Ethics Opinion 272
Conflict of Interests: “Hot Potato”
A law firm may continue to represent a client, which it has long counseled on regulatory matters, in an adversary proceeding before the relevant administrative agency, even after a second client that it represents on unrelated matters hires separate counsel and unexpectedly initiates adversary litigation in that administrative agency against the first client and refuses to waive the conflict.
Where a lawyer-client relationship is on-going, conflict of interest issues involving that client are governed by Rule 1.7(b), not Rule 1.9, and thus the lawyer may not take a position adverse to that client on behalf of another. However, the lawyer may withdraw from the representation of the client if he may do so in accordance with the provisions of Rule 1.16, and after he has done so, the lawyer’s obligations to that client are governed by Rule 1.9.
Applicable Rules
- Rule 1.7 (Conflict of Interest: General Rule)
- Rule 1.9 (Conflict of Interest: Former Client)
- Rule 1.16 (Declining or Terminating Representation)
Inquiry
A law firm has requested our opinion concerning its ability to represent two clients of the firm who are adverse in an administrative proceeding. The firm has represented Client A for a considerable period of time with respect to matters that are regulated by that agency. The firm successfully represented Client A in a completed, non-adversarial matter before the agency and thereafter continued to provide advice regarding matters regulated by that agency. The firm also represents Client B in unrelated contract matters, but has not done any work for Client B in some months. Client B represented by separate counsel, has initiated an adversarial action against Client A before that administrative agency. Client B refuses to consent to the law firm’s representation of Client A in the administrative matter.
The question posed is whether and under what conditions the law firm, consistent with the D.C. Rules of Professional Conduct, may represent Client A in the administrative proceeding initiated by Client B. The Committee concludes that the law firm may represent Client A in that proceeding if the firm is ethically permitted to withdraw from the separate, unrelated representation of Client B. We find that in the circumstances presented by this inquiry withdrawal is permitted under Rule 1.16.
Discussion
The inquiry focuses on the conflict between the firm’s two clients, A and B, in the regulatory proceeding, a conflict that arose through no action of the law firm and that was not reasonably foreseeable at the outset of the firm’s representation of either of the two clients. Fundamental to the resolution of the questions presented is the difference in the standards applicable under the Rules where a lawyer wishes to oppose a present client and where he wishes to oppose a former client. The first issue to be addressed is whether the lawyer may consider his representation of Client B as having ended for purposes of the conflict of interest rules. The second issue, assuming the answer to the first is in the negative, is whether the lawyer may withdraw as counsel to Client B in order to be free to litigate against that party under the less stringent rules governing conflicts of interest with former clients.
Governing Conflict of Interest Rules
Rule 1.7(b)(1) of the D.C. Rules of Professional Conduct provides that, without the fully informed consent of the affected clients, a lawyer may not represent a client in a matter if a position to be taken by that client in that matter is adverse to a position of another client in the same matter. This rule deals with a situation in which the lawyer is representing one client in a matter, such as a litigation or an administrative proceeding, in which another client, which the lawyer represents only in unrelated matters, takes a position adverse to the first client. Rule 1.7 is designed to ensure that an attorney will act with undivided loyalty to all existing clients. Undivided loyalty to a client is, of course, a fundamental tenet of the attorney-client relationship. See Wolfram, Modern Legal Ethics 146 (1986).
A lawyer’s duty to a former client is somewhat different and is governed by Rule 1.9. Under this rule, a lawyer may sue or otherwise take positions antagonistic to a former client, without disclosure and without the former client’s consent, if the new representation is not substantially related to the matter in which the lawyer had represented the former client. The purpose of this rule is to assure the preservation of attorney-client confidences gained in the prior representation and to preserve the reasonable expectations of the former client that the attorney will not seek to benefit from the prior representation at the expense of the former client.
