Conflicts of Interest Under California’s New Rules of Professional Conduct

Conflicts of Interest Under California’s New Rules of Professional Conduct

Although there seems to have been no detectable tremor in the force, on November 1, 2018, California’s first nearly complete overhaul of its Rules of Professional Responsibility (“Rules”) in nearly 30 years came into effect.  In addition to renumbering the rules to conform to the ABA Model Rules, California’s new rules enact a number of substantive changes and depart from the Model Rules in material respects, particularly in identifying and (potentially) avoiding conflicts of interest.

Several of the new rules relate to conflicts of interest; the most important of these are rules:

  • 1.7 (Current Clients)
  • 1.9 (Duties to Former Clients)
  • 1.10 (Imputation of Conflicts)
  • 1.18 (Duties To Prospective Client)

The new rules have abandoned the somewhat detailed “checklist” approach embodied in prior Rules 3-300 and 3-3-1; instead, the new conflict rules are closer to expressing the principled approach of the Model Rules.

Current Clients.  Rule 1.7 forbids a lawyer from representing a client in a matter (a) that is directly adverse to or (b) that would present a significant risk that the representation would be “materially limited” by the lawyer’s responsibilities or relationship with another client, a former client, a third party, or the lawyer’s own interests.

Direct adversity is usually fairly apparent, but “materially limited” conflicts may be more difficult to identify.  Generally, the latter conflicts arise where the lawyer’s judgment and advice may be significantly affected by responsibilities other than those involving the proposed representation. One example would be joint representation of multiple clients in the same matter; the best advice or strategy for one client may be detrimental to the other. Another would arise where the lawyer and the client are found jointly liable for damages or sanctions; what may be best for the lawyer is unlikely to be best for the client. In considering taking on a new representation (or continuing an existing one), the lawyer will have to think hard about whether there would be a significant risk of a material limitation on the representation.

If the conflict can be waived at all, both of these types of conflict can be waived by the fully informed consent of all clients involved; for consent to be fully informed, all reasonably foreseeable risks that would be involved must be disclosed in writing. See Rule 1.0.1 (e). Even after a waiver is obtained, it may need to be updated for the representation to continue.  See Rule 1.7, comment [10].

But some conflicts simply can’t be waived.  For example, if fully informing one client would require disclosing confidential information of a second client and the second client does not consent to its disclosure, the conflict cannot be waived. Rule 1.7 (d) provides additional examples.

Advance Waivers. Waivers of future conflicts are, in principle, possible under the new rules (as under California case law), but no bright lines are established by either.  See Rule 1.7, comment [9].  Instead, the effectiveness of such a waiver depends on a number of factors – most importantly, the extent to which the client understands (and is informed of) the possible risks involved. There appears to be no California case that has upheld an advance waiver, although one Federal decision in California has. Visa U.S.A., Inc. v. First Data Corp., 241 F.Supp.2d 1100 (N.D. Cal 2003).

Many in the legal community had hoped that the California Supreme Court would provide guidance in this area, but it did not. Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., (2018) 6 Cal.5th 59, [237 Cal.Rptr.3d 424]. The case turned on whether the conflict was one between current clients or between a current and a former client.  The court found that the City of South Lake Tahoe was a current client of the firm when J-M Manufacturing hired Sheppard Mullin to represent it in a qui tam action in which the City of South Lake Tahoe was one of many adverse parties. Sheppard Mullin had argued that South Lake Tahoe was a former client and that,  because the representation was not related to the qui tam action, there was no conflict to disclose.  The court disagreed, noting a pattern of continued, albeit sporadic, representation of South Lake Tahoe in employment matters (representation that picked up again about two weeks after Sheppard Mullin agreed to represent J-M Manufacturing).  Since the court found that a conflict existed between current clients, but was not disclosed at the time the waiver was given, any consent was not “fully informed,” and therefore not valid.

At a minimum, all reasonably foreseeable risks of such a waiver must be disclosed, and the disclosure(s) must be updated as newly foreseeable risks arise.

Former Clients.  Lawyers may not represent a client whose interests are materially adverse to a former client in a matter (whether contentious or transactional) that is the same or substantially the same as the matter in which the lawyer represented the former client.  Rule 9.1(a). Similarly, a lawyer moving to a new firm cannot represent a client of the new firm whose interests are materially adverse to a client represented by the former firm in a matter that is the same or substantially related to the matter involving the former firm. Rule 9.1(b). The new firm can’t either, if the new lawyer’s conflict is imputed to the rest of the firm.  Either type of conflict can be waived by the former client’s informed written consent.

Two matters are substantially related if the former client’s confidential information would be material to, and thus would be expected to be used to the former client’s disadvantage, in the subsequent matter. Rule 1.9, comment[3].

Imputation of Conflicts.  The former California rule was that one lawyer’s knowledge of a former client’s confidential information was imputed to the entire firm, so that if one lawyer was subject to disqualification, so followed the entire firm.  Although there have been some cases in California suggesting that an ethical screen could mitigate the effect of this rule, new Rule 1.10 now explicitly provides that a proper screen (a term defined in Rule 1.0.l (k)) can avoid imputing the knowledge (under Rule 1.9(b)) of a newly-hired lawyer to the remainder of the firm, at least where the new hire did not play a substantial role in the matter prior to joining the new firm, and where the affected former client(s) of the new lawyer are provided prompt (and fairly detailed) written notice of the screen.

Prospective Clients. Rule 1.18 (duties to prospective clients) does not have a counterpart in the former rules.  This rule provides that the receipt of confidential information from a prospective client, who does not become an actual client, can disqualify the attorney (and the firm) from later being adverse to the prospective client.  Even before Rule 1.18 became effective, the Central District of California applied this new rule to disqualify not only the attorneys who had actually received detailed confidential information from a prospective client but also, by imputing the knowledge of the confidential information, the entire firm.  SkyBell Technologies Inc. v. Ring Inc., No. 18-cv- 00014 (C.D. Cal Sept. 18, 2018).  Despite the lack of a prior, corresponding rule, the court found that the same result would have been reached under prior California case law, coupled with the Supreme Court’s approval of Rule 1.18. Id. at 18-20.

Rule 1.18 is not entirely unforgiving. As in the case of a lateral attorney hire, knowledge of the prospective client’s confidential information will not be imputed to the entire firm if the attorney(s) that actually received the confidential information is promptly and adequately screened from the rest of the firm.

The alternative is to request (and receive) only sufficient information from the prospective client 1) to check for conflicts and then, 2) to determine whether the attorney wants to represent the client.  This alternative, however, may not be practical in today’s world of competition for clients and “beauty contests.”

While the form of California’s new Rules of Professional Conduct have changed significantly; the full effect of their substance may not be known for some time.