By Lazar Emanuel [Originally published in NYPRR December 2003]
[Editor’s note. This is the second of two articles summarizing Formal Opinion 2003-2 of the Association of the Bar of the City of New York dealing with DR 5-105(E), the Rule requiring law firms to maintain records of clients and engagements in order to avoid conflicts among clients. The first article (see NYPRR Nov. 2003) described the record-keeping systems recommended by the City Bar. This article describes the data that should be recorded about each client and each matter.]
To understand what systems a law firm should install in order to provide adequate conflict checking, it is first necessary to review the provisions of DR 5-105.
DR 5-105(A) instructs a lawyer to decline new employment by a client if his judgment in behalf of another client will be impaired by the new representation. DR 5-105(B) instructs a lawyer to discontinue multiple employment if his judgment in behalf of one client will be adversely affected by his representation of another client, or if he is likely to be involved in representing differing interests. DR 5-105(C) offers some relief in a case of potential conflict by permitting a lawyer to represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interests of each client and if the clients consent to the representation after full disclosure of the risks involved in the simultaneous representation. DR 5-105(D) prohibits all lawyers in a firm from accepting a representation that is prohibited to any one of them under DR 5-105(A) or DR 5-105(B).
DR 5-105(E), adopted by the Appellate Divisions in 1999, requires all law firms to maintain records enabling the firms to check for potential conflicts between clients. In Formal Opinion 2003-2, the ABCNY first defined the records that a firm must maintain and the policies and systems it must implement for checking proposed engagements against current and prior engagements. The Opinion went on to list the “minimum” records a law firm must keep in order to comply with DR 5-105(E). This article summarizes these minimums.
1. Client Names. The records should contain the “full and precise name” of each client of the firm.
2. Adverse Party Names. The records should contain “the precise names of parties involved in a matter whose interests are materially adverse” to each party represented by the firm.
3. Description of Engagement. The records should contain “a brief description of each engagement or prospective engagement.”
The Opinion continues:
With this basic information at hand, a law firm should be able to detect most potential conflicts involving clients or former clients before accepting any proposed engagement…Of course, after identifying a potential conflict, the firm may need to conduct factual and legal investigation to determine whether a prohibited conflict actually exists or is likely to develop. But the basic information outlined…should render effective assistance to most firms in putting them on notice that possible conflicts exist and that further study may be required.
The ABCNY did not believe that DR 5-105(E) itself requires any record-keeping with respect to “financial, business, property or personal interests” that may create conflicts with clients. Personal conflicts are not “engagements,” and are not within the scope of DR 5-105(A). The Opinion did not address whether another provision of the Code may require a law firm to check for personal conflicts under DR 5-101.
Written Letters of Engagement. Since March 4, 2002, all lawyers have been required under 22 NYCRR Part 1215 to provide letters of engagement to all clients in matters involving more than $3,000, except in domestic relations matters (which require a written retainer agreement) or where the client has previously paid the lawyer for other services “of the same general kind.” Firms that do not have repeat clients — e.g., firms that handle personal injury work — may use the letters of engagements to satisfy the record keeping requirements so long as they identify the adverse party adequately (either in a separate record or in the letter of engagement itself). However, the letters of engagement will not satisfy the record-keeping requirements for matters involving clients who have previously paid for services of the same general kind or for clients whose fees will not exceed $3,000.
Policies and Systems. DR5-105(E) requires every law firm to have a “policy implementing a system” for checking proposed engagements against prior or current engagements. Interpreted literally, this might be construed as not requiring a firm to check the written records it is required to maintain. A solo practitioner might be satisfied to rely only on his memory, for example, or a small firm might use the “system” of relying on a partner with a good memory or on “asking around the firm” to see if anyone can foresee a conflict.
The ABCNY does not believe that any of these informal methods of conflict checking constitutes a “system” within the meaning of DR 5-105(E). It would be pointless to require that a law firm maintain written records without also requiring the firm to consult those records as part of a conflict-checking “system.” A “system” requires systematic review of the firm’s records.
Because law firms vary widely in size, function and purpose, no one system will fit all. Small firms may need only to check their basic records regularly and to consult amongst themselves about any potential conflicts suggested by the records.
As firms get larger, they need more comprehensive systems. They should be encouraged to make maximum use of technology. They may need to install a software system designed especially to identify conflicts. Some firms will be able to use standard “off-the-rack” programs. Other firms, “especially those with larger or more complex practices,” will need to get technical help in designing a software program fitting the firms’ needs.
Even a “system” providing a regular electronic review of records may not disclose all conflicts or potential conflicts. Small firms may be able to supplement the system by regular communication among the lawyers in the firm, either in writing or orally. Larger firms, “especially those with more than one office,” may need to supplement their review through email or other regular exchanges among lawyers in the firm designed specifically to prompt recognition of potential conflicts. In these larger firms, communication among lawyers is especially important because a check of the firm’s basic database (client names, adverse party names and brief description of the engagement) may not be adequate to reveal possible conflicts.
