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THE ASSOCIATION OF THE BAR OF THE CITY OF NEW
YORK
COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS
FORMAL OPINION 2007-3
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TOPICS: Corporate-family conflicts; duty of loyalty;
duty to preserve confidences and secrets.
DIGEST: When a law firm is approached to represent
a client adversely to an entity that is a corporate-family member (an “affiliate”)
of a current corporate client, the law firm faces a potentially disabling
corporate-family conflict. In response, the law firm should first ascertain
whether its engagement letter with the current corporate client excludes
affiliates as entities that the law firm also represents, or whether
the engagement letter contains an applicable advance conflicts waiver
from the current corporate client, thereby allowing the adverse representation.
If consulting the engagement letter does not end the inquiry, the law
firm must then analyze whether there is a corporate-family conflict.
In performing this analysis, the law firm should consider whether: (a)
the firm’s dealings with the affiliate during the firm’s
representation of the current corporate client, the overlap between that
client and the affiliate in personnel and infrastructure, or other facts
would give rise to an objectively reasonable belief on behalf of the
client that the law firm represents the affiliate; (b) there is a significant
risk that the law firm’s representation of either the current corporate
client or the client in the adverse representation (the “adverse
client”) would be materially limited by the law firm’s responsibilities
to the other client; and (c) during its representation of the current
corporate client, the law firm learned confidences and secrets from either
the current client or the affiliate that would be so material to the
adverse representation as to preclude the law firm from proceeding. If
any of these conditions obtain, the law firm must secure informed consent
before accepting the adverse representation. Law firms may seek to avoid
corporate-family conflicts by defining the scope of representations before
potential conflicts emerge, and by employing advance waivers when appropriate.
CODE: DR 4-101(B); DR 5-105(A), (B) & (C); DR 5-109;
DR 7-101(A)(1) & (2).
QUESTION
May a law firm accept a representation that is adverse to an affiliate
of a current corporate client?
DISCUSSION
I. Conflicts Involving an Affiliate of a Current Corporate Client
In recent years, corporate merger and acquisition activity has eclipsed
all previous records. At the same time, mergers between law firms have
become increasingly common, with a resulting increase in the number of
clients they represent. Against this backdrop, it is hardly surprising
that law firms today often find themselves approached1 to
undertake representations adverse to affiliates of current corporate
clients. 2
At times, the need to determine whether the adverse representation
raises a corporate-family conflict will be avoided because either (1)
the engagement letter, or another agreement, between the current corporate
client and the law firm excludes affiliates as entities that the law
firm also represents, or the current corporate client has waived the
conflict in advance;3 or (2) the
law firm declines the representation because it does not wish to offend
its current corporate client.
This opinion offers guidance in analyzing corporate-family conflicts
when neither contractual nor business considerations dictate the outcome. 4
A. The Limits of the “Entity Theory” and of the “No-Affiliates” and “All-Affiliates” Positions.
We discuss below several “bright-line” tests that have
been considered in analyzing corporate-family conflicts, and conclude
that a more nuanced and fact-specific approach is necessary.
DR 5-109 and Model Rule 1.13 provide that a law firm retained by an
organization represents the organization and not its constituents. Sometimes
referred to as the “entity theory,” this means that although
the law firm may be “dealing with the organization’s directors,
officers, employees, members, shareholders, or other constituents,” when “it
appears that the organization’s interests may differ from those
of the constituents with whom the lawyer is dealing,” the law firm
must act in the best interests of the organization, rather than of its
constituent(s). DR 5-109. Therefore, DR 5-109 and Model Rule 1.13 suggest
that, at least when the affiliate is a shareholder of the current corporate
client—for example, the parent of a subsidiary—the law firm
could represent a new client adversely to the parent on a matter unrelated
to the representation of the subsidiary, because the parent is not the
law firm’s client. But the entity theory has never been interpreted
so expansively as to create a rule that a law firm represents only its
current corporate client, and none of the client’s affiliates.5
Similarly to the entity theory, the “no-affiliates” position
holds that a law firm representing one member of a corporate family “never
(by that fact alone), or hardly ever, represents any other affiliated
entity. . . .” Wolfram at 299. Under the no-affiliates
position, a law firm could almost always represent a new client adversely
to the affiliate of a current corporate client if the new matter is unrelated
to the lawyer’s representation of the current client. So, for example,
under the no-affiliates position, a law firm representing a holding company
whose sole, wholly owned subsidiary is a bank, could represent a new
client in litigation adverse to the bank, without the consent of the
holding company, as long as the litigation involving the bank is unrelated
to the work that the law firm has performed for the holding company.6
At the other end of the spectrum lies the “all-affiliates” position,
which holds that “a lawyer who represents one member of a multi-member
corporate family is always deemed to represent all others as well. . . .” Wolfram
at 298-99. Under the all-affiliates position, a law firm could never
represent a new client in a matter that was adverse to an affiliate of
a current corporate client without the current client’s consent.
