Firm mergers and imputations: The sleeping dragon of disqualifications

Attorneys are aware of the most basic of conflict principles: an attorney cannot represent a plaintiff, then change sides and represent the defendant in the same case. But the conflict rules go well beyond that. California’s Rule of Professional Conduct 1.9—a rule duplicated in substantial part by most jurisdictions and the ABA’s Model Rules—protects clients’ expectations that, during and after a representation, they can trust their counsel will not use the secrets learned from that client to obtain a strategic advantage for another client. Rule 1.9 applies to a lawyer’s representation of a new client in a matter that is substantially related to a former client’s (Rule 1.9(a)), and any matter “in which a firm with which the lawyer formerly was associated had previously represented a client,” if the lawyer obtains confidential information related to that client and the new client’s interests are materially adverse to the former client’s (Rule 1.9(b)).

While Rule 1.9 generally tracks the Model Rule’s language, the California Supreme Court’s adoption of Rule 1.10—governing when conflicts are imputed to a firm and whether an “ethical screen” can immunize the conflict—took a more stringent approach, allowing ethical screens in far more limited circumstances. Model Rule 1.10 and certain other jurisdictions have a “broadly permitted screening” rule, which allows attorneys who were substantially involved in substantially related matters to be “walled off” to avoid imputation of an attorney’s conflict. California’s Supreme Court, however, rejected this approach and adopted a more limited screening rule. The key difference is that, under California’s Rule 1.10, ethical screens are only effective when the prohibited attorney did not “substantially participate in the same or a substantially related matter.”

When the Court adopted the proposed Rule 1.10, it also adopted the evaluations and recommendations from the State Bar’s “Commission for the Revision of the Rules of Professional Conduct.” The Commission explained that California’s Rule 1.10 differs from the Model Rule in that, “[u]nlike the Model Rule, which…would permit the principal lawyer in the same matter to be screened, [Rule 1.10] would permit screening only in limited situations, i.e., if the prohibited lawyer did ‘not substantially participate’ in the matter at issue.’”

Rules 1.9 and 1.10, combined with the multitude of firm mergers, have created a veritable “sleeping dragon” of ethical conflicts and disqualification issues. Law firms that merged with or acquired other firms likely believed that timely screening would eliminate any potential conflicts issues arising from the newly added attorneys. But Rule 1.10’s strict approach to ethical screens—in particular the requirement that an ethical screen does not suffice where a recently added attorney “substantially participated” in a “substantially related” matter—may render these firms’ attempted screens ineffective. There is a saving grace, however: Rule 1.10 allows a client to waive the Rule’s prohibitions through “informed written consent.” Given Rule 1.10’s strict prohibitions on screens, attorneys should expect courts will scrutinize such waivers rigorously.

Opportunities for California’s courts to provide guidance on the propriety of written waivers and what constitutes “substantial participation” will take time, since the circumstances necessary for these issues to be litigated may remain dormant for years – a law firm would need to add an attorney through hiring or a merger, screen the attorney, and then the new firm would need to litigate a case involving a “substantially related matter” to one previously handled by the screened attorney, all without a waiver. Nevertheless, as it has been over five years since the updated Rules’ adoption, it is likely these issues will begin making their way to the surface in California’s courts in the coming years.

Shaun A. Hoting is a partner at Keller/Anderle LLP.