This edition of Ethics Quarterly covers cases from December 16, 2007 through March 15, 2008.  Committee Members Daniel E. Eaton and Morgan J. Miller prepared this edition. Eaton served as the Coordinating Contributor and prepared one of the two Commentaries.  Committee Member Brian L. Forbes prepared the other Commentary.
In this issue, courts answer several questions that have never, or rarely, been answered before by California courts.  For example:  Is a client’s red-lined draft response to discovery that is not sent to his attorney, but is uncovered by opposing counsel through a court-ordered forensic examination of the client’s computer, covered by the attorney-client privilege?  (It is not, 5.1.4); May a California court fine and reprimand an out-of-state attorney appearing pro hac vice as lesser included punishment to revoking his pro hac vice status?  (No, 5.1.6); May participating in a “beauty contest” lead to disqualification of a firm from representing the opposition in the resulting litigation?  (It may, 5.1.12 and Eaton Commentary).

On June 17, 2008, from 5:00 p.m. – 7:00 p.m. at the County Bar Center, the SDCBA Legal Ethics Committee will present a program focused on the attorney-client privilege entitled “When Bad Things Happen at Kinko’s and Other Tales of a Privilege in Peril:  An Interactive Program.”  The program focuses on three hypothetical situations, each of which focuses on one of the many increasingly complicated questions of privilege attorneys may encounter in their practices.  For further information, please go to the Bar’s website at www.sdcba.org. 

Comments about Ethics Quarterly should be directed to Legal Ethics Committee Chair Wendy Patrick Mazzarella at this email address:  wendy.mazzarella@sdcda.org. 

Beauty Contest Confidential:  Benchmarks on the Road to the Title of “Miss Disqualified”

Daniel E. Eaton

There can be ugly consequences from entering a “beauty contest” – even if you’re named the winner.  The “beauty contest” to which I am referring, of course, is the selection process some business clients use to pick counsel by interviewing several firms.  The winning contestant typically is awarded the work.  But is disqualification of the losing contestants warranted from working on the other side of the case?  That question was answered in a detailed and thorough opinion by United States District Judge Dana Sabraw for the Southern District of California in The Laryngeal Mask Co. Ltd. v. Ambu A/S (S.D.Cal. 2008) 2008 WL 558561, abstracted in this issue at 5.1.12.  In that case, the winner of a beauty contest found itself unable to represent either side in the contest that mattered.   How? 
 
A.        The Facts of Laryngeal Mask

Laryngeal Mask involved a patent infringement suit over a medical device that maintains the airways of a patient under anesthesia.  The two patents in the case were assigned to plaintiff The Laryngeal Mask Company, Ltd. and licensed to co-plaintiff LMA North America, Inc.  (Id. at *1.)  Plaintiffs claimed that the defendants were selling a competing product that infringed those patents.  Before filing suit, a lawyer from Shearman & Sterling, at the request of a partner from that firm who sat on the board of the plaintiffs’ parent corporation, contacted two lawyers from Finnegan Henderson Farabow Garrett & Donner, LLP (“the Finnegan firm”) about representing the plaintiffs.  The two Finnegan lawyers were interviewed at the D.C. offices of the Finnegan firm the day before Thanksgiving 2006 by the Shearman & Sterling partner who sat on the board and another Shearman & Sterling lawyer.  (Id. at **1-2.)  The meeting lasted over an hour.  The Finnegan lawyers and plaintiffs disputed the kind of information shared at the meeting and whether the Finnegan lawyers ever offered legal advice to the plaintiffs. 
In early January of 2007, the allegedly infringing companies retained a different partner in Finnegan’s D.C. office in the dispute, though plaintiffs still had not filed suit.  Later that month, plaintiffs called one of the Finnegan attorneys who had interviewed them to tell him the plaintiffs had decided to retain the firm; the firm had won the beauty contest.  The Finnegan lawyer responded that the firm had developed a non-waivable conflict of interest.  The lead Shearman & Sterling lawyer in the interview wrote a letter to remind the Finnegan firm “to maintain in strict confidence all information obtained from your prospective client.”  (Id. at *3.)  Plaintiffs sued defendants in October 2007.  The day after the Finnegan firm filed an answer on behalf of the defendants, plaintiffs moved to disqualify the firm.  (Ibid.)
The Court ultimately found, after resolving conflicts in the evidence, some of which was filed in camera, that disqualification of the Finnegan firm was warranted.  The Court’s analysis identifies the risks firms face in participating in this sort of process.

