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Conflicts of Interest and Vicarious Disqualification
Rhodium’s primary jurisdiction for intellectual property, patent-related and defense work is the State of California, and this is the jurisdiction that I am most familiar with. The following article explains the position quite well:-
“Even the most diligent practitioner is susceptible to post-agreement discovery of irreconcilable conflicts of interest. Indeed, conflicts as a result of a joint-defense agreement may arise through no fault of the conflicted attorney or law firm.
For example: Four clients and four law firms wish to enter into a joint-defense agreement. You and your firm diligently perform a conflict check and enter into the agreement. Members of the joint-defense group then share legal memoranda as well as key documents. Later, well into litigation, you learn that one of the law firm members failed to perform an adequate conflict check. Indeed, the other firm had a past representation of an adverse party in a substantially related matter. Under these facts, the firm’s disqualification is a serious risk. In fact, if tainted information was shared within the joint-defense group, disqualification of the entire group may be mandatory.
This scenario illustrates that each attorney member of a joint-defense group necessarily puts a great deal of faith in the other attorneys. So, if you are contemplating such an agreement, make sure you “know” the other attorneys well. One civil case, Essex, illustrates this point. There, a magistrate judge for the District Court of New Jersey issued an order disqualifying all of the law-firm members of a joint-defense group. The order followed the discovery that one of the firms had previously represented the plaintiff on related matters. After that representation, the firm was retained by one of the defendants to defend it in another action. The defendants and their counsel entered into a joint-defense agreement. As a result, the Court found that an implied attorney-client relationship was created between all of the attorney members of the joint-defense group and all of the clients. Moreover, the magistrate ruled that this relationship created an irrebuttable presumption that each firm was privy to plaintiff’s confidential information. Essex Chemical Corp. v. Hartford Accident and Indemnity Co., 975 F. Supp. 650 (D.C.N.J 1997) reversed by District Court Judge in Essex Chemical Corp. v. Hartford Accident and Indemnity Co., 993 F. Supp. 241 (D.C.N.J 1998).
Fortunately for the other law firms, the magistrate’s decision automatically to disqualify them was later reversed by a district court judge. The court ordered a hearing to determine whether confidential information was actually shared with the other law firms. While the other firms were given a chance to avoid disqualification, Essex nevertheless illustrates how far some courts may apply vicarious disqualification.
Joint-defense agreements can give rise to unanticipated conflicts and vicarious disqualification issues. For example, most attorneys are aware that when attorneys change law firms, disqualifying conflicts can result when former clients of the attorney are adverse to the new law firm. See Frazier v. Superior Court, 97 Cal. App. 4th 23, 29-30 (2002). But you might not be aware that joint-defense agreements dramatically expand this risk. Indeed, the risk is two-sided: a conflict can arise if a law firm party to a joint-defense agreement hires a new attorney who formerly represented a party adverse to a member of the joint-defense group. Likewise, if the new attorney, while at a prior firm, worked on matters involving joint-defense agreements, adversity between the new law firm and members of the attorney’s prior joint-defense group may result in a disqualifying conflict on other cases.
A recent case illustrates this scenario. At his prior firm, an attorney representing a party in a joint-defense group was privy to confidential information about a substantially related matter that his new firm was handling adversely to members of the attorney’s former joint-defense group. Although the firm erected an ethical screen to ensure that no information respecting the matter be exchanged with the new attorney, the trial court – applying the automatic-vicarious-disqualification rule (similar to the magistrate in Essex) – disqualified the entire law firm. Panther v. Park, 123 Cal. Rptr. 2d 599 (2002), rehearing denied, review granted, review transferred to Court of Appeal, Panther v. Park, 130 Cal. Rptr. 2d 656 (2003).
Fortunately for the new law firm, the Panther court reversed, holding that such situations merely create a rebuttable presumption in favor of disqualification, which can be rebutted – as was the case there – by a showing that the new law firm implemented effective screening procedures to ensure that confidential information would not be passed to the adverse attorneys. But Panther was de-published and, to date, no California state court case has squarely decided this issue in the joint-defense context. Whether California courts will apply the automatic-vicarious-disqualification rule to this particular scenario remains an open issue.
Law firms contemplating hiring attorneys should consider the following prophylactic measures to reduce the risk of disqualification. First, inquire whether the attorney has worked on any matters where a joint-defense agreement was in place. Second, acquire the names of all parties to the joint-defense agreement. Third, obtain a copy of the joint-defense agreement to determine whether it contains any applicable waiver provisions. Fourth, run a conflict check on the parties to the joint-defense agreement, including the firm’s past “clients.”Fifth, if the firm or the attorney is adverse to any of the members, analyze whether the matters are substantially related. If the matters are not substantially related, an ethical screen respecting that client is advisable.
Ethical Screen – Sufficient?
When a substantially related conflict exists, the situation is more complex and nebulous. Absent an effective waiver provision in the agreement, if the conflict initially goes undetected, it will likely result in automatic disqualification, because the new law firm will not have the opportunity to erect an ethical screen prior to the new attorney’s arrival. Moreover, if the switching attorney was directly privy to relevant confidential documents, it is uncertain whether ethical screens will be sufficient. See Frazier, supra, 97 Cal. App. 4th at 30. In such a situation, it is inadvisable to hire the attorney without first obtaining an enforceable conflict waiver from the client.
