Enforcing advance conflict waivers

Conflicts of interest continue to be the most common alleged legal malpractice error, according to a 2015 survey by Ames & Gough, as well as a basis for disciplinary action. As the legal industry specializes and contracts, potential conflicts become even more prevalent, and disqualification motions abound. Unquestionably, conflicts are important and lawyers must actively manage them.

One method attorneys use to manage the risk of a conflict of interest is advance conflict waivers. There is no per se ethical prohibition against advance conflict waivers. See Cal. State Bar Formal Opinion No. 1989-115. Enforceability, however, is not assured, and depends on two factors: (1) how adequate was the disclosure; and (2) how informed was the consent? Because an advance conflict waiver seeks as its express purpose that the client waive a conflict not yet in existence, to be enforceable, there must be a high and accurate level of precognition of a future event. Where "informed written consent" is defined as written consent given after adequate disclosure of the relevant circumstances and actual and potentially reasonably forseeable adverse consequences, the tension between future prediction and informed written consent is clear. California Rule of Professional Conduct 3-310(A).

Case law teaches us that whether an advance waiver is enforceable is a highly fact-based determination, and one not uniformly applied by the courts. We can, however, discern certain parameters. Where the conflict is sufficiently disclosed and client's waiver fully informed, some California courts have enforced the waiver.

In Zador Corp. N.V. v. Kwan, 31 Cal. App. 4th 1285 (1995), a joint representation case, the court enforced an advance waiver that said that in the event of a future conflict between the two joint clients, the law firm would continue to represent one client notwithstanding "any adversity that may develop." The Court of Appeal found that the question was governed by the issue of consent, and that Kwan had knowingly consented to the law firm's actions. Because the advance waiver was detailed, the "any adversity" language of the consent was broad enough to cover the law firm's subsequent representation of Zador in Zador's cross complaint against Kwan.

In Visa U.S.A. Inc. v. First Data Corp., 241 F. Supp. 2d 1100 (N.D. Cal. 2003), the court denied a motion to disqualify, noting that while an advance waiver need not state the exact nature of the future conflict, the disclosure must be sufficiently detailed, and the discussion of the potential conflict sufficiently accurate, that the client's consent is fully informed. Visa identified seven factors to consider: (1) the breadth of the waiver; (2) the temporal scope of the waiver (whether it waived a current conflict or whether it was intended to waive all conflicts in the future); (3) the quality of the conflicts discussion between the attorney and the client; (4) the specificity of the waiver; (5) the nature of the actual conflict (whether the attorney sought to represent both clients in the same dispute or in unrelated disputes); (6) the sophistication of the client; and (7) the interests of justice.

The court also rejected the argument that a second waiver is always needed for an enforceable advance waiver, only requiring one when the attorney believes "the first waiver was insufficiently informed." In Visa, both clients were sophisticated, and could be expected to understand the full extent of the waiver. Finally, the law firm erected an ethical wall between the attorneys handling matters for each client.

A similar result occurred in UMG Recordings Inc. v. MySpace, 526 F. Supp. 2d 1046 (C.D. Cal. 2007), wherein the court found that law firm had made clear from the beginning that it would not agree to represent UMG without an advance conflict waiver, and thus the law firm did not deal "dubiously" with UMG. "To disqualify [law firm] now would lead to a harsh result, given the minor nature of the conflict and - most importantly - the fact that [law firm] has agreed to abandon the claims and efforts that gave rise to its conflict."

In contrast, where specificity is lacking, California courts continue to find generally worded advance waivers to be unenforceable. One case involved an advance waiver in an engagement letter. Concat LP v. Unilever PLC, 350 F. Supp. 2d 796 (N.D. Cal. 2004). Without identifying any specific client or matter, the clause read in part, "It is possible that some of our present or future clients will have disputes or other dealings with you during the time that we represent you. Accordingly, as a condition of our undertaking of this matter for you, you agree that [firm] may continue to represent, or may undertake in the future to represent, existing or new clients in any matter, including litigation, that is not substantially related to our work for you, even if the interests of such clients in those other matters are directly adverse to you."

The court found this language lacked specificity, and that a second waiver was needed since the first waiver insufficiently disclosed the nature of the conflict that subsequently arose between the parties. Thus, disqualification was warranted.

The most recent case to join the advance waiver jurisprudence in California is Western Sugar Coop. v. Archer-Daniels-Midland Co., 98 F. Supp. 3d 1074 (C.D. Cal. 2015), which also rejected an advance waiver, signed 16 years earlier, for lack of specificity. Similar to the Concat clause, the Western Sugar advance waiver read, "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."

The court found this language broad, open-ended, and lacking in specificity, without identifying any potentially adverse client, potential conflicts, or the nature of the representative matters. It rejected the argument that the client's supposed sophistication should be given weight so as to offset the lack of specificity, finding that given the first waiver's generality, a second more specific waiver was required but not obtained.

The law firm in Western Sugar was correct that the ABA Model Rules and cases from other jurisdictions permit generally worded advance waivers where the client is highly sophisticated, represented by counsel, and the waiver limited to future conflicts unrelated to the subject of the representation. See, e.g., Model Rule 1.7, comment [22], and Galderma v. Activis, 927 F. Supp. 2d 390 (N.D. TX. 2013). Nevertheless, California is not a Model Rules state, and there is no analog to Model Rule 1.7 Comment [22] in the CRPC or the Business and Professions Code.

While this may change in the future, at present, California lawyers who wish to use advance waivers as an effective risk management tool should draft advance waivers to be as specific as possible, use them only with sophisticated clients, advise the client to have independent counsel review it, be restrained as to scope and time, constrain their use to unrelated future matters, and if the advance waiver is a precondition of your agreement to take on a matter - make that clear as well.