR 5-105(B) [22 N.Y.C.R.R.
§ 1200.24].
We conclude that a representation may be limited to eliminate adversity
and avoid a conflict of interest, as long as the lawyer’s continuing
representation of the client is not so restricted that it renders her
counsel inadequate and the client for whom the lawyer will provide the
limited representation consents to the limitation. In obtaining consent
from the client, the lawyer must adequately disclose the limitations
on the scope of the engagement and the matters that will be excluded.
In addition, the lawyer must disclose the reasonably foreseeable consequences
of the limitation. In making such disclosure, the lawyer should explain
that separate counsel may need to be retained, which could result in
additional expense, and delay or complicate the rendition of legal services.
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Discussion
A Lawyer May Limit the Scope of the Engagement
to Eliminate a Conflict with Another Client
Under the Code, a lawyer shall neither undertake nor continue the concurrent
representation of several clients if doing so would likely involve the
lawyer in representing differing interests. DR 5-105(A),(B) [22 N.Y.C.R.R.
§ 1200.24]. Absent informed consent, the Code also prohibits
a lawyer from representing a person in the same or a substantially related
matter in which that person's interests are materially adverse to the
interests of a former client. DR 5-108(A) [22 N.Y.C.R.R. § 1200.27].
The sine qua non, then, for the triggering of these proscriptions
is the adverse nature of the lawyer's engagement, and where there is
no adversity to a present or former client, these proscriptions do not
apply. At bottom, the attorney-client relationship is consensual. Accordingly,
we see no reason why the client cannot limit the scope of the lawyer's
representation to eliminate an adversity between another client and
the lawyer, and thereby avoid any conflict.
Our conclusion is fortified by the Restatement of the Law Governing
Lawyers, which specifically approves limiting the scope of
a lawyer’s representation to avoid conflicts:
Id. Illustration 4.
In this same vein, Rule 1.2(c) of the Model Rules of Professional Conduct
also supports such a limitation on representation. Model Rule 1.2(c)
provides: "A lawyer may limit the objectives of the representation."
Several ethics opinions interpreting this provision have found that
a lawyer may limit the scope of representation to avoid a conflict.
Notably, the American Bar Association's Ethics 2000 - Commission
on the Evaluation of the Rules of Professional Conduct has proposed
clarifying the section by changing the word "objectives" in Model Rule
1.2(c) to "scope."
The case law also supports the conclusion that certain potential conflicts
may be avoided by limiting the scope of representation. In Interstate
Properties v. Pyramid Co. of Utica, 547 F. Supp. 178, 181 (S.D.N.Y.
1982), the court did not find any conflict where a law firm "circumscribed
its relationship with [client A] to remove the possibility of conflict
by first acting only as special environmental counsel to [client A]
and then, as it became involved in more general commercial affairs of
[client A], by limiting its involvement to developments in which [client
B] had no potential or actual interest as competitor or partner."
Several bankruptcy courts have reached similar conclusions. See
In re Fondiller, 15 B.R. 890, 892 (B.A.P. 9th Cir. 1981) ("An
attorney representing the trustee as general counsel would be required
to give legal advice and to proceed with appropriate litigation in connection
with these matters. Any number of possible conflicts can be envisioned.
The foregoing reasoning, however, does not apply to those situations
in which an attorney’s services are limited to a narrow field for
a specific purpose"); In re H & S Transp. Co., 53 B.R.
128, 132 (M.D. Tenn. 1985) (law firm appointed by trustee to represent
jointly administered estates of four corporate debtors was entitled
to reasonable compensation, where firm represented the trustee only
to the extent that the interests of each estate were parallel; citing
Fondiller with approval for the proposition that "a law
firm may limit its representation so as to avoid conflicts of interest").
The Limitation Must Be
Adequate to Eliminate the Adversity
Our conclusion that it is permissible to limit the scope of a lawyer’s
representation of a client to avoid conflicts with other current or
former clients depends on the nature and adequacy of such a limitation.
Although the nature and adequacy of the limitation necessarily will
depend on the specific engagement creating the potential adversity,
the limitation should be sufficient to eliminate the "differing
interests" that would otherwise exist. And it bears emphasis that
both the lawyer and client must adhere scrupulously to the limitation.
Indeed, it goes without saying that a lawyer may not circumvent the
limitation by acting adversely "behind the scenes." See
Funds of Funds Ltd. v. Arthur Andersen & Co., 567 F.2d 225,
234 (2d Cir. 1977).