If the fact situation presented by the inquiry were governed by Rule 1.7(b), it is clear that the law firm could not undertake the representation of Client A in the regulatory proceeding in which the firm’s Client B was a party with separate representation, without the informed consent of both Clients A and B. On the other hand, if the firm’s representation of Client B were at an end at the time Client A sought the firm’s assistance against B, the situation would be governed by Rule 1.9 instead of Rule 1.7. In that situation, there would be no impediment to the firm’s representing Client A against former Client B as long as the regulatory proceeding was unrelated to the firm’s prior representation of former Client B.
Whether Client B Should Be Regarded as a Current Client
In light of the difference in the conflict of interest rules governing present and former clients, it is important to determine at the outset whether B should be regarded as a current or a former client. In many instances, such a question can be easily answered from objective facts. If the lawyer had previously withdrawn from the representation of Client B under Rule 1.16, the withdrawal would have terminated the relationship and converted the client into a former client. Or, if the firm had completed the single discrete task for which it had been retained, the client is a former one. Such is the situation envisioned in Comment [8] to Rule 1.3: “If a lawyer’s employment is limited to a specific matter, the relationship terminates when the matter has been resolved.” That could be the situation presented to us in this inquiry, as the law firm completed all tasks for Client B and there has been no communication between them for some months.
On the other hand, certain facts are presented which suggest that the attorney/client relationship is continuing in this situation with respect to Client B. We are informed that the inquiring law firm is from time to time consulted by B on contract matters, which may indicate a continuing relationship punctuated by periods of inactivity. B appears to have a subjective belief that it continues to be a client of the firm. Since a reasonable subjective belief can be the basis for the formation of an attorney/client relationship (see Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir. 1978)), it may also be the basis for the continuation of the relationship. The inquirer, moreover, refers to B as a client in its inquiry, and the inquirer sought B’s consent to the representation of A in the administrative proceeding. With additional facts which may or may not be present here, another sentence of Comment [8] to Rule 1.3 could apply and lead to the conclusion that B remains a client:
If a lawyer has served a client over a substantial period in a variety of matters, the client sometimes may assume that the lawyer will continue to serve on a continuing basis unless the lawyer gives notice of withdrawal. Doubt about whether a client-lawyer relationship still exists should be eliminated by the lawyer, preferably in writing, so that the client will not mistakenly suppose the lawyer is looking after the client’s affairs when the lawyer has ceased to do so.
While additional facts might affect our determination, we assume, on the facts presented and for purposes of this analysis, that B is a current client of the inquiring law firm.
Whether the Lawyer May Withdraw From Representing Client B
If B is a current client, the question then arises whether the lawyer may withdraw from representing Client B and invoke the more lenient conflict of interest provisions of Rule 1.9 to determine his obligations to his former client. Rule 1.16(b) provides, in relevant part, that a lawyer may withdraw from representing a client only if withdrawal can be accomplished without “material adverse effect” on the interests of the client.
Under the facts presented here, we conclude that the firm may withdraw under Rule 1.16(b) because it appears that withdrawal as counsel from Client B can be accomplished without “material adverse effect” on Client B. All projects for Client B have apparently been completed; no work had been done on the unrelated contract matters for several months; no outstanding projects appear to be contemplated imminently; and Client B was able to obtain different counsel, as reflected by the fact that B retained other counsel to represent it in connection with the administrative proceeding.
Relevance of Rule 1.7(d)
Our conclusion respecting the permissibility of the firm’s representation of Client A against Client B is consistent with newly promulgated D.C. Rule 1.7(d). While this provision does not in terms apply in this situation, we believe it provides guidance and support for our resolution of this matter under Rule 1.16.
Rule 1.7(d) deals with the situation in which a law firm is representing two clients simultaneously in unrelated matters, and thereafter adversity between the clients’ positions in a particular matter develops or for the first time becomes apparent.1 Thus, under this Rule, if the law firm had been representing Client A in an ongoing administrative proceeding and Client B, represented by separate counsel, unexpectedly intervened in the administrative proceeding taking positions adverse to Client A, then the law firm would be able to continue both representations so long as it reasonably concluded that neither representation would interfere with the other.2
If the lawyer is currently representing both Client A and Client B, why then does Rule 1.7(d) not control in this situation, since one client has retained other counsel and preemptively sued the other? The answer is that when Rule 1.7(d) speaks in terms of a conflict not foreseeable “at the outset of a representation,” we believe that this means representation in a particular discrete matter, as contemplated in Rule 1.7(b).