B.        If the Prospective Client Shared Confidential Information, the Court Will Probably Find an Attorney-Client Relationship Arose from the Interview.

“An attorney represents a client -- for purposes of a conflict of interest analysis – when the attorney knowingly obtains material confidential information from the client and renders legal advice or services as a result.”  (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148 (“SpeeDee”).)  Relying on a supplemental declaration submitted by one of the Shearman & Sterling lawyers that the Court declined to share with the lawyers representing the Finnegan attorneys in the disqualification motion, the Court found that the plaintiffs had shared “confidential information concerning the subjects of venue, claim construction in relation to the theory of their case, and settlement.”  (Id. at *6.)  That finding was critical because, as the Court explained, whether an attorney-client relationship was formed for disqualification purposes depends primarily on “whether and to what extent the attorney acquired confidential information.”  (Id. at *3, quoting SpeeDee, 20 Cal.4th at 1148.)  There was no discussion of how the requirement that the attorney “knowingly obtain[]” such information affects the disqualifying effect of receiving confidential client information. 
By contrast, in Abubakar v. County of Solano (E.D.Cal. 2008) 2008 WL 336727, abstracted at 5.1.9, Judge Lawrence Karlton, for the United States District Court for the Eastern District of California, found that no confidential information had been exchanged for disqualification purposes by private lawyers representing a county when they met with 15 correctional officers about a pending lawsuit against the county challenging the county’s strip search policy.  The lawyers also represented the county in a pending action brought by 160 correctional officers -- including nine of the officers with whom the lawyers met -- in a wage and hour lawsuit in which the officers claimed, among other things, that part of the uncompensated time included time doing strip searches.  (Id. at *6.)  Since the officers had given the lawyers no confidential information, no attorney-client relationship was formed that required their disqualification in the wage action.  This was so even though at the meeting the lawyers told the officers they would be defending them as witnesses at trial and deposition.  Critical to the Court was that, in their declarations in support of the motion to disqualify, the correctional officers did not assert that they had shared confidential information with the lawyers and the lawyers asserted in their declarations opposing the motion that they had learned nothing from the officers they could not have gotten in a deposition.  (Id. at *5.)
The lesson is that where the party seeking disqualification, in circumstances such as these, disputes whether confidential information was shared, there is a substantial risk of disqualification.  In denying lawyers for the Finnegan firm access to the supplemental declaration submitted in camera on behalf of the plaintiffs, Judge Sabraw observed:  “Though the Finnegan attorneys do not presently recall the details of the confidences, courts have widely avoided even the prospect of a swearing contest between the client and attorney.”  (The Laryngeal Mask at *5, internal quotation marks and citations omitted.)

C.        If the “Contestant” Gives Legal Advice During the Interview – Even on Procedural Matters – a Disqualifying Attorney-Client Relationship Is More Likely To Be Found.

The second, and secondary, element of finding that an attorney-client relationship has been formed for conflict of interest purposes is whether the attorney has given legal advice to the prospective client.  Judge Sabraw found that the Finnegan lawyers had provided legal advice about venue, damages, and remedies to the Shearman and Sterling lawyers interviewing them on behalf of the plaintiffs.  “While the attorneys’ limited knowledge of the facts necessarily tempered the strength of their impressions, in the context of a private interview to retain lawyers for a specific litigation, Plaintiffs reasonably accepted it as legal advice.”  (Id. at *6.)  By contrast, Judge Karlton found in Abubakar that the attorneys had not offered any legal advice, a fact that the correctional officers apparently did not dispute.  (Abubakar at *5.)

D.        If the Court Finds Confidential Information Was Shared with the Interviewed Attorneys, An Ethical Wall May Not Prevent Disqualification of Their Entire Firm.

