Formal Opinion 2001-3: Limiting the scope of an attorney’s representation to avoid client conflicts
TOPIC: Limiting the scope of an attorney’s representation to avoid client conflicts.
DIGEST: The scope of a lawyer’s representation of a client may be limited in order to avoid a conflict that might otherwise result with a present or former client of the lawyer. The lawyer must remain cognizant, however, of her duty of undivided loyalty to both clients and her duty to maintain the confidences and secrets of both clients.
CODE PROVISIONS: DR 5-105.
QUESTION: May a conflict of interest be avoided by limiting the scope of a lawyer’s representation of a client?
OPINION:
Over the last two decades, the client rosters of many law firms have grown dramatically, spurred on by a burgeoning demand for legal services, a market shift where clients that once turned to a single law firm for all their legal needs now routinely retain several law firms, and an increase in law firm size, resulting both from mergers and internally generated expansion. Although this growth may be a bellwether of the economic health of the legal profession, it also heralds the likelihood that law firms will increasingly encounter situations where one client will be adverse to another client of the firm. Given the broad reach in New York of the duty of loyalty imposed by Canon 5, this can, and often does, result in clients being deprived of one of the most important rights accorded by our judicial system — the right to select the attorney of their choice. See, e.g.,Richardson-Merrel, Inc. v. Koller, 472 U.S. 424, 441 (1985) (Brennan, J., concurring) (“A fundamental premise of the adversary system is that individuals have the right to retain the attorney of their choice to represent their interests in judicial proceedings.”).
In New York and almost all jurisdictions except Texas, a lawyer is precluded, at least prima facie, from representing one client in a matter directly adverse to another current client, even though the representation of the other client is in an entirely unrelated matter. As a result of the strict application of this rule, a client may confront many situations where a lawyer, who does not have a conflict at the inception of an engagement, subsequently develops a conflict with another client. Situations where this can occur abound, in both litigation and transactional contexts.
In one common litigation situation, a law firm may agree to defend a corporate client in a lawsuit which does not appear to pose a conflict with any other client of the law firm. As fact development proceeds, an amendment to the complaint is filed adding as a defendant an additional party, such as the company’s accounting firm, which is also a client of the attorney’s firm in unrelated matters. At this juncture, an actual conflict still may not exist if the positions of the client company and its accounting firm appear to be united in interest or are not directly adverse. But if facts develop that suggest the client company may possess a cross-claim against the accounting firm, or vice versa, a conflict may emerge that could impact the lawyer’s ability ethically to continue its representation of the corporate client. In this context, the question arises whether the law firm can ethically avoid the conflict by limiting the scope of the engagement for the corporate client to exclude any involvement in the aspect of the matter that is adverse to the accounting firm. Absent the ability of the lawyer to limit the engagement, the Code requires the attorney to withdraw from her representation of the corporate defendant. See DR 5-105(B) [22 N.Y.C.R.R. § 1200.24].
Of course, conflicts are by no means limited to the litigation realm. “Adversity of position in litigation is not a necessary precondition for the existence of a direct conflict. If, for example, two businesses were competing for the same Government contract, and each engaged the same lawyer to prepare bids, Rule 1.7(a) would surely be applicable.” In this same vein, an attorney representing a client in mergers and acquisitions practice also may face conflicts that are not foreseen — or even foreseeable — at the time the engagement commences. Such an attorney may be representing a company in an auction in which the company itself or one of its subsidiaries is to be sold. Only after the auction is commenced does another client of the attorney (or her firm) emerge as a potential buyer of the auctioned company. Continuing to represent the auctioned company could place the attorney in a position of direct adversity to the interests of the newly emerged bidder if the attorney were required to negotiate with her own client. Absent consent or the ability to unilaterally limit the scope of the attorney’s representation of the target, the attorney could be required to withdraw from her representation of the target. See DR 5-105(B) [22 N.Y.C.R.R. § 1200.24].
We conclude that a representation may be limited to eliminate adversity and avoid a conflict of interest, as long as the lawyer’s continuing representation of the client is not so restricted that it renders her counsel inadequate and the client for whom the lawyer will provide the limited representation consents to the limitation. In obtaining consent from the client, the lawyer must adequately disclose the limitations on the scope of the engagement and the matters that will be excluded. In addition, the lawyer must disclose the reasonably foreseeable consequences of the limitation. In making such disclosure, the lawyer should explain that separate counsel may need to be retained, which could result in additional expense, and delay or complicate the rendition of legal services.