Therefore, under this position, if the current corporate client is a
tiny foreign subsidiary of a large holding company with hundreds of subsidiaries—both
domestic and foreign—in unrelated industries, all of which are
held for investment purposes, the law firm cannot represent a new client
adversely to any of the hundreds of subsidiaries in the holding company,
absent the consent of the tiny foreign subsidiary.
As this analysis shows, the “entity theory” and the “no-affiliates” and “all-affiliates” positions
can yield indefensible results. Thus, a more nuanced and fact-specific
approach to corporate-family conflicts is necessary.
II. Ethical Duties Underlying the Analysis of Corporate-Family
Conflicts
Two core ethical duties animate the analysis of corporate-family conflicts:
the attorney’s duty of loyalty and the attorney’s duty to
preserve the confidences and secrets of a client.7
A lawyer is a fiduciary. Cinema 5 Ltd. v. Cinerama, Inc., 528 F.2d
1384, 1386 (2nd Cir. 1976). As a fiduciary, an attorney “is charged
with a high degree of undivided loyalty to [the] client.” In re
Kelly, 23 N.Y.2d 368, 375 (1968). EC 5-1 states that “[t]he professional
judgment of a lawyer should be exercised, within the bounds of the law,
solely for the benefit of the client and free of compromising influences
and loyalties.” DR 5-105(A) prohibits a lawyer from undertaking
a representation if the lawyer’s independent professional judgment
on behalf of the client is likely to be adversely affected, or if the
representation is likely to involve the lawyer in representing differing
interests. Under DR 5-105(C), the lawyer may accept the adverse representation
only “if a disinterested lawyer would believe that the lawyer can
competently represent the interests of each [client] and if each consents
to the representation after full disclosure of the implications of the
simultaneous representation and the advantages and risks involved.” See
also Model Rule 1.7.
An attorney also has the important duty to preserve client confidences
and secrets, and to refrain from using those confidences or secrets to
the disadvantage of the client, or for the advantage of the lawyer or
another person, absent the client’s consent after full disclosure.
DR 4-101(B).8 See also Model Rule
1.6. When an attorney is faced with undertaking a representation adverse
to an affiliate of a current corporate client, the attorney must be mindful
of not violating this duty, even inadvertently.
III. Considerations in Determining Whether a Law Firm May Accept
a Representation
Adverse to an Affiliate of a Current Corporate Client
A. Is the Affiliate De Facto a Current Client of the Law Firm? Whether the adverse representation raises a corporate-family conflict
requiring informed client consent rests in part on whether the affiliate
is de facto a current client of the law firm. When the engagement letter,
or another agreement, has not defined the law firm’s clients to
exclude affiliates, and when there is not an advance waiver allowing
the law firm to act adversely to the affiliate, then the law firm must
consider whether the affiliate is de facto a current client. Although
this will turn on the specific facts and circumstances of each representation,
set forth below are questions that the law firm should consider in this
connection.
1. Does the current corporate client have an objectively reasonable
belief that its affiliate has de facto become a current client of the
law firm, either because of the law firm’s relationship and dealings
with the affiliate during the representation, or because of significant
overlaps in personnel and infrastructure between the corporate client
and its affiliate?
Corporate affiliation, without more, does not transform all of a current
corporate client’s affiliates into clients of the law firm. But
the circumstances of a particular representation may be such that the
current corporate client has an objectively reasonable belief that some
or all of its affiliates have de facto become the law firm’s clients.