Many potential problems can be avoided through careful drafting of joint-defense agreements. Clauses to consider include:
- a disclaimer of any actual attorney-client relationship between an attorney and client other than the pre-existing client of that attorney, and that no such relationship will be deemed to arise by implication (Important to avoid future waiver of privilege)
- a repudiation of the existence of any duty of loyalty (as opposed to a duty of confidentiality) between an attorney for anyone other than the attorney’s own client
- a waiver of the right to seek the disqualification of the attorney members based on access to joint-defense materials
- a waiver of the right to object to counsel for the other clients acting adversely towards them in this or other litigation
- a description of the parameters by which joint-defense materials may be used by the group members and their counsel
- a representation that the sharing of joint-defense materials is in the parties’ common interest reasonably necessary to achieve the purpose for which their attorneys were engaged (This is the triggering language for the joint-defense privilege)
- an ethical screen limiting document access to only those attorneys actually working on the matter
- a representation that all of the attorneys have performed thorough conflict checks (This reduces the risk of vicarious disqualification)
- a method for clients and their attorneys to withdraw from the agreement and to provide notice to the other parties
And this is only to name a few possible clauses, as the particulars of each agreement will vary greatly depending on the nature of the case (i.e., civil or criminal), the facts, and the parties’ unique goals. Moreover, what you put in the agreement can significantly avoid the risk of disqualification. For these reasons, it is highly recommended that you consult with a practitioner experienced in crafting such agreements.
Careful Crafting a Must
Two federal criminal cases, Henke and Stepney, illustrate the importance of careful crafting of such agreements. United States v. Henke, 222 F.3d 633; Stepney, 246 F. Supp. 2d 1069. In Henke, the Ninth Circuit Court of found that: “[a] joint defense agreement establishes an implied attorney-client relationship with the co-defendant….[¶] This privilege can also create a disqualifying conflict where information gained in confidence by an attorney becomes an issue….”Henke, 222 F.3d at 637. In Henke, the agreement apparently did not contain a waiver of the right to seek disqualification of counsel or the right to object to the use of joint-defense materials. And, under such circumstances, the court found that information obtained by the defense attorneys resulted in a disqualifying conflict when one of the defendants elected to testify for the government.
The Henke decision, standing alone, is particularly troubling, as it could be argued that joint-defense agreements create a presumption of a broad implied attorney-client relationship that could result in an array of disqualifying conflicts. But such an expansive interpretation is not warranted.
Indeed, in Stepney, a February 2003 criminal decision, Judge Patel of the Northern District of California reached the opposite conclusion. The court held that joint-defense agreements merely create a duty of confidentiality, which is limited to information actually shared within the group, and that the agreement does not create a “true”attorney-client relationship, implied or otherwise, between the attorneys and the other group members. Indeed, the court expressly distinguished obligations created by joint-defense agreements with those created by actual attorney-client relationships.
Moreover, finding that there is no duty of “loyalty”in the joint-defense context, Judge Patel rejected the automatic-vicarious-disqualification rule, explaining that “no conflict of interest arises unless the attorney actually obtained relevant confidential information.” Id. at 1080-81 (emphasis added).
In Stepney, the court – taking a uniquely proactive stance 1 – required joint-defense agreements to be in writing and submitted to the court for review in camera prior to going into effect. Indeed, the court raised many issues sua sponte in an effort to control the docket by avoiding last-minute withdrawal or disqualification. To this end, the court reviewed existing agreements in the case, analyzed them and ordered revised agreements in conformity with the court’s ruling. Specifically, to avoid disqualification issues as in Henke, the court ordered that the agreements be amended to add waiver provisions, as well as clauses respecting the scope and nature of the relationship between the various clients and attorneys. Id. at 1086.
The contrast between Henke and Stepney dramatically illustrates the need for careful crafting of such agreements. Indeed, based on the Stepney court’s proactive ruling, the court apparently considers waiver provisions in joint-defense agreements to be enforceable notwithstanding the Henke decision. Thus, the failure to put a likely enforceable waiver provision into such agreements could be an unnecessary and fatal mistake.
Implied Attorney-Client Relationships & Privilege Waiver
But what happens if your client and another member of joint-defense group become adverse in litigation? One concern is potential waiver of the attorney-client privilege. For example, under the California Evidence Code, the attorney-client privilege is waived respecting communications and advice between co-parties of the same attorney or law firm. Evid. Code § 962. If a court decides that you represented the entire group, then your client may have waived the privilege as it pertains to future actions with other group members. On the other hand, if it is clear that each client is represented solely by its own attorney as should be explicitly provided in the agreement Â– section 962 will likely not apply. First Pacific Networks Inc. v. Atlantic Mutual Ins. Co., 163 F.R.D. 574, 580 (N.D.Cal. 1994) (under California law, the exception to the attorney-client privilege created by section 962 only applies to co-clients of the same attorney(s)).
To reduce the chances of waiver, the agreement should include a clause repudiating the right to assert such a waiver and an affirmative waiver of section 962, along with a recitation of its text.
In addition to characterizations and disclaimers, you have to avoid taking actions that can be construed as creating an attorney-client relationship. Indeed, even seemingly innocuous conduct might give rise to an implied attorney-client relationship. It is not uncommon for members of joint-defense groups to attend hearings on the other members’ behalf. But, however innocent, this can arguably create an attorney-client relationship. For example, at a case management conference, “counsel for each party and each self-represented party must appear personally….” Cal. Ct. Rule 212(b)(1) (emphasis added). If a joint-defense agreement does not expressly repudiate an attorney-client relationship, such an appearance might later support a motion to disqualify.
This is but another example of the need to carefully craft joint-defense agreements that expressly define the roles and relationships of the attorneys and clients.
The decision to enter into a joint-defense agreement should be carefully taken; the benefits, such as efficiency and information sharing, must be weighed against the risks of disqualification and privilege waivers. And the agreement must be carefully crafted to minimize risks and maximize benefits, all within the context of the client’s unique circumstances and goals.”