The Court in Laryngeal Mask noted that the Ninth Circuit has suggested that California may be moving in the direction of recognizing ethical walls where individual attorneys in a firm are disqualified from working on a particular matter.  (Id. at *7, citing In re County of Los Angeles (9th Cir. 2000) 223 F.3d 990, 995-996.)  Nonetheless, the Court disqualified the entire Finnegan firm, particularly because the attorneys representing the defendants in the patent litigation worked in the same D.C. office as the attorneys whom the plaintiffs interviewed.  At least on facts like those, a court may conclude that  “[t]he risk of inadvertent disclosure of confidential information through casual conversation is too great and the appearance of divided loyalty is too strong to make an exception” to vicarious disqualification of the entire firm. (Id. at *7, citation and footnote omitted.)  The Court also noted that the ethical wall the Finnigan firm had put in place had too many holes to be adequate.  (Ibid. at note 8.)
Judge Charles A. Breyer of the Northern District, in another decision abstracted in this Ethics Quarterly, reaffirmed his view that California law does not recognize ethical walls to defeat vicarious disqualification.  (Largo Concrete, Inc. v. Liberty Mutual Fire Insurance Company (N.D.Cal. 2008) 2008 WL 53128 at *5, abstracted at 5.1.2.)

E.         Conclusion

            Clients will undoubtedly continue to use beauty contests to select counsel.  But, as the law firm in Laryngeal Mask learned, even the winner of the contest can be kept out of the ultimate battle by the rules that apply in disqualification cases - even in the absence of any unethical conduct by anyone at the firm.  At least three cases in this issue of Ethics Quarterly provide guidance to lawyers confronting these issues going forward.

Loyalty Gone Wild

Brian L. Forbes

The attorneys’ duty of loyalty has changed in recent decades.  It has become overly broad and more restrictive, leading to unintended consequences:  it increases costs and risks for both clients and lawyers, and it contributes to the decline in public respect for and confidence in the legal profession.

The new duty of loyalty encourages tactical disqualification motions, and it justifies court rulings that disrupt long standing attorney-client relationships, “perversely depriving clients of the very benefit which that ethical duty is designed to secure – the law firm’s loyalty.”  (ABCNY Form. Op. 2006-1.)  The new duty of loyalty visits significant injury on law firms of all sizes, and it impairs the fundamental right of clients to be represented by counsel of their choice. 
 
The new duty of loyalty is novel and uniquely American.  It exists only in the US, where it has become the rationale for the following categorical prohibition:  attorneys must not represent a client in a matter adverse to another client, even if the matters are unrelated.  So for lawyers in California, and in every other US jurisdiction other than Texas, absent formal conflict waivers, it is now unlawful to represent a client in any matter adverse to another client.

The new duty of loyalty appeared in rules of professional conduct in the US in the late 20th century, based on remarkably scant precedent.  (See Thomas D. Morgan, Suing a Current Client, 9 Geo. J. Legal Ethics 1157, 1164-69 (1996).)  It emerged in the 1960’s and ‘70s.  It resulted from a superficial reading of relevant cases, reading out of context poorly-drafted ABA Model Code provisions, and adoption of ABA Model Rule 1.7, which was a last-minute, backdoor addition to the draft ABA Model Rules in the early 1980’s.  (Id. at 1179-84.)

The leading case in California was Jeffrey v. Pounds (1977) 67 Cal.App.3d 6.  It denied, in part, a law firm’s claim for attorneys’ fees in an auto accident case.  The accident victim fired the law firm when he learned that the firm was simultaneously representing his wife in their divorce action.  The accident case later settled.  The law firm then claimed $500 for work done before it was fired.  The court found no ethical conflict as the accident case and the divorce action were unrelated, but the court declined to award fees for work done after the law firm’s attorney-client relationship with the wife commenced.  The reasoning was based on badly reasoned cases from other states, from which the court concluded that “[a] lay client is likely to doubt the loyalty of a lawyer who undertakes to oppose him in an unrelated matter.”