This may occur, for example, when the law firm is counsel to the parent
of a wholly owned subsidiary, and the two corporations share the same
officers, directors, or in-house counsel. Although under New York law
a subsidiary is legally distinct from its parent, even if it is wholly
owned and the two corporations share stockholders, officers, directors,
and offices,9 these facts may nevertheless
give rise to a reasonable belief that both entities are clients of the
law firm. This is especially true if the adverse representation would
require the law firm to oppose the same representatives of the affiliate
with whom it has regularly communicated while representing the corporate
client. Otherwise, an attorney could negotiate in the morning on behalf
of the same person whom the attorney is cross-examining in the afternoon.
The caselaw on motions to disqualify in the context of corporate-family
conflicts identifies the following factors as relevant to determining
whether the affiliate has de facto become a client of the law firm:10
- Do the current corporate client and its affiliate share the same
directors, officers, management, or other personnel?;
- Do the current corporate client and its affiliate share the same
offices?;
- Do the current corporate client and its affiliate share the same
legal department (or report to the same general counsel)?;
- Do the current corporate client and its affiliate share a substantial
number of corporate services?; and
- Is there substantial integration in infrastructure between the current
corporate client and its affiliate, such as shared computer networks,
e-mail, intranet, interoffice mail, health benefit plans, letterhead
and business cards, etc.?
Standing alone, the presence of one or more of these factors may not
warrant the conclusion that the affiliate has de facto become a client.
But the greater the overlap between the current client and its affiliate,
and the more that overlap relates to both the existing representation
of the current corporate client and the adverse representation, the more
objectively reasonable the belief will be that the affiliate has de facto
become a client of the law firm.
B. Is there a significant risk that the law firm’s representation
of either the current corporate client or the adverse client in the
adverse representation will be materially limited by the law firm’s
responsibilities to the other client? The law firm’s duty of loyalty also requires the law firm to
determine whether there is a significant risk that its representation
of either its current corporate client or the adverse client will be
materially limited by its responsibilities to the other client. For example,
we agree with the Committee on Standards of Attorney Conduct of the New
York State Bar Association that “before accepting a representation
adverse to an affiliate of a corporate client, a lawyer should consider
whether the extent of the possible adverse economic impact of the representation
on the entire corporate family might be of such magnitude that it would
materially limit the lawyer’s ability to represent the client opposing
the affiliate with loyalty and zeal.”11 Under
those circumstances, “Rule 1.7 will ordinarily require the lawyer
to decline representation adverse to a member of the same corporate family,
absent the informed consent of the client opposing the affiliate of the
lawyer’s corporate client.”12 The
same standard applies under the existing provisions of the Code. DR 5-105(B).
C. During its representation of the corporate client, did
the law firm learn confidences and secrets from either the client
or its affiliate that would be so material to the adverse representation
as to preclude the law firm from proceeding? While representing the current corporate client, the law firm may have
acquired confidences and secrets from the client directly—or from
the affiliate to benefit the client—that are highly material to
the adverse representation, so that the law firm cannot represent one
client without using or disclosing the confidential information of the
other. As we explained at length in ABCNY Formal Op. 2005-2, this circumstance
would render the law firm unable to proceed, absent consent.13
IV. Prophylactic Measures: Avoiding Conflicts Involving an
Affiliate of a Current Corporate Client
The easiest way for a law firm to avoid corporate-family conflicts—at
least those that may be anticipated—is to define the scope of the
engagement before a potential conflict emerges and the situation becomes
contentious. Law firm and client are best served by a frank discussion
of potential corporate-family conflicts in advance. ABA Formal Opinion
95-390 (1995) has embraced this approach, stating that the “best
solution to the problems that may arise by reason of clients’ corporate
affiliations is to have a clear understanding between lawyer and client,
at the very start of the representation, as to which entity or entities
in the corporate family are to be the lawyer’s clients, or are
to be so treated for conflicts purposes.” 14
Accordingly, law firm and client may choose to define their relationship
by agreeing to an advance conflict waiver or by delineating in the engagement
letter, or other agreement, those affiliates that the law firm is undertaking
to represent. But care should be taken in this regard because “[a]
lawyer may not ethically ask for nor may a lawyer agree to any. . . restriction
unnecessarily compromising the strong policy in favor of providing the
public with a free choice of counsel.” See ABA Comm. on Ethics
and Prof’l Responsibility, Formal Op. 94-381 (1994); Wolfram at
349. Thus, the law firm and client should be mindful of entering into
an agreement which places excessive restrictions on the lawyer’s
right to practice, for example, by restricting the law firm from any
representation adverse to hundreds of corporate affiliates, both here
and abroad.
