When a lawyer's personal interests give rise to a conflict

In California and many other states, the lawyer must obtain informed written consent when the lawyer has a personal conflict of interest. California Rules of Professional Conduct (“CRPC”) rule 1.7(b) provides:

“A lawyer shall not, without informed written consent* from each affected client and compliance with paragraph (d), represent a client if there is a significant risk the lawyer’s representation of the client will be materially limited by the lawyer’s responsibilities to or relationships with another client, a former client or a third person,* or by the lawyer’s own interests.” (Italics added.)

Rule 1.7 also provides that even where there is no significant risk requiring the lawyer to comply with subparagraph (b), the lawyer may nonetheless be required to obtain the client’s written consent after written disclosure of the personal interests of other lawyers in the lawyer’s firm, e.g., where another lawyer in the law firm has a personal relationship with a party or witness in the same matter (rule 1.7(c)(1)), or another party’s lawyer in the same matter is related to the lawyer, or where another party’s lawyer has “an intimate personal relationship with the lawyer” (rule 1.7(c)(2)).

The CRPC attempts to provide guidance in interpreting the black letter of the rules through official comments. For example, Comment [4] to Rule 1.7 explains in part that “[e]ven where there is no direct adversity, a conflict of interest requiring informed written consent* under paragraph (b) exists if there is a significant risk that a lawyer’s ability to consider, recommend, or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer’s other responsibilities, interests, or relationships, whether legal, business, financial, professional, or personal…” “The mere possibility of subsequent harm does not itself require disclosure and informed written consent.* The critical questions are the likelihood that a difference in interests exists or will eventuate and, if it does, whether it will materially interfere with the lawyer’s independent professional judgment….” “(Italics added.)

In other words, the California conflict of interest rule applies to the lawyer’s purely personal interests when there is a “significant risk” that the representation will be “materially limited” by the lawyer’s personal interest. Presumably, this means that not every personal interest will be disqualifying, since the lawyer might reasonably conclude that the risk of the limitation is small and insignificant, and that any limitation would be immaterial to the competent representation of the client. Of course, the practical problem is that it is likely to be difficult for a lawyer to be objective in analyzing whether the lawyer’s personal or intimate relationship with a person involved in a client’s matter would pose a meaningful risk to the client’s interests, or would restrict the lawyer’s ability to competently and diligently represent the client.

Case law has addressed some situations in which a lawyer has a duty to elevate the client’s interests above those of the lawyer. Perhaps the most common of these is that the lawyer must not dilute the duty of loyalty owed to each client, so that the lawyer is absolutely precluded from accepting or continuing representation when the interests of multiple clients conflict with one another. Where the lawyer is providing joint or concurrent representation to more than one client in the same or related matters, informed written consent must be obtained from each affected client. In the event that the lawyer’s duty would be impaired to competently represent each of the clients with undivided loyalty, without elevating the interests of one over another, the conflict may be unwaivable (irrespective of whether the clients consent).

Under Rule 1.8.1, a lawyer’s financial relationship with a client is almost always a potential conflict of interest. As is explained in Comment [1] to 1.8.1: “A lawyer has an “other pecuniary interest adverse to a client” within the meaning of this rule when the lawyer possesses a legal right to significantly impair or prejudice the client’s rights or interests without court action. (See Fletcher v. Davis (2004) 33 Cal.4th 61, 68 [14 Cal.Rptr.3d 58]; see also Bus. & Prof. Code, § 6175.3 [Sale of financial products to elder or dependent adult clients; Disclosure]; Fam. Code, §§ 2033-2034 [Attorney lien on community real property].) However, this rule does not apply to a charging lien given to secure payment of a contingency fee. (See Plummer v. Day/Eisenberg, LLP (2010) 184 Cal.App.4th 38 [108 Cal.Rptr.3d 455].)”

However, investment in a publicly traded corporation’s stock does not constitute a financial relationship with a client that triggers a rule 1.8.1 duty. Nor does a typical arrangement in which in-house counsel receives equity-based compensation; the American Bar Association has concluded that option or restricted stock grants “are merely a form of compensation and, like cash, are a facet of the general employment relationship rather than part of or related to any particular transaction or undertaking.” Litigation Section of the American Bar Association, Lawyers Doing Business with Their Clients: Identifying and Avoiding Legal and Ethical Dangers, A Report of the Task Force on the Independent Lawyer (2001).

Accepting gifts from clients is suspect, and undue influence is presumed. CRPC rule 1.8.3. Writing oneself into a client’s estate plan as a beneficiary is a particularly egregious conflict, and would undoubtedly lead to professional discipline at a minimum.

On the other hand, at least in California, a lawyer does not have a disqualifying conflict simply because the lawyer may be advocating inconsistent legal positions on behalf of different clients in unrelated matters. Nor is it a per se conflict of interest if lawyers who are spouses are representing adverse parties since lawyers are presumed to comply with their ethical and legal duties absent evidence to the contrary. Derivi Construction & Architecture, Inc. v. Wong, 118 Cal. App. 4th 1268, 14 Cal. Rptr. 3d 329,

Still, lawyers should consider whether any given situation could potentially impair the lawyer’s objectivity in representing the client, or create a material limitation conflict of interest under rule 1.7(b). The issue is, would the lawyer’s personal, social, romantic or financial interest in the subject matter of the representation constitute a personal interest so significant that the lawyer is required to disclose to the client that there is a substantial and material risk that the lawyer’s independent judgment and competent advice and representation would be significantly limited? When in doubt, the lawyer would be prudent to either avoid the attorney-client relationship altogether, or alternatively, refrain from having any sort of personal interest in the client or the client’s legal matter.

Ellen A. Pansky is the founder of Pansky Markle Attorneys at Law.