Discussion
A Lawyer May Limit the Scope of the Engagement
to Eliminate a Conflict with Another Client
Under the Code, a lawyer shall neither undertake nor continue the concurrent representation of several clients if doing so would likely involve the lawyer in representing differing interests. DR 5-105(A),(B) [22 N.Y.C.R.R. § 1200.24]. Absent informed consent, the Code also prohibits a lawyer from representing a person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of a former client. DR 5-108(A) [22 N.Y.C.R.R. § 1200.27]. The sine qua non, then, for the triggering of these proscriptions is the adverse nature of the lawyer’s engagement, and where there is no adversity to a present or former client, these proscriptions do not apply. At bottom, the attorney-client relationship is consensual. Accordingly, we see no reason why the client cannot limit the scope of the lawyer’s representation to eliminate an adversity between another client and the lawyer, and thereby avoid any conflict.
Our conclusion is fortified by the Restatement of the Law Governing Lawyers,which specifically approves limiting the scope of a lawyer’s representation to avoid conflicts:
Some conflicts can be eliminated by an agreement limiting the scope of the lawyer’s representation if the limitation can be given effect without rendering the remaining representation objectively inadequate.
Restatement of the Law Governing Lawyers § 121, cmt. c(iii) (2000) (“Restatement”). The Restatement offers the following illustration:
Lawyer has been retained by Client to represent Client in general business matters. Client has a distribution contract with manufacturer, and there is a chance that disputes could arise under the contract. Lawyer represents Manufacturer in local real estate matters completely unrelated to Client’s business. An agreement between Lawyer and Client that the scope of Lawyer’s representation of Client will not extend to dealing with disputes with Manufacturer would eliminate the conflict posed by the chance otherwise of representing Client in matters adverse to Manufacturer. Such an agreement would not require the consent of Manufacturer.
Id. Illustration 4.
In this same vein, Rule 1.2(c) of the Model Rules of Professional Conduct also supports such a limitation on representation. Model Rule 1.2(c) provides: “A lawyer may limit the objectives of the representation.” Several ethics opinions interpreting this provision have found that a lawyer may limit the scope of representation to avoid a conflict. Notably, the American Bar Association’s Ethics 2000 – Commission on the Evaluation of the Rules of Professional Conduct has proposed clarifying the section by changing the word “objectives” in Model Rule 1.2(c) to “scope.”
The case law also supports the conclusion that certain potential conflicts may be avoided by limiting the scope of representation. In Interstate Properties v. Pyramid Co. of Utica, 547 F. Supp. 178, 181 (S.D.N.Y. 1982), the court did not find any conflict where a law firm “circumscribed its relationship with [client A] to remove the possibility of conflict by first acting only as special environmental counsel to [client A] and then, as it became involved in more general commercial affairs of [client A], by limiting its involvement to developments in which [client B] had no potential or actual interest as competitor or partner.” Several bankruptcy courts have reached similar conclusions. See In re Fondiller, 15 B.R. 890, 892 (B.A.P. 9th Cir. 1981) (“An attorney representing the trustee as general counsel would be required to give legal advice and to proceed with appropriate litigation in connection with these matters. Any number of possible conflicts can be envisioned. The foregoing reasoning, however, does not apply to those situations in which an attorney’s services are limited to a narrow field for a specific purpose”); In re H & S Transp. Co., 53 B.R. 128, 132 (M.D. Tenn. 1985) (law firm appointed by trustee to represent jointly administered estates of four corporate debtors was entitled to reasonable compensation, where firm represented the trustee only to the extent that the interests of each estate were parallel; citing Fondiller with approval for the proposition that “a law firm may limit its representation so as to avoid conflicts of interest”).
The Limitation Must Be
Adequate to Eliminate the Adversity
Our conclusion that it is permissible to limit the scope of a lawyer’s representation of a client to avoid conflicts with other current or former clients depends on the nature and adequacy of such a limitation. Although the nature and adequacy of the limitation necessarily will depend on the specific engagement creating the potential adversity, the limitation should be sufficient to eliminate the “differing interests” that would otherwise exist. And it bears emphasis that both the lawyer and client must adhere scrupulously to the limitation. Indeed, it goes without saying that a lawyer may not circumvent the limitation by acting adversely “behind the scenes.” See Funds of Funds Ltd. v. Arthur Andersen & Co., 567 F.2d 225, 234 (2d Cir. 1977).