CONCLUSION
Given today’s ever-burgeoning corporate merger and acquisition
activity, the increasing size and complexity of multi-national corporate
structures, and frequent law-firm mergers, it is no surprise that law
firms can find themselves faced with determining whether they may undertake
simultaneous representations both for and against members of the same
corporate family. Although some of these corporate-family conflicts may
be averted by either (1) an engagement letter, or other agreement, that
delineates which affiliates, if any, of a corporate client the law firm
represents, or contains an applicable advance waiver; or (2) a business
decision to forgo a new representation adverse to an affiliate of an
important corporate client, a law firm may often be required to analyze
whether it may accept a new engagement adverse to the affiliate of a
current corporate client.
This opinion provides an ethical framework to analyze potential corporate-family
conflicts. The law firm should consider whether the affiliate has de
facto become a client of the law firm. The relevant considerations, which
are highly fact-specific, include the nature of the law firm’s
relationship and dealings with the affiliate during its representation
of the corporate client, as well as the presence of significantly overlapping
personnel and infrastructures between the corporate client and its affiliate.
The law firm should also consider (a) the presence of any material limitations
on the law firm’s responsibilities to either the current corporate
client or the adverse client if the law firm were to accept the adverse
representation; and (b) whether the law firm learned confidences and
secrets during the representation of the corporate client that would
be so material to the adverse representation as to preclude the law firm
from proceeding. Although these determinations are not always easily
made, a thoughtful analysis should help the law firm decide whether it
may proceed without the informed consent of one or both clients.
September 2007
1 For a discussion of
the subject of “thrust-upon” conflicts, see Ass’n of the Bar of
the City of N.Y. Comm. on Prof’l and Judicial Ethics (“ABCNY”),
Formal Op. 2005-5.
2 In this opinion, the law firm’s
existing corporate client is referred to as the “current corporate
client,” or the “current client.” The term “affiliate” has
the same meaning as in Rule 405 of the General Rules and Regulations
under the Securities Act of 1933. Rule 405, 17 C.F.R. § 230.405,
defines “[a]n ‘affiliate’ of, or person ‘affiliated’ with,
a specified person, [as] a person that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under
common control with, the person specified.” Thus, an “affiliate” is
a corporate-family member of a current corporate client. The “adverse
client” refers to the client that has approached the law firm to
undertake a representation adverse to an affiliate of the current corporate
client (the “adverse representation”).
3 For a discussion of advance conflicts
waivers, see ABCNY Formal Op. 2006-1.
4 This opinion sets forth what is
ethically permissible. Of course, a law firm may take a more restrictive
view of corporate-family conflicts, and may decline new representations
that are nonetheless permissible under this opinion.
5 Charles W. Wolfram, Corporate-Family
Conflicts, 2 J. of the Inst. for the Study of Legal Ethics 295, 308 (1999)
(“ Wolfram”).
6 A narrow exception exists to the
no-affiliates position—the “alter-ego” exception—that
extends the law firm’s conflicts to affiliates considered to be
alter-egos of the firm’s client. This exception imports a test,
which originated in the entirely unrelated context of corporate liability
and considerations of veil-piercing and which is shaped by very different
considerations, to corporate-family conflicts. Many cases and commentators
have rejected using the alter-ego test to analyze corporate-family conflicts. See,
e.g., Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, 69 Cal.App.4th
223, 249, 251-52 (1st Dist. 1999); 1 Geoffrey C. Hazard and W. William
Hodes, The Law of Lawyering § 17.9, at 17-29 (3d ed. 2005); Wolfram
at 346-47.
7 The attorney’s duty of zealous
representation under DR 7-101 also plays a role in analyzing corporate-family
conflicts. Under DR 7-101(A)(1) and (2) a lawyer may not “fail
to seek the lawful objectives of the client through reasonably available
means,” or “prejudice or damage the client during the course
of a professional relationship.” For example, simultaneously representing
the adverse client and the current corporate client can chill the law
firm’s vigor on behalf of either client.