While it would not be unreasonable to interpret the phrase “outset of a representation” to mean the client’s initial retention of the lawyer on any matter, it is clear from the context of Rule 1.7(d) that the drafters had in mind the outset of representation in the discrete matter in which the unforeseen conflict arises. The narrow exception to Rule 1.7(b) carved out by the new subsection (d) addresses the situation in which one client potentially has the power to disable the law firm from its ongoing representation of another client in a particular matter already in progress, simply by intervening in the proceeding with separate counsel, which would of course result in substantial prejudice to the client deprived in midstream of its lawyer.3
It would be a considerable step beyond this narrow class of “thrust upon” conflicts to extend Rule 1.7(d) to situations where, as here, there is a current general “representation” of a client but the matter in which adversity develops has not yet begun. Such an expansive reading of Rule 1.7(d) would, we believe, make a larger inroad into the protections of Rule 1.7(b) than the drafters of Rule 1.7(d) intended. Thus, we believe that Rule 1.7(d) does not apply where a law firm represents two clients on unrelated matters and thereafter one client decides to sue the second client in a new matter. In this situation, the law firm may represent one of the clients in the new matter only with the informed consent of both clients.
We believe the facts of the instant inquiry take it outside the terms of Rule 1.7(d), since there was no discrete matter in existence prior to the time that Client B initiated the proceeding against Client A. On the other hand, the concerns underlying the enactment of Rule 1.7(d) are clearly implicated here, since Client B’s initiation of an action against Client A in a forum in which Client A would reasonably have expected to be able to avail itself of the services of its long-standing lawyers, would work precisely the same sort of “substantial prejudice” towards Client A about which the drafters of the “thrust upon” rule were concerned. We are thus reassured that our conclusion in this situation, that the firm should be able to represent Client A by withdrawing from its representation of Client B if allowed by Rule 1.16, is consistent with the overall policies of the rules.
In sum, we believe that the law firm should be able, under the circumstances presented, (i) to withdraw as counsel to Client B, rendering it a former client; and (ii) to continue thereafter, consistent with Rule 1.9, to represent A in the administrative proceeding, taking positions adverse to former Client B provided that the matter is not substantially related to the work that the law firm did for Client B.
Analysis of Precedents
In reaching our conclusion, we are mindful of a line of judicial authority and opinions of Bar committees in other jurisdictions that severely limit a lawyer’s ability to terminate a client once a potential conflict arises in order to be able to take positions adverse to the erstwhile client. See, e.g., Picker Intl., Inc. v. Varian Assoc., Inc., 869 F.2d 578 (Fed. Cir. 1989); Unified Sewerage Agency v. Jelco, Inc., 646 F.2d 1339 (9th Cir. 1981); Penn Mutual Life Ins. Co. v. Cleveland Mall Associates, 841 F. Supp. 815 (E.D. Tenn. 1993); Harte Biltmore Ltd. v. First Pennsylvania Bank, 655 F. Supp. 419 (S.D. Fla. 1987). These cases have been cited for the broad proposition that “a law firm may not withdraw from a representation where the purpose is to undertake a new representation adverse to the first client, even in an unrelated matter, and apparently even if the withdrawal would not have an adverse impact on the client.” Hazard & Hodes, The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct, p. 480.1 (1996). As noted in the Hazard & Hodes handbook, this rule has come to be called the “hot potato” rule as a result of the colorful statement by District Court Judge Aldrich in Picker Intl., Inc. v. Varian Assoc., Inc., 670 F. Supp. 1363, 1365 (N.D. Ohio 1987), aff’d, 869 F.2d 578 (Fed. Cir. 1989): “A firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more lucrative client.”
