You can’t interview potential expert witnesses and share confidential information with them solely to taint them with a conflict that would prevent the experts from working for the other side, the Texas State Bar Professional Ethics Committee recently said in Opinion No. 676.

“T’aint” ethical

Lots of litigation requires expert testimony in order to support plaintiff’s allegations or to defend against them.  But if a lawyer shares confidential information with a prospective expert, the expert may be disqualified from working for the other side.  (There is a helpful collection of the cases on this point at Freivogel on Conflicts.)

What if your case involves an area where there are only a few specialized experts who can testify?  How about “interviewing” all of them, and providing confidential information about the case, even though you don’t have any actual intention of hiring them?  Can you try to keep the qualified experts out of the grasp of the other side with that tactic?

Not surprisingly, the Texas ethics committee said “No.”

The Lone Star State’s version of Model Rule 4.1(a) prevents using means to represent a client that have no substantial purpose other than to burden a third person, or using methods of obtaining evidence that violate the rights of a third person.  That prohibition applies to prevent a lawyer from hiring an expert, or communicating confidential information to a potential expert, “when the lawyer has no substantial purpose other than to … imped[e] the opposing party’s access to a limited pool of potential experts,” the committee said.

That “substantial purpose” is clearly a question of fact, said the committee, and it’s not necessarily improper to retain an expert and still interview additional ones, as long as the lawyer is actually considering using them.

Using misrepresentations and deceit to disqualify a prospective expert could also violate Texas’ version of Model Rule 8.4(c), barring dishonesty, fraud, deceit or misrepresentation, the committee added.

Can a client DQ a lawyer by “taint shopping”?

The principle that the Texas ethics committee applied is echoed, as to lawyers and clients, in comment [2] to Model Rule 1.18.  If a prospective client consults us about the possibility of hiring us, we take on confidentiality duties to that person or entity, even if we are not ultimately hired.

But especially in smaller legal markets, there can be an abusive tactic where a person “interviews” several lawyers in a specialty area — not with the goal of hiring one of them, but to preclude the other side from doing so.  That’s commonly known as “taint shopping,” and comment [2] makes clear that “a person who communicates with a lawyer for the purpose of disqualifying the lawyer is not a ‘prospective client.'”  Such a pretextual “shopper” is not owed any duties under Rule 1.18.

In an unusual application of the lawyer-witness rule, a district court recently held that the rule would not prevent an assistant state attorney general from being on an open phone line along with the court and other party representatives during the execution of a death-row inmate — even though the assistant AG might have to testify as a fact witness during the execution.

Open phone line

The inmate, Robert Van Hook, was scheduled to be executed in Ohio for a 1985 murder.  He and many other inmates had challenged Ohio’s lethal injection execution protocol on Constitutional grounds.  He requested that an open phone line be maintained through the course of his execution, and that his attorney, the Ohio assistant AG on the case, and the court be on the line, so that his attorney could move for a temporary restraining order to halt the execution mid-stream if it began to go wrong.

Some executions by lethal injection, including in Ohio, have had serious problems in being carried out.  (See here, here and here, for example.)

Lawyer-as-witness issue?

The Ohio Attorney General objected to the inmate’s request, because if the inmate’s lawyer moved for a stay or TRO during the execution, “an Assistant Attorney General may be placed in the difficult position of becoming a fact witness in order to rebut allegations made by Plaintiffs” in the ensuing telephone hearing from the death house.  This would create a conflict of interest under Ohio ‘s version of Model Rule 3.7, the Attorney General said, that would require recusal of one or more lawyers.  Because of the limited number of assistant AG’s familiar with the case, recusal would hamper the ongoing litigation over Ohio’s execution protocol, he noted.

The magistrate judge rejected the AG’s argument.  Ohio Rule 3.7(a)(3) (like the Model Rule) provides that “a lawyer shall not act as an advocate at a trial in which the lawyer is likely to be a necessary witness unless … the disqualification of the lawyer would work substantial hardship on the client.”