8 According to Professor Roy Simon, “[t]ogether
with the duty of loyalty, this is the most important duty in the Code,
and is the bedrock of the adversary system and the attorney-client relationship.” Simon’s
N.Y. Code of Prof’l Responsibility Annotated 479 (2006 ed.).
9 See N.Y. County Lawyers’ Ass’n
Comm. on Prof’l Ethics, Op. 684 (1991) (citing 13 N.Y. Jur. 2d
Bus. Relationships § 30 (1981) and related references therein).
10 See Discotrade v. Wyeth-Ayerst
Int’l Inc., 200 F. Supp. 2d 355 (S.D.N.Y. 2002) (disqualifying
firm from representation adverse to sister corporation of a current client
because their relationship “is so close as to deem them a single
entity for conflict of interest purposes”; the sister corporations
were subsidiaries of a single corporate parent, shared the same board
of directors, as well as several senior officers including their president, “interacted
intimately, for example by using the same computer network, e-mail system,
travel department, and health benefit plan,” and shared common
letterhead, business cards, and e-mail addresses); JPMorgan Chase Bank
v. Liberty Mutual Ins. Co., 189 F. Supp. 2d 20 (S.D.N.Y. 2002) (disqualifying
firm from representation adverse to the primary subsidiary of a current
client, when relationship between the parent and subsidiary “is
extremely close and interdependent, both financially and in terms of
direction”; subsidiary accounted for 95% of parent’s total
revenue and over 90% of its total income, subsidiary and parent operated
from same headquarters, shared the same board of directors, and had certain
common officers, including the same general counsel); Travelers Indemnity
Co. v. Gerling Global Reins. Corp., No. 99 CIV. 4413(LMM), 2000 WL 1159260
(S.D.N.Y. Aug. 15, 2000) (disqualifying firm from representation adverse
to the sibling of a former corporate client, when “there is substantial
overlap in their corporate structure”; the sibling corporations “share
common offices in New York City, and the same computer network and systems.
Additionally, the two companies maintain common human resource and payroll
departments and corporate services staff. Finally, there is significant
overlap between senior management positions . . . including the chairman,
president, chief operating officer, chief financial officer, and chief
actuary.”; “They even share the same . . . travel agents,
mail services, credit card issuers, and annual employee gatherings.”)
(internal citations omitted); Hartford Accident and Indemnity Co. v.
RJR Nabisco, Inc., 721 F. Supp. 534 (S.D.N.Y. 1989) (declining to disqualify
firm from representation adverse to parent of former client that was
the parent’s wholly owned subsidiary, in a matter unrelated to
the prior representation, but holding that parent corporation was a client
of the firm through its subsidiary because “[c]ertain aspects of
their separate corporate identities notwithstanding, the parent corporation
attached considerable importance to the products liability litigation
against its subsidiary and, accordingly, supervised the subsidiary’s
litigation. . . . If the parent and subsidiary were in fact distinct
and separate entities for representation purposes, then there would have
been no need for the parent’s general counsel to have retained
this supervisory role.”).
11 Report and Recommendations of
Committee on Standards of Attorney Conduct, Proposed Rule 1.7, cmt. 34B,
at 88 (2005). The Committee on Standards of Attorney Conduct has proposed
a revision of the Code of Professional Responsibility for consideration
by the House of Delegates of the New York State Bar Association.
12 Id.
13 See also, e.g., Restatement
(Third) of Law Governing Lawyers, § 20 cmt.d (2000) (“Sometimes
a lawyer may have a duty not to disclose information [to a client], for
example because it has been obtained in confidence from another client…”);
ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 95-390
(1995); N.Y. County Lawyers’ Ass’n Comm. on Prof’l
Ethics, Op. 684 (1991). See also Westinghouse Elec. Corp. v. Kerr-McGee
Corp., 580 F.2d 1311, 1320-21 (7th Cir. 1978) (holding that a fiduciary
relationship may result when confidential information is divulged by
members of a trade association to counsel for the association, with a
reasonable belief that counsel is acting for their benefit).
14 For the Committee’s
views and recommendations concerning advance waivers, please refer to
ABCNY Formal Op. 2006-1.
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