Conflict Waiver Fails After ‘Mission Creep’ in Lobbying Work

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By Joan C. Rogers

Holland & Knight must stop representing a bank in a civil fraud case against a company the firm concurrently represented in other matters during the run-up to the suit, the U.S. District Court for the Southern District of New York held April 28 ( First NBC Bank v. Murex, LLC , 2017 BL 141143, S.D.N.Y., No. 16 Civ. 7703 (PAE), 4/28/17 ).

The court concluded that a broad advance conflict waiver in the company’s engagement agreement didn’t cure the problem. H&K’s services expanded beyond the nonlegal services contemplated in the agreement, and the waiver provision didn’t mention the specific adverse matter, Judge Paul A. Engelmayer said.

Advance conflict waivers have become a regular feature of engagement agreements for big law firms and their corporate clients. But as this case makes clear, a future conflict waiver isn’t a bulletproof shield, especially if the firm’s adverse role comes across as stabbing the client in the back.

Ethanol distributor Murex LLC retained H&K for a three-month period to lobby the Environmental Protection Agency about the obligations of entities that had purchased fraudulent “RINs” (tracking numbers for renewable fuel).

A nonlawyer senior policy analyst in H&K’s Washington office arranged the engagement, which called for “regulatory consulting services.” The engagement agreement stated that the conflicts of interest rules applicable to lawyers wouldn’t apply, and the agreement permitted H&K to represent clients adverse to Murex in unrelated matters.

During the same time frame, H&K litigators in Atlanta were getting ready to sue Murex on behalf of First NBC Bank for allegedly participating in fake ethanol transactions aimed at defrauding FNBC.

Advance Waiver Isn’t Effective

H&K argued that Murex was solely a lobbying client, but the court found that H&K formed an attorney-client relationship with the company.

The firm’s representation of Murex broadened beyond lobbying work to include helping Murex defend itself against a threatened EPA enforcement action and briefly counseling Murex on a pending lawsuit in which Murex was represented by a different law firm, the court said.

Those activities outside the scope of the engagement agreement clearly amounted to legal services, and it was reasonable for Murex to believe it had an attorney-client relationship with H&K, it found.

The court decided that on the facts here, H&K couldn’t use the waiver provision in its agreement as a shield. “The agreement simply did not cover the legal services that H&K came to provide Murex,” it said.

Also, “the agreement’s broadly worded advance waiver provision also did not identify the FNBC matter as one in which the firm sought to reserve the right to be adverse to Murex,” the court said. The waiver “fell well short of embodying informed client consent,” it said.

What Went Wrong

The court said the firm created its own predicament by “avoidable human and systemic lapses” at two junctures.

The first problem was that H&K’s Washington, D.C., office unknowingly took on work for a client that its Atlanta litigators were preparing to sue. The nonlawyer policy analyst who accepted the engagement didn’t follow up or alert anyone when a conflicts check highlighted a potential problem, because he believed that the nature of his lobbying work wouldn’t give rise to an attorney-client conflict, the court said.

Second, the policy analyst didn’t notify anyone at H&K before starting to defend Murex against a possible EPA enforcement action. H&K’s ethics and conflicts specialists never got the opportunity to warn him to confine his work to lobbying, and never got a chance to consider whether to expand the engagement to include additional services.

“The answer is for firms to have systems, cultures, and informed personnel that assure that decisions as to client matter intake and expansion are made collaboratively, consultatively, and carefully with due regard for the conflict consequences,” the court wrote.

Firm Must Exit

The court ruled that H&K’s attorney-client representation of Murex was concurrent with the firm’s representation of FNBC even though its relationship with Murex ended before the case got to court.

In light of the concurrent representation, H&K had the heavy burden of showing the absence of an actual or apparent conflict in loyalties, and it failed to carry this burden, the court said.

The court found that H&K’s continued representation of FNBC would taint the litigation in two ways. First, the initial complaint in the case created the “appearance of disloyalty” to its former client Murex, it said.

A neutral observer could see the initial complaint as trying to “dirty up” Murex for no good reason by accusing it of regulatory and legal violations relating to RINs and asserting that Murex was involved with the EPA on a fraud matter, the court said.

Second, the court said that H&K’s representation of Murex provided it with access to significant confidential information that could be helpful to FNBC in the litigation.

H&K’s implementation of an ethics screen after Murex filed its motion to disqualify didn’t rebut the presumption that the firm’s FNBC lawyers had access to Murex’s confidences, the court ruled.

The firm elected to have its FNBC litigation team defend against the motion to disqualify, and those lawyers were exposed to Murex’s confidential materials submitted in connection with the disqualification issue, it said.

Holland & Knight represented First NBC Bank. Morrison & Foerster LLP and Kane Russell Coleman & Logan P.C. represented Murex.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bna.com

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