In the context of litigation, a lawyer defending a client in an action
who determines that there are potential cross-claims between the lawyer’s
client and another party also represented by the same law firm in an
unrelated matter may, with the informed consent of the client whose
engagement is being limited, limit her engagement to the defense of
the case, and exclude representation of the client against the other
client. Although the lawyer’s two clients would continue to be
directly adverse to each other, the limitation would eliminate the lawyer’s
differing interests and preclude any conflict. In this context, however,
it is important that the lawyer refrain from actions that would effectively
undermine the limitation by placing the lawyer in a position adverse
to the other client. Although there is no prohibition against the lawyer’s
recommending or otherwise assisting her client in retaining other counsel
for purposes of litigating the cross-claims, there are constraints on
the lawyer’s interaction with the new counsel. The lawyer may not
assist, or otherwise participate with, new counsel in litigating against
her own client. This means that the lawyer may not instruct the other
lawyer or strategize on the best way to proceed or indicate which evidence
already developed pertains to the case against the other client.
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Steps to Limit an
Engagement Effectively
-- Written Terms of the Limited Engagement
In our view, there are several steps a lawyer should take both to effectively
limit representation and avoid the ethical pitfalls highlighted in Fund
of Funds Ltd., 567 F.2d at 234. As a threshold matter, the "terms
of the limited engagement" should be memorialized in writing as
soon as possible, and in detail. These rules should be communicated
both to separate counsel (if any) and to the client to ensure they both
fully understand the limitations on the scope of the original firm’s
representation.
In this connection, it is critical that the client whose engagement
is being limited fully understands the implications of the limitation,
including any restriction on communication with any separate counsel
and the impact, if any, on the cost of handling the matter. A limited
engagement should not be proposed if a client could not reasonably conclude
that the proposed arrangement serves its interests. In some circumstances,
such as where the client is a large corporation already represented
by inside or outside counsel, or a sophisticated individual, the client
would, after disclosure, be able to provide meaningful consent. In other
circumstances, however, such as the representation of unsophisticated
individuals, the client, unaided, may not be able to provide informed
consent. See N.Y. City 2001-2 (concluding that "sophisticated
corporate and institutional clients can consent to conflicts which might
be non-consentable in cases involving lay clients"). In the latter
situation, the attorney should advise the client that she may retain
independent counsel to evaluate the limited engagement. Cf. DR5-104(A)(2)
[22 N.Y.C.R.R. § 1200.23] (requiring an attorney entering
into a business transaction with a client to advise the client that
she may retain independent counsel to evaluate the proposed business
venture).
-- Communications with Separate Counsel Must Be Regulated
When it comes to communications with separate counsel, the overarching
and guiding principle should be neutrality toward the law firm's other
client. Accordingly, the original law firm should avoid any action or
communication with separate counsel where the purpose is to create a
detriment to the law firm's other client. The original law firm may
engage in routine efforts to coordinate with separate counsel, and may
provide copies of generally relevant information developed in the case,
such as records of related court proceedings or regulatory investigations,
so long as they are not segregated or otherwise targeted at the other
client. The original law firm may also provide in bulk any documents
it has discovered that are connected to the case. But the original firm
may not in any way "selectively" disclose or segregate for
review or otherwise identify documents that would be "particularly relevant"
to claims against the other client. Work product, such as interview
memoranda relevant to the case, may be shared, but the original law
firm may not share documents concerning the legal strategy for the case
that might be applicable to issues or claims involving the other client.
-- In Representing Its Client in the Limited Representation the
Law Firm May Take No
Action for the Purpose of Injuring Its Other Client
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In its limited representation, the law firm also may fully adduce evidence
that assists its original client against its adversary. Conversely,
the law firm may not adduce evidence or seek discovery in order to adversely
impact its other client. As long as the evidence is adduced for the
sole purpose of assisting its client, the possibility that the same
facts adduced may be exploited by another lawyer against the other client
does not preclude the law firm from doing so. See Sumitomo
Corp. v. J.P. Morgan & Co., Inc., Nos. 99 Civ. 8780, 99 Civ.