A main justification for the bar against acting as a lawyer and a witness in the same cause is confusion for the trier of fact in taking account of these dual roles.  But, the judge said, there was little risk of confusing the court under the likely circumstances here.  And any possible confusion was outweighed by the substantial hardship to the defendants that would result if the court were to bar testimony from the assistant AG with intimate knowledge of the case, and who was observing the execution, the judge held.  Therefore, the open phone line plan would not be impeded by the possibility of disqualification under the lawyer-as-witness rule.

The magistrate judge also held that the purpose of the open phone line — a possible post-lethal-injection motion for injunctive relief — was not “futile.”  The court said that Van Hook had the right to challenge his execution as cruel and unusual, and “he does not lose that right once the injection begins….”

Van Hook’s execution proceeded without incident on July 25.

Do you toil in the pressure cooker of a firm, but dream of going in-house? Many lawyers have that goal.  But the churn works in the other direction, too, with in-house lawyers migrating to firms or solo practice.  When they do, they can face conflict of interest issues leading to disqualification, as a former in-house lawyer for Rolls-Royce discovered earlier this year.

A luxury ride

Donald Little was in-house counsel for Rolls-Royce for more than 10 years.  A couple years after he left, he represented Rolls-Royce as outside counsel in a suit by Davis S.R. Aviation, defending against allegations that Rolls-Royce made false statements about airplane engine parts in order to prevent Davis from selling engines on the open market. That case settled.

Then, in 2016, a different plaintiff filed suit against Rolls-Royce under the False Claims Act, but based on the same constellation of facts as Davis, centering on the alleged use of defective parts in a U.S. Air Force aircraft.  The qui tam plaintiff alleged that Rolls-Royce improperly used the parts, resulting in a crash, and that it submitted false documents and invoices for payment to the air force.

Little became one of the lawyers for the qui tam plaintiff in the False Claims Act case.

Rolls-Royce moved to disqualify Little, as well as to dismiss the case. The magistrate judge recommended disqualification and dismissal, and the U.S. district court for the Western District of Texas overruled the plaintiff’s objections and accepted the recommendation.

The rubber meets the road

In its opinion, the district court noted that the magistrate judge had “expressed disbelief at Little’s insistence that he should not be disqualified” in light of his prior work for Rolls-Royce, in a matter substantially related to the qui tam suit.

The Texas version of Model Rule 1.9 (Duties to Former Clients) is codified in Rule 1.09(a) of the Texas Disciplinary Rules of Professional Conduct.  Like the Model Rule, the Texas version bars representation adverse to a former client in the same or a substantially related matter, except with the former client’s consent.

In the view of the magistrate judge and the district court, this was a no-brainer: it was “a clear violation” of the conflict rules for Little to represent the plaintiff adverse to Rolls-Royce in the qui tam action, because it was substantially related to his prior work in-house for Rolls-Royce, and to the Davis case, in which Little had represented Rolls-Royce as outside counsel.

In-house counsel take heed

Migrating from a berth as in-house counsel to being outside counsel raises former-client conflict issues that you – and your new employer – must be aware of.  As the Association of Corporate Counsel has pointed out, all the ethics rules apply with equal force to in-house counsel.  Even lateral moves, from a company law department to the same post with a competitor can raise some thorny former-client conflict issues.  See Dynamic 3D Geosolutions LLC v. Schlumberger Ltd. (Schlumberger N.V.), 837 F.3d 1280 (Fed. Cir. 2016) (affirming disqualification of plaintiff’s in-house counsel and outside counsel in patent infringement case; plaintiff’s in-house counsel was defendant’s previous deputy GC).  Be aware, and you can avoid the risk of disqualification.

* Joy A. Wilson is a rising second-year law student at the University of Illinois College of Law where she is a finalist on the university negotiations team and client counseling team and an event coordinator for the Black Law Student Association and Sports and Entertainment Law Society.