In the context of litigation, a lawyer defending a client in an action who determines that there are potential cross-claims between the lawyer’s client and another party also represented by the same law firm in an unrelated matter may, with the informed consent of the client whose engagement is being limited, limit her engagement to the defense of the case, and exclude representation of the client against the other client. Although the lawyer’s two clients would continue to be directly adverse to each other, the limitation would eliminate the lawyer’s differing interests and preclude any conflict. In this context, however, it is important that the lawyer refrain from actions that would effectively undermine the limitation by placing the lawyer in a position adverse to the other client. Although there is no prohibition against the lawyer’s recommending or otherwise assisting her client in retaining other counsel for purposes of litigating the cross-claims, there are constraints on the lawyer’s interaction with the new counsel. The lawyer may not assist, or otherwise participate with, new counsel in litigating against her own client. This means that the lawyer may not instruct the other lawyer or strategize on the best way to proceed or indicate which evidence already developed pertains to the case against the other client.
Steps to Limit an
Engagement Effectively
— Written Terms of the Limited Engagement
In our view, there are several steps a lawyer should take both to effectively limit representation and avoid the ethical pitfalls highlighted in Fund of Funds Ltd., 567 F.2d at 234. As a threshold matter, the “terms of the limited engagement” should be memorialized in writing as soon as possible, and in detail. These rules should be communicated both to separate counsel (if any) and to the client to ensure they both fully understand the limitations on the scope of the original firm’s representation.
In this connection, it is critical that the client whose engagement is being limited fully understands the implications of the limitation, including any restriction on communication with any separate counsel and the impact, if any, on the cost of handling the matter. A limited engagement should not be proposed if a client could not reasonably conclude that the proposed arrangement serves its interests. In some circumstances, such as where the client is a large corporation already represented by inside or outside counsel, or a sophisticated individual, the client would, after disclosure, be able to provide meaningful consent. In other circumstances, however, such as the representation of unsophisticated individuals, the client, unaided, may not be able to provide informed consent. See N.Y. City 2001-2 (concluding that “sophisticated corporate and institutional clients can consent to conflicts which might be non-consentable in cases involving lay clients”). In the latter situation, the attorney should advise the client that she may retain independent counsel to evaluate the limited engagement. Cf. DR5-104(A)(2) [22 N.Y.C.R.R. § 1200.23] (requiring an attorney entering into a business transaction with a client to advise the client that she may retain independent counsel to evaluate the proposed business venture).
— Communications with Separate Counsel Must Be Regulated
When it comes to communications with separate counsel, the overarching and guiding principle should be neutrality toward the law firm’s other client. Accordingly, the original law firm should avoid any action or communication with separate counsel where the purpose is to create a detriment to the law firm’s other client. The original law firm may engage in routine efforts to coordinate with separate counsel, and may provide copies of generally relevant information developed in the case, such as records of related court proceedings or regulatory investigations, so long as they are not segregated or otherwise targeted at the other client. The original law firm may also provide in bulk any documents it has discovered that are connected to the case. But the original firm may not in any way “selectively” disclose or segregate for review or otherwise identify documents that would be “particularly relevant” to claims against the other client. Work product, such as interview memoranda relevant to the case, may be shared, but the original law firm may not share documents concerning the legal strategy for the case that might be applicable to issues or claims involving the other client.
— In Representing Its Client in the Limited Representation the Law Firm May Take No
Action for the Purpose of Injuring Its Other Client
In its limited representation, the law firm also may fully adduce evidence that assists its original client against its adversary. Conversely, the law firm may not adduce evidence or seek discovery in order to adversely impact its other client. As long as the evidence is adduced for the sole purpose of assisting its client, the possibility that the same facts adduced may be exploited by another lawyer against the other client does not preclude the law firm from doing so. SeeSumitomo Corp. v. J.P. Morgan & Co., Inc., Nos. 99 Civ. 8780, 99 Civ. 4004 (JSM) 2000 WL 145747 (S.D.N.Y. Feb. 8, 2000). After all, “facts” are inherently neutral. There is no “plaintiff’s evidence” or “defendant’s facts.” To be sure, the same facts or evidence can be argued by one side or the other to support a position adverse to the interests of the other party. But the underlying facts or evidence are themselves unaligned. For this reason, a lawyer is precluded from attempting to blockade a witness from an adversary by limiting access to the witness. As Professor Wolfram states: “Witnesses do not ‘belong’ to either party and generally should be as available for interviews to one side as to the other.”See Wolfram, Modern Legal Ethics § 12.4.2 at 647. Accordingly, the lawyer is free to elicit facts or evidence even though another lawyer may exploit it to the detriment of another client. Of course, it goes without saying that the lawyer may not elicit these facts for the purpose of adversely affecting his other client and may not assert that these facts are adverse to the other client.
