Market Rivalry Isn't ‘Materially Adverse'Conflict

By Joan Rogers

Aug. 22 — Lawyers aren't precluded from accepting a litigation matter just because the new client and a former client have generally competing economic interests, the New York state bar's ethics committee advised July 15 (New York State Bar Ass'n Comm. on Prof'l Ethics, Op. 1103, 7/15/16).

An attorney who previously represented a corporation can handle a new client's suit against another company, even though the former client and the new client are marketplace rivals and it would be in the former client's interest for the new client to lose the suit, the committee advised.

The opinion addresses a conflicts question on which there's scant authority—that is, whether it's “materially adverse” under the rule on former-client conflicts to handle litigation against a third party when the outcome would economically help a former client's competitor.

The committee said no. General economic adversity poses neither a current-client conflict nor a former-client conflict, it advised.

Economic Adversity ≠ Material Adversity

The committee said that New York Rule of Professional Conduct 1.9(a) on former-client conflicts doesn't prevent a lawyer from representing a new client unless both prongs of the rule are satisfied: (1) the new matter must the same or substantially related to the former matter, and (2) the new client's interests must be “materially adverse” to the former client's interests.

Regarding the second prong, the committee said the competing economic interests between the current and former clients don't create a conflict under Rule 1.9(a).

Economic competition between current clients doesn't prohibit a lawyer from representing them in unrelated matters, the committee said. It quoted Comment [6] to Rule 1.7, which addresses current-client conflicts:

[S]imultaneous representation in unrelated matters of clients whose interests are only economically adverse, such as representation of competing economic enterprises in unrelated litigation, does not ordinarily constitute a conflict of interest and thus may not require consent of the respective clients.

Although the committee didn't mention it, the same language appears in Comment [6] to Model Rule 1.7.

The committee also cited Charles W. Wolfram, Competitor and Other ‘Finite Pie' Conflicts, 36 Hofstra L.R. 539, 550–55 (2007), which discusses lawyers' representation of economic competitors.

Because a lawyer may simultaneously represent current clients who are economic competitors, it follows even more so that a lawyer may subsequently represent a client whose economic interests are contrary those of a former client, the committee said.

Litigation Against Third Party

The committee concluded that the inquiring attorney who previously represented Corp. A can represent Corp. B in unrelated litigation against Corp. X, even though A and B are competitors in the same industry and current client B's failure in the litigation would likely force it out of business and thereby indirectly benefit former client A.

For one thing, Rule 1.9(a) doesn't bar the attorney from representing current client B against third party X, because the inquirer said the new and former matters aren't substantially related, the committee said.

Also, current client B's interests in the new litigation matter aren't “materially adverse” to former client A under Rule 1.9, the committee said. “Just as competing economic interests do not create ‘differing interests' within the meaning of Rule 1.7(a)(1), so they do not create a “materially adverse” interest within the meaning of Rule 1.9(a),” it said.

“That would stretch the meaning of ‘materially adverse' too far,” it said. Though Rule 1.9(a) doesn't prevent the lawyer from representing client B in the new matter, the lawyer remains bound by Rule 1.9(c) not to use or reveal the former client's confidential information protected by Rule 1.6, the committee noted.

Dispute Between Current Client and Ex-Client

The committee also advised that the attorney may represent current client B in a new matter that's factually unrelated to the matter in which the attorney represented former client A, even though A and B are competitors and A is threatening to sue B in the matter.

Former client A's threat to sue current client B, even if the threat morphs into a lawsuit, doesn't prohibit the attorney from representing B in the matter so long as A remains a former client and the previous and current matters aren't substantially related, the committee advised.

The committee said that Rule 1.9(a) would prohibit the attorney from defending current client B in the lawsuit brought by former client A if the current representation is substantially related to the former representation of A. This is because the “materially adverse” prong of Rule 1.9 is always met when a former client is on the opposite side of a lawsuit involving a substantially related matter, it said.

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

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

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