Particular Types of Conflicts
New York’s law on conflicts with current clients is well established — under DR 5-105, supra, a law firm may not oppose a current client in any matter — even an unrelated matter — unless the law firm satisfies the “disinterested” lawyer standard and unless all clients affected by the conflict give their informed consent. The records required under DR 5-105(E) will usually be adequate to detect potential conflicts. But no system can detect all conflicts. Special attention should be directed to situations that require practice-specific conflict checking.
Corporate Family Conflicts. Law firms with practices involving corporate affiliates, subsidiaries and other corporate relatives need to exercise special care to identify potential conflicts. The firm may be disqualified, for example, from opposing a corporate entity that belongs to a current corporate client. Whether it is disqualified depends on many factors, “including the relationship between the two corporations and the relationship between the work the law firm is doing for the current client and the work the law firm wishes to undertake in opposition to the client’s corporate family member.” Although a firm is not required to maintain a record showing every corporate affiliate of every current client, it needs to impose a system for alerting the firm to conflicts with members of the corporate client’s family. To help the firm determine whether the potential adversary is related to a current client of the firm, it may need to install its own database showing the members of its corporate clients’ families, or it may utilize a commercial service to supply that data in a specific case. If its checks reveal a potentially disqualifying conflict, the firm can ask for the client’s consent.
Corporate Constituents. A law firm that represents corporate or business clients, especially closely-held businesses, often finds that it has developed an attorney/client relationship with an officer or a shareholder of the business. It may represent the officer or shareholder individually in a real estate or tax matter, for example. Because “(A) lawyer employed or retained by a corporation or similar entity owes allegiance to the entity and not to a shareholder, director, officer, employee, representative or other person connected with the entity (EC 5-18),” the law firm will need to incorporate in its conflict-checking system the names of individual constituents of the entity with whom the firm may have developed an attorney/client relationship.
Trade Association Members. A law firm that represents a trade association must consider the association itself as the client for conflict-checking purposes. However, the firm may find that it has developed an attorney/client relationship with a member of the Association. For example, the member may have disclosed confidential information to the firm during a private meeting with one of its lawyers. The relationship would prevent the firm from opposing the interests of the member. A law firm representing a trade association should include data identifying the association’s members in its conflict checking system.
Firm’s Own Former Clients. Former clients of a law firm must give their informed consent before the firm may represent another client in the same or a substantially related matter in which the interests of the other client are materially adverse to the interests of the former client. DR 5-108(A). “In short, absent the former client’s informed consent, or absent an information screen or other procedures mandated by DR 9-101(B) for conflicts involving former public servants, a lawyer may not oppose a former client in the same or a substantially related matter.”
Conflicts with Former Clients Are Common. Ordinarily, if a law firm consistently maintains its database of former and current clients, a potential conflict with a former client will be disclosed. In an appropriate case, the firm will be able to ask for the former client’s consent. However, it’s not always clear whether a particular client is a current client or a former client. “To provide effective assistance to the firm in avoiding conflicts with current clients, a law firm’s conflict-checking system should include some means of determining whether a client remains a current client or has become a former client.”
Former Clients of Laterals. When a lawyer moves from one private law firm to another, he brings with him all the potential conflicts between his former clients and the clients — both former and current — of his new law firm [citing Kassis v. Teachers Ins. and Annuity Assn., 93 N.Y.2d 611, 695 N.Y.S. 515 (1999)]. And even if the lateral himself never represented a client of the former firm, the new law firm may be disqualified from representing a client in a matter substantially related to a matter in which the former law firm represented that client, so long as the lateral acquired “information protected under DR 4-101(B) that is material to the matter.”
Therefore, the new firm should include in its database the means for determining which clients the lateral represented personally at his former firm. It would be prudent to include also pertinent information concerning matters about which the lateral acquired protected information while at his former firm. In obtaining this information, the new law firm should be careful to consider the lateral’s obligations to his former firm.
Conflicts Excluded from ABCNY Opinion. The Opinion did not deal with a number of other possible sources for conflicts among clients, although it recognized that there were many. These include: (a) conflicts in class actions; (b) conflicts created by a lawyer ‘s investment in his client’s business; (c) conflicts that arise when a lawyer serves on a client’s board; (d) conflicts created in insurance triangles; (e) conflicts created by the firm’s non-lawyers, especially those who have worked for other firms; (f) conflicts created by temporary lawyers who work or have worked at other firms; (g) conflicts that arise when lawyers are represented by other lawyers; (h) conflicts that arise when a current client is an adverse witness; (i) conflicts involving former public servants; and (j) special conflicts created by a firm’s participation in a beauty contest and in other business-development activities.
Each law firm should determine which of these conflicts it is likely to face and “adopt measures to detect and deal with them.”
Lazar Emanuel is the publisher of NYPRR.
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