Our conclusion is supported by the recent decision in Sumitomo, which held that counsel had successfully limited the scope of representation to avoid conflicts. InSumitomo, when it became apparent to a law firm that investigating potential claims on behalf of client A might involve the assertion of claims against several entities, including client B (a client on unrelated matters), the law firm provided A with a list of potential separate counsel, and contacted counsel on behalf of A. The original law firm then proceeded to represent A against the non-clients, while in a second litigation separate counsel, chosen from the list supplied by the original law firm, prosecuted A’s claims against B. B then moved both to consolidate the case against B with the other cases and to disqualify the original law firm under DR 5-105, arguing that the litigations were so similar that the original law firm’s success in the litigation against non-clients would adversely affect B.
The Sumitomo court granted B’s motion to consolidate the separate litigations for pretrial purposes. Nevertheless, the Court refused to disqualify the law firm. TheSumitomo court held: “No decision, however, has found that the Code’s prohibition against simultaneous representation extends to the situation before the Court. Here [the original law firm] is not representing [A] against [B] in this litigation in violation of DR 5-105. Instead, [the original law firm] is representing [A] against . . . a non-client, while [the separate law firm] is representing [A against B, the original law firm’s] current client in an unrelated matter. Thus, the per se rule against simultaneous representation articulated inCinema 5 and other decisions does not require the Court to disqualify [the original law firm].” Id. at *4. The court further explained: “While one can understand that [B’s] in-house counsel might be unhappy that a law firm which represents it in some matters was taking a position in litigation involving another client that, if adopted, would prejudice an argument that [B] was advancing in a separate case, that does not mean that the law firm is violating a confidence of its client or engaging in unethical conduct.” Id. at *4. In addition, the court noted that the original law firm was “not involved in attempting to establish wrongdoing by [B] or seeking a judgment that will directly impact [B].” Id.
Where the adversity is less direct, an attorney may correspondingly have more latitude, for example, in a situation where her client must subpoena another of her clients as a non-party witness. To be sure, “it will . . . frequently be the case that a lawyer’s taking discovery, whether testimonial or documentary, on behalf of one client, of a third party who is also a client, will present such direct adverseness, so as to be disqualifying under Rule 1.7(a)” ABA 92-367 (October 16, 1992) at 2-3. In circumstances such as these, separate counsel may be brought in for the purposes of issuing the subpoena and taking discovery from the non-party client.
Similar issues concerning the nature and adequacy of the limitation on representation arise in the corporate context. Where a lawyer represents a company in an auction to sell the company or a part of it, and another client emerges as a potential buyer, absent consent the lawyer cannot negotiate with the second client. But the lawyer may limit the representation to exclude from the scope of representation any aspect adverse to the lawyer’s other client and continue to advise the company in all the other aspects of the auction on matters that are not adverse to the second client.
Finally, although judging the efficacy of a particular limitation on an engagement is necessarily fact specific, there predictably are circumstances where a lawyer’s attempt to limit the scope of her engagement will be doomed. For example, the limitation may be inadequate to protect the client, or once limited so as to address the conflict, the lawyer’s engagement may no longer provide meaningful value to the client whose engagement is limited, or in order to advance one client’s interests, the lawyer must harm the interests of the other client.
Conclusion
The Committee concludes that the scope of a lawyer’s representation of a client may be limited in order to avoid a conflict that might otherwise result with a present or former client, provided that the client whose engagement is limited consents to the limitation after full disclosure and the limitation on the representation does not render the lawyer’s counsel inadequate or diminish the zeal of the representation. An attorney whose representation has been limited, however, must be mindful of her duty of loyalty to both clients. Where the portion of the engagement to be carved out is discrete and limited in scope, such a limitation may well resolve the conflict presented.
Issued: July 2001
