How to effectively address conflict issues in advance

There are nearly 190,000 active members of the State Bar of California. All are subject to the same ethical duties. Experience suggests that the overwhelming majority of these members consistently intend to honor those obligations. Yet, this year alone, the State Bar will likely receive complaints about the conduct of between 5 and 10 percent of its members. Why is that?

The answer usually lies in the details.

One area where this is especially evident is conflicts. Lawyers often recognize when there are potential or actual conflicts. And though they know that they need a waiver, sometimes the instrument they prepare is insufficient. That can lead to disqualification, and ramifications both in civil and disciplinary matters.

Ironically, the risk of having an ineffective waiver is even greater when lawyers try to get out in front of the issue and obtain one in advance. The reason for that is the requirement that, as the foundation for a waiver, clients provide informed written consent. Rule of Professional Conduct 1.0.1 provides that informed consent is a person's agreement to a proposed course of conduct after the lawyer has communicated and explained both the relevant circumstances and the material risks, including any actual and reasonably foreseeable consequences of the proposed course of conduct.

It is this concept that led some ethicists to decry the use of advance waivers at all. The risk, of course, is that because the conflict has not yet arisen, the lawyer drafting such a waiver may have inadequate information to provide to the client regarding the risks that a future conflict may bring. Indeed, the lawyer may not even be able to fully prognosticate the circumstances that will trigger a conflict to arise. As might be expected, and largely due to this reasoning, advance waivers have had mixed results.

A classic example of the perils of an advance waiver are those that the California Supreme Court addressed last year in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. There, an international firm agreed to represent a pipe manufacturer in a qui tam action. The firm had previously provided legal services to a public entity intervener. That entity had signed an advance waiver permitting Sheppard Mullin to represent future clients adverse to it in unrelated matters.

In its engagement agreement with the manufacturer, the firm had a similar waiver provision. It provided that the firm has many attorneys and multiple offices and may currently or in the future represent one or more other clients in matters involving the manufacturer. Conditioning the engagement on consent for the firm to be able to represent another client in a matter, even if that client was adverse to the manufacturer, the firm required the manufacturer to waive the duty of loyalty so long as the lawyers maintained confidentiality. This conflict waiver provision was similar to the one provided to the public entity. The problem was that Sheppard Mullin did not tell the manufacturer about its representation of the public entity before or at the time the engagement agreement was signed. Obviously, this was information not that the firm failed to predict, but that it actually knew. Yet, it failed to disclose the representation. So, the client was not given the opportunity to provide informed consent.

A few weeks after Sheppard Mullin began representing the manufacturer, it provided additional legal services to the public entity, and billed approximately 12 hours to that entity over the year. The public entity then successfully moved to disqualify the firm in the qui tam action. Even though both clients agreed to the law firm's representation of any other client, currently or in the future, in matters not substantially related to its representation of them, even if the interests of the clients are adverse to one another, Sheppard Mullin had failed to disclose that a current conflict actually existed. For that reason, the firm was disqualified.

Nationally, several courts have held that broad, open-ended advance conflict waivers like the ones Sheppard Mullin employed are ineffective to provide informed consent. For example, earlier this year, in Southern Visions, LLP v. Red Diamond, Inc., the U.S. District Court for the Northern District of Alabama noted, "Open-ended advance conflict waivers are especially suspect where a lawyer seeks to rely on them to provide effective consent to directly adverse litigation between current clients."

But all of this does not mean that advance conflict waivers are necessarily ineffective. In 1995, the 6th District Court of Appeal gave California lawyers incredibly useful direction in Zador Corporation v. Kwan. First, the court described the factors that need be considered in determining whether an advance waiver is practical in a given situation. These include how well the potential conflict was described and whether the client was given the opportunity to consult with independent counsel. Notably, the court explained, "California law does not require that every possible consequence of a conflict be disclosed for a consent to be valid. Indeed, ... the California Supreme Court recognized that '[w]aiver of the consequences of potential conflict was not inadequate simply because neither the court nor the agreement undertook the impossible burden of explaining separately every conceivable ramification.'"

Perhaps more significantly, it provided the verbatim language of the advance waiver it found to be effective. Although, as Sheppard Mullin's case demonstrates, conflict waivers should be personalized to each case, the Zador opinion provides a framework for drafting. A major takeaway from Zador is that advance waivers are more likely to be effective when they provide as much relevant information as possible that is known to the lawyer about the potential conflicts, and provides a good description of the circumstances that ultimately lead to a conflict.

With these concepts in mind, as a practical matter, lawyers might safeguard against later issues for themselves by informing their clients if a conflict -- even one they believed would be covered in an advance waiver -- materializes and addressing it then. That way, the situation may be handled up front, rather than later in the representation, when disqualification may result. Waiting could bring challenges for clients, and by extension, the lawyers who are removed.