Since 1992, rule 3-310(C)(3) of the California rules of professional conduct has prohibited lawyers from representing a current client’s adversary without the informed written consent of each client.  In 1994, the California Supreme Court clarified and expanded the prohibition:  absent informed written consent, lawyers must not accept or continue with any matter adverse to any current client regardless of whether the matters are unrelated.  (Flatt v. Superior Court (1994) 9 Cal.4th 275, 284-285.)

It was not always thus.  Before such changes, the duty of loyalty of attorneys was identical to the duty of loyalty of any other fiduciary.  (Ordinary principals, using ordinary agents, have always been adequately protected by fiduciary duties limited to execution of the agency.)  "Unless otherwise agreed, an agent is subject to a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency."  (Restatement 2nd of Agency § 387, cmt. b (1958) (emphasis added).)  The traditional (limited) common-law fiduciary duty of loyalty still applies to lawyers in Texas.  (See Tex. DRPC 1.06, the only version of Model Rule 1.7 that is consistent with prior US law and with current law in virtually all jurisdictions outside of the US.)

The new duty of loyalty can be onerous, particularly for lawyers who work in law firms and for clients who rely on law firms.  The disparate impact results from recent changes in the law—and recent changes in the legal profession, which continually adapts to meet the needs of clients.  Another change is the recent trend toward lateral hiring and freedom of movement for lawyers.  “Partners in law firms have become increasingly ‘mobile,’ feeling much freer than they formerly did and having much greater opportunity than they formerly did, to shift from one firm to another and take revenue-producing clients with them.”  (Rehnquist, The Legal Profession Today (1986) 62 Ind.L.J.151, 152, quoted in Howard v. Babcock (1993) 6 Cal.4th 409, 420-421.)

Under current applicable law, when a conflict requires a lawyer’s disqualification, the disqualification extends vicariously to the lawyer’s entire law firm.  (See People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1139 and cases cited therein).  Although there is nothing in California’s rules of professional conduct about imputed knowledge and vicarious law firm disqualification, it is settled in decisional law.  (See, e.g., City and County of San Francisco v. Cobra Solutions, Inc. (2006) 38 Cal.4th 839, 847.)

Risks for clients and lawyers alike are exacerbated by the new “modified substantial relationship test” (Jessen v. Hartford Casualty Ins. Co. (2003) 111 Cal.App.4th 698, 707-711; Farris v. Fireman's Fund Ins. Co. (2004) 119 Cal.App.4th 671, 678-681), making it easier than ever before to demonstrate purportedly good cause for disqualification even where good cause does not actually exist.  It is now relatively easy to disqualify lawyers and law firms and to frustrate the ability of their clients, particularly big corporate clients, to be represented by counsel of their choice.

In the new global economy change is inevitable, and the pace of change constantly increases.  Lawyers and law firms must adapt to respond quickly and effectively to the needs of clients.  As one court has observed:

We have seen the dawn of the era of the “mega-firm.”  Large law firms (like banks) are becoming ever larger, opening branch offices nationwide or internationally, and merging with other large firms.  Individual attorneys today can work for a law firm and not even know, let alone have contact with, members of the same firm working in a different department or the same firm across the hall or a different branch across the globe.

Adams v. Aerojet-General Corp. (2001) 86 Cal.App.4th 1234, 1236, holding that disqualification based on a conclusive presumption of imputed knowledge derived from a lawyer's past association with a law firm is out of touch with present day law practice.  One wonders why clients should have to litigate such issues.

Rules of professional conduct will not work if they don’t match reality.  Regulators simply cannot keep up with the realities of the morphing legal profession.  Rules quickly become out of date and sometimes become counterproductive.  The new duty of loyalty is a good example. 

Sophisticated clients hire lawyers, not law firms, and such clients should be able to select the counsel of their choice and anticipate and expect that such counsel will be able to handle their matters to conclusion.  Lawyers and clients now have to negotiate and enter into written agreements (advance conflict waivers) to mitigate some of the risks created by the new duty of loyalty.  The delay, distraction and costs entailed in dealing with such risks are a constant irritation, discouraging clients from seeking representation by the most experienced, qualified, and cost-effective lawyers, specialists who would otherwise handle the clients’ most challenging and most important legal matters.