4004 (JSM) 2000 WL 145747 (S.D.N.Y. Feb. 8, 2000). After all, "facts"
are inherently neutral. There is no "plaintiff’s evidence"
or "defendant’s facts." To be sure, the same facts or
evidence can be argued by one side or the other to support a position
adverse to the interests of the other party. But the underlying facts
or evidence are themselves unaligned. For this reason, a lawyer is precluded
from attempting to blockade a witness from an adversary by limiting
access to the witness. As Professor Wolfram states: "Witnesses
do not ‘belong’ to either party and generally should be as
available for interviews to one side as to the other." See
Wolfram, Modern Legal Ethics § 12.4.2 at 647. Accordingly,
the lawyer is free to elicit facts or evidence even though another lawyer
may exploit it to the detriment of another client. Of course, it goes
without saying that the lawyer may not elicit these facts for the purpose
of adversely affecting his other client and may not assert that these
facts are adverse to the other client.
Our conclusion is supported by the recent decision in Sumitomo,
which held that counsel had successfully limited the scope of representation
to avoid conflicts. In Sumitomo, when it became apparent to a
law firm that investigating potential claims on behalf of client A might
involve the assertion of claims against several entities, including
client B (a client on unrelated matters), the law firm provided A with
a list of potential separate counsel, and contacted counsel on behalf
of A. The original law firm then proceeded to represent A against the
non-clients, while in a second litigation separate counsel, chosen from
the list supplied by the original law firm, prosecuted A’s claims
against B. B then moved both to consolidate the case against B with
the other cases and to disqualify the original law firm under DR 5-105,
arguing that the litigations were so similar that the original law firm’s
success in the litigation against non-clients would adversely affect
B.
The Sumitomo court granted B’s motion to consolidate the
separate litigations for pretrial purposes. Nevertheless, the Court
refused to disqualify the law firm. The Sumitomo court held:
"No decision, however, has found that the Code’s prohibition
against simultaneous representation extends to the situation before
the Court. Here [the original law firm] is not representing [A] against
[B] in this litigation in violation of DR 5-105. Instead, [the original
law firm] is representing [A] against . . . a non-client, while [the
separate law firm] is representing [A against B, the original law firm’s]
current client in an unrelated matter. Thus, the per se rule against
simultaneous representation articulated in Cinema 5 and other
decisions does not require the Court to disqualify [the original law
firm]." Id. at *4. The court further explained: "While
one can understand that [B’s] in-house counsel might be unhappy
that a law firm which represents it in some matters was taking a position
in litigation involving another client that, if adopted, would prejudice
an argument that [B] was advancing in a separate case, that does not
mean that the law firm is violating a confidence of its client or engaging
in unethical conduct." Id. at *4. In addition, the court
noted that the original law firm was "not involved in attempting
to establish wrongdoing by [B] or seeking a judgment that will directly
impact [B]." Id.
Where the adversity is less direct, an attorney may correspondingly
have more latitude, for example, in a situation where her client must
subpoena another of her clients as a non-party witness. To be sure,
"it will . . . frequently be the case that a lawyer’s taking
discovery, whether testimonial or documentary, on behalf of one client,
of a third party who is also a client, will present such direct adverseness,
so as to be disqualifying under Rule 1.7(a)" ABA 92-367
(October 16, 1992) at 2-3. In circumstances such as these, separate
counsel may be brought in for the purposes of issuing the subpoena and
taking discovery from the non-party client.
Similar issues concerning the nature and adequacy of the limitation
on representation arise in the corporate context. Where a lawyer represents
a company in an auction to sell the company or a part of it, and another
client emerges as a potential buyer, absent consent the lawyer cannot
negotiate with the second client. But the lawyer may limit the representation
to exclude from the scope of representation any aspect adverse to the
lawyer’s other client and continue to advise the company in all
the other aspects of the auction on matters that are not adverse to
the second client.
Finally, although judging the efficacy of a particular limitation on
an engagement is necessarily fact specific, there predictably are circumstances
where a lawyer’s attempt to limit the scope of her engagement will
be doomed. For example, the limitation may be inadequate to protect
the client, or once limited so as to address the conflict, the lawyer’s
engagement may no longer provide meaningful value to the client whose
engagement is limited, or in order to advance one client’s interests,
the lawyer must harm the interests of the other client.
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Conclusion
The Committee concludes that the scope of a lawyer’s representation
of a client may be limited in order to avoid a conflict that might otherwise
result with a present or former client, provided that the client whose
engagement is limited consents to the limitation after full disclosure
and the limitation on the representation does not render the lawyer's
counsel inadequate or diminish the zeal of the representation. An attorney
whose representation has been limited, however, must be mindful of her
duty of loyalty to both clients. Where the portion of the engagement
to be carved out is discrete and limited in scope, such a limitation
may well resolve the conflict presented.
Issued: July, 2001