Representing a campus sexual assault victim-turned-activist and later using her confidential information in representing an alleged campus assailant with interests adverse to the former client is a “textbook” conflict of interest.  That’s the message the Pennsylvania Supreme Court sent in suspending a lawyer for a year in a consent-to-discipline case published this week.

Former -client conflict

Most lawyers know that it’s a conflict of interest to take on a new representation adverse to a former client they’ve represented previously in a substantially related matter — at least without consent from both the new client and the former client.  Model Rule 1.9, “Duties to Former Clients,” codifies the rule.

In litigation, engaging in this kind of former-client conflict of interest will likely get you disqualified.  But as this case illustrates, disciplinary action is also possible.

The complainant in the disciplinary case, Hope Brinn, was a former Swarthmore College student who alleged that she had been sexually assaulted on campus, and who subsequently became a victims’ rights advocate, including for other students allegedly assaulted at the college.

Swarthmore activism 

Following her assault, the lawyer reached out to Brinn via Facebook, suggesting that she hire him.  She responded “I hire you!”  During their many communications by e-mail, Facebook, phone and in person, the lawyer said he intended to support Brinn in litigation, campus adjudication against her assailant, and in her national activism.  He also assured her that anything she shared with him was confidential.

He assisted Brinn in preparing a class complaint, which she and another activist filed in 2013 with the Department of Education’s Office for Civil Rights on behalf of 12 other Swarthmore students, raising concerns about how the college handled sexual assault complaints.  One of several alleged campus assailants was identified as “Juan Doe” in the  complaint.

A month after the OCR class complaint was filed, Brinn terminated the lawyer’s representation.  Almost two years later, the lawyer represented the same Juan Doe in filing suit against Swarthmore.

“The Angry Feminist Cabal”

The lawyer’s 135-page complaint in federal district court on Juan Doe’s behalf alleged that Swarthmore discriminated against him by giving credence to false allegations against him of sexual assault asserted by “Jane Doe,” and making him the unfair target of “vigilante justice from student activists.”  The complaint, filed under seal, referred to Brinn at least 55 times by a pseudonym, “Student  Activist No. 1.”

The complaint had a long section titled “The Angry Feminist Cabal within Swarthmore’s OCR … Complaints Trigger Jane Doe’s Complaint Against Juan,” in which the lawyer alleged on behalf of Juan Doe that Brinn had encouraged Jane Doe to manufacture a sham complaint of sexual assault against Juan Doe.  The complaint also alleged that Brinn and others became radicalized, and made false accusations in their attempt to make Swarthmore “a safe place for women.”

The complaint contained confidential information that Brinn had provided to the lawyer during the former representation.

DQ granted … and then suspension

The district court judge granted Swarthmore’s motion to disqualify the lawyer from representing Juan Doe, based on violations of Rule 1.6 (“Confidentiality”) and Rule 1.9, arising from his former representation of Brinn.  The court found a “clear and complete disregard” by the lawyer of the rule against unconsented-to former-client conflicts and his duties of confidentiality.

Likewise, the disciplinary board found in adopting the consent-to-discipline petition that the lawyer engaged in “a textbook conflict of interest by representing Juan Doe in a matter substantially related to [the lawyer’s] representation of Ms. Brinn in which Juan Doe’s interests were materially adverse to the interests of Ms. Brinn.”  In addition, the board found, the lawyer lied to disciplinary authorities during their investigation, claiming that the judge in the Juan Doe case had denied the disqualification motion.

In addition to the conflict raised by representing Juan Doe, the petition detailed the lawyer’s misconduct in two other cases as well, involving claims against his mother’s employer.

Take-home lessons

Be alert for former-client conflicts, of course (including ones like this, which would seem clear-cut), and be aware that disqualification is not the only potential adverse outcome.  And, of course, if you find yourself in a disciplinary investigation, never misrepresent anything; that can never help you.

