When Conflict Grows From Corporate Merger, Dropping One Client Is Sometimes an Option

By Joan C. Rogers  

A California lawyer who is unable to obtain waivers to deal with a “thrust-upon” conflict of interest arising from a corporate client's merger may ethically withdraw from representing one client and continue to represent the other if he has not received confidential information from the now-former client that is substantially related to the matter in which representation is ongoing, according to a recent opinion from the Orange County bar's ethics committee (Orange County (Cal.) Bar Ass'n Professionalism and Ethics Comm., Op. 2012-1).

Examining California cases and ethics rules, the committee concluded that when a conflict develops between two clients as a result of a corporate acquisition, the more permissive rules governing successive representation are better suited to resolve the lawyer's dilemma than the stricter rules governing concurrent representation. Each situation needs careful analysis of the duties of loyalty and confidentiality, the opinion makes clear.

Small Bio, Big Bio.

In the scenario considered by the committee, Attorney A has represented Small Bio for a decade in patent prosecution matters and continues to represent it. The lawyer also represents a long-term client (LTC) in patent litigation against Big Bio. When Big Bio unexpectedly acquires Small Bio, the lawyer is uncertain about his ethical obligations.

As an initial matter, the committee explained that most California courts follow the “unity of interests” test set out in Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft LLP, 81 Cal. Rptr. 425, 15 Law. Man. Prof. Conduct 62 (Cal. Ct. App. 1999), for analyzing parent-subsidiary conflicts of interest, rather than the “alter ego” test set out in Brooklyn Navy Yard Cogeneration Partners LP v. Superior Court, 70 Cal. Rptr.2d 419 (Cal. Ct. App. 1997).

The committee pointed out, however, these cases arose in the context of disqualification motions. It cautioned that the California Business & Professions Code imposes broader ethics obligations, including the duty to avoid representation of adverse interests, the duty to protect confidential information, the duty of loyalty to clients, and requirements for mandatory and permissive withdrawal.

Applying the Morrison Knudsen factors, the panel found that under the particular circumstances, Attorney A's continuing representation of both Small Bio and LTC does not involve a conflict of interest at this time, because the law departments of Small Bio and Big Bio are not integrated and no confidential information about the parent has passed to the subsidiary.

The opinion recommends, however, that Attorney A monitor the circumstances of the merger and continue to evaluate whether a unity of interests may come to exist between Small Bio and Big Bio.

If a unity of interest develops, the committee advised, the lawyer may attempt to resolve the conflict by obtaining informed written consent from both Small Bio and Big Bio, on the one hand, and LTC on the other, as required by California Rule of Professional Conduct 3-310(C) when attorneys represent parties with adverse interests.

Duty of Loyalty.

Assuming conflict waivers cannot be obtained, the committee said, the next question is whether the attorney may continue to represent one of the two adverse clients, and if so, which one.

In a concurrent representation situation, the panel observed, the ethical duty of loyalty governs whether the lawyer may or must withdraw. The duty of loyalty may permit--or even require--a lawyer in a thrust-upon conflict situation to withdraw from representing one or both clients, it noted.

While acknowledging that the “hot potato” rule bars a lawyer from curing dual representation conflicts by severing a relationship with a pre-existing client, the committee pointed out that Attorney A did not knowingly undertake the adverse representation and did not create the conflict.

“[A] 'thrust-upon' conflict situation involves the competing interests of 'innocent' parties ….”
Orange County Ethics Op. 2012-1

On the contrary, it noted, Big Bio created the conflict by acquiring Small Bio, and Attorney A and his law firm are innocents. Attorney A has devoted substantial resources to both Small Bio and LTC, the committee emphasized.

In a footnote, the opinion cites Gould Inc. v. Mitsui Mining & Smelting Co, 738 F. Supp. 1121 (N.D. Ohio 1990), which concluded that when a conflict resulted from client merger activities or other unforeseeable circumstances that the law firm did not create, the firm may be permitted to withdraw from its representation of one of the clients, so long as the withdrawal would not cause undue hardship to the client the firm wants to drop.

The footnote contrasts Gould with Cascades Branding Innovation LLC v. Walgreen Co., No. 11 C 2519, 2012 U.S. Dist. LEXIS 61750, 28 Law. Man. Prof. Conduct 295 (N.D. Ill. May 3, 2012), which held that a law firm may not defend a longtime client in a patent matter because it learned confidential information about the opponent's likely litigation strategies when it discussed possible representation in a different patent case with the opponent's parent company.

Successive Representation Standard.

The committee concluded that in the scenario under consideration, “Attorney A may ethically withdraw from representing one client and continue to represent the other if he has received no confidential information from the now-former client that is substantially related to the matter in which representation is ongoing.”

To the extent Big Bio is potentially more lucrative than LTC, Attorney A should not simply drop LTC to appease Big Bio, the committee cautioned. Otherwise, it advised, Attorney A may withdraw from representing either LTC or Big Bio if he complies with his ethical duties governing withdrawal under Rule 3-700, which include complying with any court rule that requires permission to withdraw and taking reasonable steps to avoid harming the client's rights, such as giving the client due notice and time to hire replacement counsel and returning client papers and property.

The committee agreed with dicta in Truck Ins. Exchange v. Fireman's Fund Ins. Co., 8 Cal. Rptr.2d 228 (Cal. Ct. App. 1992), that the disqualification standard governing successive representation should apply when a lawyer withdraws from an adverse concurrent representation due to a thrust-upon conflict.

In successive representation situations, the committee noted, a lawyer may continue representing one client if that representation is not substantially related to the representation of the client from whom he has withdrawn. This “substantial relationship” test, it said, requires an examination of the similarity between the factual and legal issues, the extent of the attorney's involvement, and whether the attorney received confidential information about the former client that could give its adversary a significant practical advance.

The court in Truck Ins. Exchange reasoned that if representations are not substantially related and client confidences are not endangered, disqualifying a lawyer for the mere happenstance of an unseen concurrent adverse representation would unfairly prevent clients from having counsel of choice and would penalize a lawyer who had done no wrong.

The committee endorsed that reasoning. While acknowledging some possibility that a thrust-upon conflict could be viewed as a concurrent conflict requiring per se disqualification, it concluded that “since a 'thrust-upon' conflict situation involves the competing interests of 'innocent' parties, we believe that Truck Insurance Exchange's reasoning is not only correct, but also provides the best articulation of an attorney's ethical obligations when facing a 'thrust-upon' conflict dilemma.”

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

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