What are your ethics obligations when your client gives you documents that the client may not be entitled to have?  Model Rule 4.4(b), adopted in some form by most jurisdictions, provides some guidance.  Applying it, together with other principles, a New Jersey appeals court, in an unpublished ruling, recently disqualified a firm from representing the plaintiff in a  wrongful termination case.

“Burn files”

The disqualified firm’s client, Sanchez, was the former chief compliance officer at a pharmaceutical company.  After receiving a disciplinary warning as a result of complaints about his “deportment” involving employees who reported to him, Sanchez told management that he had personal copies of confidential files of his employer, which he called his “burn files.”  He said that he would use these “‘burn files’ to ‘f–k'” the employer “when they try to get [him].'”

Sanchez was fired two months later, and sued his employer for wrongful termination in New Jersey state court under the Garden State’s whistleblower law.

Sanchez gave the documents to his lawyers.  In discovery, the employer asked for any confidential documents that Sanchez had taken.  By the time Sanchez’s lawyers responded and acknowledged the “burn files,” nine months had passed.  Asserting that the documents had been improperly taken, contained trade secrets and were privileged, the employer moved to preclude their use and to disqualify Sanchez’s lawyers.

The trial court granted the motion, leading to the appeal.

Careful company policies

Several policies of the employer helped the court conclude that Sanchez wrongfully took the “burn files.”

  • Employees in general were required to protect the company’s confidential information and barred from “improperly possessing or using” it.
  • Another policy prohibited employees from accessing confidential or secret information outside the scope of their work responsibilities, and misusing or disclosing it.
  • As a high-level manager, Sanchez had also signed a contract agreeing to return documents and work-related data after leaving the company.

Interplay of discovery rules, ethics principles, other law

The court of appeals upheld the trial court’s orders, including disqualifying Sanchez’s lawyers.  New Jersey’s version of Model Rule 4.4, said the court, “impose[s] an ethical obligation on attorneys to safeguard confidential information of third persons.”  It provides that “a lawyer who receives a document … and has reasonable cause to believe that the document … was inadvertently sent shall not read the document … [and] shall (1) promptly notify the sender [and] (2) return the document to the sender…”

This rule, the court held, is coupled with the state’s discovery rules, which provide that a party who is notified that information produced in discovery is subject to a claim of privilege must promptly return, sequester or destroy it, and not use it until the privilege claim is resolved.  (New Jersey’s rule is like those in many other jurisdictions, and Rule 26(b)(5)(B) of the federal civil rules.)

The court also analyzed the state supreme court’s 2010 multi-factor test in Quinlan v. Curtiss-Wright Corp., holding that in some circumstances employees can  take and use employer confidential documents to prove claims under the state’s anti-discrimination statute.  Here, though, the court of appeals agreed that Sanchez was required to return the “burn files” that he removed “through self-help, pre-litigation measures.”

This case underscores that you must consider different sources of law in working through the issues presented when your client gives you documents that the client may not be entitled to have.  Both the discovery rules and ethics rules potentially apply, plus the rules on attorney-client privilege and relevant case law.

“Chaotic self-help battle”

The appeals court concluded there was reasonable cause here to believe that the documents Sanchez improperly took were privileged, and said that the judiciary must “prevent the discovery process from degenerating into a chaotic self-help battle.”

As for disqualification, the court said that having an opponent’s privileged documents weighs in favor of disqualification, because less-severe remedies “fail to adequately address both the [Rule 4.4(b)] violation and the attendant harm of access and exposure to privileged documents.”

The key to the ethics violation here, said the court of appeals, was the nine-month delay during which Sanchez’s lawyers failed to notify opposing counsel that they had the “burn files.”  That was an “unreasonable delay” that “rendered futile” any attempt to mitigate the harm caused by disclosing the documents.

Don’t get burned

Rule 4.4(b) and the obligation to notify the sender extends to documents that are “inadvertently sent.”  The question implicitly raised by this case is whether documents that the lawyer obtains as a result of being improperly taken by a party should be treated the same as those that are “inadvertently sent.”  The court here seems to conclude that the answer is “yes,” but without any explicit analysis that would provide guidance.  Nonetheless, the lawyer’s mere exposure to the opposing party’s privileged documents would apparently have been enough, in this court’s view, to mandate the remedy of disqualification.

Bottom line:  be sure you consider all the sources of law that might apply, including ethics rules, when your client drops “burn files” in your lap — otherwise, you might end up getting burned with a DQ order.

A Pennsylvania state court judge disqualified Drinker Biddle & Reath LLP earlier this month from appearing for either defendant in a shareholder dispute involving a Philadelphia LLC that provides services to pharmaceutical companies.  The opinion spotlights the conflict issues that can come up when representing an entity and its controlling member against a claimed minority owner.

Pharma company faceoff

The plaintiff and the individual defendant apparently agreed to form a company in 2010, and the resulting LLC retained Drinker Biddle. In his complaint, the plaintiff alleged that Drinker Biddle prepared operating agreements that (although unexecuted) resulted in an implied agreement giving him an 18 percent stake in the company.

Three years later, however, the plaintiff claimed, the same Drinker Biddle lawyer prepared another operating agreement that froze the plaintiff out and gave the individual defendant 100 percent of the company.

When the plaintiff sued the company and the individual defendant, he included a derivative claim on behalf of the company, asserting that the individual defendant had breached his fiduciary duties.  Drinker Biddle lawyers entered appearances for both the company and the individual, leading to the DQ motion.

Organization as client

The court said that Pennsylvania’s version of Model Rule 1.13 (they are substantively identical) governed.  Titled “Organization as Client,” a rule comment deals with the question “whether counsel for the organization may defend … [a derivative] action.”  The comment says that “if the claim involves serious charges of wrongdoing by those in control of the organization, a conflict may arise between the lawyer’s duty to the organization and the lawyer’s relationship” with individual constituents of the organization.

The court said that such a conflict arises “because the interests of those who control the company (and with whom the attorney has had a preexisting relationship) may diverge from the interests of the company itself.”  Quoting a federal Third Circuit case, the court said that “except in patently frivolous cases[,] allegations of directors’ fraud, intentional misconduct, or self-dealing require separate counsel.”

That was the case here, the court said, because the plaintiff alleged that the individual defendant engaged in self-dealing, facilitated by legal advice from Drinker Biddle, and involving an agreement that excluded the plaintiff.

Scarce law?

In a Law360 article, counsel for the plaintiff said that there was surprisingly little law on the issue, given that “any time there’s a closely held [company] dispute, you routinely have one firm representing the company and also representing the majority and the founding shareholder.”

The court also ruled that Drinker Biddle couldn’t drop one defendant and stay on as counsel to the other, reasoning that its lawyers might be witnesses (Model Rule 3.7), and that remaining for one of its clients in the case would involve the firm in a conflict with the other client (Model Rules 1.7 and 1.9), particularly given the possibility of cross-claims.

Although the opinion is from a state trial court, it is instructive reading if you are involved in a derivative claim situation like this, or are considering representing more than one party in a company control dispute.

What if you’re about to initiate litigation on behalf of your client, or you are in the middle of litigation, and you find that a different client you represent in another matter has documents relevant to the case?  Can you subpoena the documents from your own client?  Can you cross-examine that client at trial?   Here is some background and some practical advice.

Current client conflicts

The ABA’s Ethics Committee analyzed this recurring scenario 25 years ago in its Formal Opinion 92-367, under the verbose-but-descriptive title “Lawyer Examining a Client as an Adverse Witness, or Conducting Third Party Discovery of the Client.”

The focus is on Model Rule 1.7, which deals with current-client conflicts.  It addresses representations directly adverse to existing clients and also situations where your representation of a client may be “materially limited” by your duties to another client.

The Committee concluded that cross-examining or directing third-party discovery to an existing client likely would be directly adverse to that client, and would create a disqualifying conflict of interest — unless both clients consented.  The circumstances would likely “pit the duty of loyalty to each client against the duty of loyalty to the other,” said the Committee.

The possibility of a “material limitation” on your representation of the litigation client is equally clear.  First, you could breach the duty of confidentiality you owe to your client who is the witness or the target of a document subpoena.  After all, in these circumstances, by definition, you have information that is relevant to the litigation you are conducting on behalf of the other client.

Second, there is a “punch-pulling” problem:  your interest in keeping the witness-client, or in not inconveniencing that client, may consciously or unconsciously cause you to go easier on that client, conducting a “‘soft’ or deferential” examination or document request, to the possible disadvantage of your litigation client.

The conflict issue is sharpened, of course, by Model Rule 1.10, the imputation rule:  if you are disqualified, so are all the other lawyers in your firm, by imputation.

Best practices?

The good news is that this conflict is generally viewed as being subject to the affected clients’ consent and waiver.  But how should you proceed?  Regarding the situation presented by third-party discovery against a current client, the experience of my firm and others suggests the following possible steps:

  • Advise the litigation client on whose behalf you want to serve the document subpoena that the target of the subpoena is another firm client in unrelated matters.
  • Get permission from the litigation client to inform the target of the subpoena about the subpoena and the subject matter of the request.
  • Determine if the subpoena target will be objecting to the subpoena or attempting to block production of any information called for by the subpoena.
  • If the answers to that question is “no,” then there is likely little risk of an actual conflict; but otherwise, there is a conflict that requires a waiver.

In the absence of a waiver from each client, or if your litigation client objects at the outset to the exploratory discussion with the subpoena target, you can’t proceed.

In that case, the  ABA Ethics Committee suggests that, as an alternative to withdrawing (which presents obvious and even acute problems, depending on the stage of the litigation), you might be able to co-counsel with an un-conflicted lawyer who would shoulder the third-party discovery.  A New York City Bar Association ethics opinion endorses that course of action.  But a California opinion questioned whether such co-counsel would be truly independent so as to alleviate the conflict.

The ABA’s ETHICSearch has a useful recent article on the ins and outs  of this quandary.

Clearly, there is a lot to think about when you are faced with this problem, and as always, you should make sure you know how your own jurisdiction approaches it.

If you’re driving from state to state, the rules of the road are generally consistent.  While details may differ, a red light means “stop” in every state of the Union.  But under our federal system, each U.S. jurisdiction has authority to regulate the practice of law — and under the resulting state ethics rules, not only the details, but even some of the basics may differ.

That’s spotlighted in a district court opinion issued earlier this year, denying a motion to disqualify counsel in a defamation case because plaintiff was not a “prospective client” under South Carolina’s ethics rules.

“If there is no conflict”

The plaintiff sued ten John and Jane Does, alleging he was defamed in a blog post.  The plaintiff first threatened suit against the blogger, who hired counsel at a Greenville, S.C. firm, (“Wyche”).  Ten days later, plaintiff’s lead counsel reached out to a different lawyer at Wyche.  They discussed the possibility of the Wyche lawyer serving as local counsel for plaintiff, and plaintiff’s lead lawyer asked for a fee agreement “if there is no conflict.”  The Wyche lawyer took the relevant names “for conflict purposes,” provided the firm’s rates, and said in an e-mail that “I hope we get the opportunity to work together.”

You can see where this is going, right?  The next day, the Wyche lawyer — having discovered that the firm already represented the blogger — told plaintiff’s lawyer that the firm had a conflict and declined the representation.

Later, plaintiff issued a subpoena to the blogger, claiming that she had knowledge of the Does’ identities.  When the Wyche firm appeared on behalf of the blogger, plaintiff moved to disqualify.

That’s where the Palmetto State’s ethics rules on prospective clients came into play.

Prospective client?

To safeguard the confidentiality interests of prospective clients, Model Rule 1.18 provides that if you obtain “information from [a] prospective client that could be significantly harmful to that person in the matter,” you and your firm are generally disqualified from adverse representation in the same or a substantially-related matter.

Who is a “prospective client” under the Model Rule? Anyone who consults with you “about the possibility of forming a client-lawyer relationship with respect to a matter” — even when no lawyer-client relationship ensues.

But South Carolina’s Rule 1.18 is more restrictive.  It’s version defines a “prospective client” as someone who consults with a lawyer — but “only when there is a reasonable expectation that the lawyer is likely to form the relationship.”

That made all the difference to the court in ruling on plaintiff’s DQ motion.  The court said that there was no evidence that a “commitment” was “likely” that the Wyche firm would represent the plaintiff.  The “hope-we-can-work-together” comment was only a “polite courtesy,” the court said.

“Niceties,” are not binding commitments to represent someone, the court held, and “are not, absent unusual circumstances, reasonably interpreted to indicate a commitment is likely.”  The plaintiff’s lawyer also clearly understood that before any engagement, Wyche had to check for conflicts.

Without having become a “prospective client” under South Carolina’s version of Rule 1.18, the plaintiff had no basis for disqualifying the Wyche firm.

Different rules, different outcome

The plaintiff here might have met the definition of “prospective client,” and been entitled to the protection of Rule 1.18, in a state that hews to the broader Model Rule language, instead of South Carolina’s more-restrictive version.  So you must be aware of such nuances in the ethics rules of the road.

But you also must be diligent in not “hearing too much” when a prospective client reaches out to you.  The Wyche lawyer who talked to the plaintiff’s lead counsel in this case didn’t get confidential information about the plaintiff before checking for conflicts.

That’s good policy.  There are plenty of examples of successful DQ motions where a lawyer has listened to details — which prospective clients often want to relate — and only then discovered a conflict.  The always-excellent Freivogel on Conflicts collects the cases.  In worst-case scenarios, that can result in needing to decline the prospective engagement and step away from the one that raises the conflict.  That’s the message of ABA Ethics Opinion 90-358 (1990) — an outcome no one wants.

One dollar billsLitigation funding is in the news again, with the U.S. Chamber of Commerce spearheading a request to amend the Federal Rules of Civil Procedure to require initial disclosure of all third-party agreements for compensation that are “contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.”

The Chamber joined with 28 other organizations in a letter sent earlier this month to the federal courts’ Rules Committee, saying that its aim is to bring third-party litigation funding out of “the shadows” and to identify “a real party in interest that may be steering a plaintiff’s litigation strategy and settlement decisions.”

The new push follows up on a 2014 proposal that the Chamber and a few other organizations made to the same rulemaking committee, which was rejected.  Things have changed since then, the Chamber’s June 1 letter said, citing expansion of third-party funding in the U.S., with several significant players reporting significant and steady growth, and on-line marketplaces opening the way for investors to shop for individual cases to contribute to.

Shift in momentum?

As we reported in February, the U.S. District Court for the Northern District of California became the first court to mandate disclosure of litigation funding that parties in class actions receive from outside sources, under a revision to the court’s standing order.  That was followed up in March, when the U.S. House of Representatives passed the Fairness in Class Action Litigation Act of 2017, which likewise would require disclosure of third-party funders in class actions.  The bill is now before the Senate Judiciary Committee.

Problems with alternative litigation funding

The process for amending the federal civil rules is a lengthy one.  But with at least some momentum on its side, the U.S. Chamber cited several justifications for the rule change it seeks, including:

  • The champerty problem.  This old legal doctrine, which seeks to prevent buying and selling lawsuits, still continues to be in play, with at least three state courts of appeals citing it or suggesting it as a viable defense in 2016-17, and a U.S. bankruptcy court in January finding an agreement to be champertous.
  • Fee-sharing issue.  Model Rule 5.4(a) bars almost all forms of sharing legal fees with non-lawyers, with the goal of preserving the lawyer’s independent professional judgment. But some models of third-party litigation funding apparently involve plaintiffs’ counsel repaying the funder’s investment out of the lawyer’s attorney fees, if any.
  • Confidentiality and conflicts.  To the extent that funding arrangements require disclosure of client information to the financier they could raise confidentiality concerns under the ethics rules, as well as privilege issues.  And lawyers who have “contracted directly with a funding company may have … duties to it that are … perhaps inconsistent with” the duties of loyalty to the client, including conflicts arising from steering clients to favored funders.

Watch and wait

In a press release, one large litigation funder, Bentham IMF, said that the Chamber’s proposal was misguided, including because the law firms using such financing were assisting under-served and under-funded clients — small-to-mid-size businesses and individuals — who could not otherwise afford to litigate their claims.  Bentham also said that the rule amendment proposal was unfairly one-sided, and that defendants should have to abide by similar disclosure rules.

Litigation funding will continue to be a hotly debated issue, and if your clients are involved in civil litigation, these are developments that bear watching.  Stay tuned.

potatoes covered in soil against whiteEven though a Mississippi lawyer’s conflict of interest lasted only one day, that was enough for a U.S. magistrate judge to disqualify him from representing a client adverse to Allstate Insurance Co. on a coverage claim, in a ruling issued last week.  Sending a termination letter to the insurer the day after accepting the new client’s case didn’t help the lawyer.  The judge found that the lawyer’s duty of loyalty required him to turn down the case, in light of the fact that he had pending cases in which he was directly representing Allstate.

Hot potato doctrine

The court recognized that the key issue in the case was whether the lawyer could drop Allstate as a client, turning it into a “former client” for purposes of the conflict-of-interest rules.  If so, then the “more lenient” substantial-relationship test would apply, in which the court looks at whether the new client’s matter is substantially related to the work the lawyer did for the former client.  But if the lawyer takes on the new client and represents it concurrently with the now-adverse existing client without both clients’ consent, then the duty of loyalty under Model Rule 1.7 has been breached.

The “hot potato” doctrine prohibits a lawyer from turning an existing client into a former client by “firing” it in order to accept an engagement adverse to the existing client.  The 1987 case that gave the principle its name is Picker International, Inc. v. Varian Associates, in which the federal district court judge said that “A firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more lucrative client.”

Termination didn’t cure impropriety

In the Mississippi case, the court said that the lawyer’s conduct was understandable:  he hadn’t received any new work from Allstate in over a year; his firm was wrapping up its work on the “handful” of cases it still had, the majority of which were near the end of their life-spans; and the firm planned to end its relationship with the insurer based on the fact that it was not getting new work.

Nonetheless, said the judge, the lawyer and his firm had an attorney-client relationship with Allstate when the lawyer signed a contract to represent the claimant against the insurer, and he couldn’t abandon his existing client by dropping it like a hot potato:  “In withdrawing representation of Allstate to pursue a new, more attractive representation, [the lawyer] violated the duty of loyalty he owed to Allstate.”

Game of spuds

The question of when a client becomes a former client under conflict rules can be a nuanced one.  For instance, the hot-potato doctrine may not operate when a conflict is “thrust upon” a law firm as a result of a client merger, the addition or new parties or other circumstance over which the firm has no control.  Then, the firm may be able to choose to avoid disqualification by withdrawing from the representation that creates the conflict.  See, e.g., Sabrix, Inc. v. Carolina Casualty Ins. Co. (D. Ore. 2003) (hot-potato rule did not apply where withdrawal followed another party’s naming of additional defendant that created conflict).  And timing matters, too.  For example, if a firm has a new client in mind for the future, may it terminate an existing relationship in order to prevent a conflict?

Bottom line:  Be careful in working through these conflict issues so you don’t drop the ball — or the potato.