We believe this line of authority does not govern the instant inquiry, for several reasons. In the first place, none of these cases was decided by a District of Columbia court; none was interpreting the D.C. Rules; and none of the cases arose in the District of Columbia. We are not aware of a District of Columbia court decision that addresses the issue. Second, and more important, we believe that the cases and bar opinions from the other jurisdictions are distinguishable on the facts presented by this inquiry, as well as by differences in the applicable rules.
We believe that the facts presented here make clear that the broadest statement of the so-called “hot potato rule” is too categorical to apply in all circumstances and is inconsistent with the optional withdrawal provisions of the D.C. Rules. As Professors Hazard and Hodes noted: “The [‘hot potato’] rule will not wash if applied uncritically, whenever a lawyer drops a client for the purpose of suing that client on behalf of someone else.” Id. at 480.2 (emphasis in original). These noted ethics professors further observe that the approach is “certainly inconsistent with the permissive withdrawal scheme of Rule 1.16(b)” and that a definition of loyalty broad enough to encompass the mere act of dropping a client “would convert the client-lawyer relationship into one of perpetual servitude.” Ibid.
In each of the cited cases in which a lawyer was disqualified from continuing a representation of a client, the lawyer had affirmatively undertaken action — such as initiating a law firm merger — which created the potential conflict. In each of the cases, the representation of the client, whose termination was proposed, was active. Further, each jurisdiction involved had adopted Canon 9, of the former Code of Professional Responsibility, which provides that in all matters an attorney must avoid even the “appearance of impropriety.” The D.C. Rules deliberately do not include any provision focusing on the appearance of impropriety. See Paragraph [32] Explanation of Committee and Board Revisions, Rule 1.7 of Proposed Rules of Professional Conduct submitted to the District of Columbia Court of Appeals, Nov. 19, 1986, by the Board of Governors of the District of Columbia Bar. Finally, none of the jurisdictions had a “thrust-upon” conflicts rule like D.C.’s Rule 1.7(d), which allows an attorney to remain in a matter after an unforeseeable conflict has arisen. In all of these respects, these cases from other jurisdictions are distinguishable.
It does not appear from the facts of this Inquiry that the law firm had any role in creating the conflict between the two clients, and indeed it had no reason to anticipate that such a conflict would develop when it undertook the representation of A in the administrative agency matters. Nor was the firm currently actively engaged in representing Client B in any particular matter, such that its withdrawal might work some prejudice to Client B.
We believe that the approach taken by the Alabama Supreme Court in AmSouth Bank v. Drummond Company, Inc., 589 So. 2d 715 (Ala. 1991) is instructive. In that case, a firm represented Client A in a litigation and Client B, a bank, in unrelated securities matters. During the course of the litigation, Client B, in its fiduciary capacity as a trustee, retained separate counsel and joined the lawsuit against Client A. Client A agreed to waive the conflict, but Client B refused. The law firm promptly withdrew as counsel for Client B and continued to represent Client A in the lawsuit. Former Client B then moved to disqualify the law firm. The Alabama Supreme Court held that the law firm had acted properly in withdrawing as counsel to Client B in the suit because the litigation was not related to the matters on which the firm had represented Client B.
In considering the interplay among Rules 1.7, 1.9 and 1.16 of the Alabama Rules of Professional Conduct—which are similar, but not identical, to the provisions under which we operate in the District of Columbia—the AmSouth Court stated that the Rules of Professional Conduct are “rules of reason,” and that it had always employed a “common sense” approach to questions concerning the professional conduct of lawyers. The Court emphasized four factors in reaching its conclusion that the law firm acted properly in withdrawing as counsel to Client B and thereby treating Client B as a former client for purposes of the conflict rules:
- The law firm did not by its actions create the conflict of interest; rather, Client B had taken the initiative;
- Client A would be substantially prejudiced by the withdrawal of the law firm, which had already devoted hundreds of hours to the defense of A in the litigation;
- The law firm, after failing to obtain consent, promptly withdrew from representing Client B; and
- Client B would not be materially prejudiced by the withdrawal of the firm as its counsel on the unrelated matters which had consumed very few hours to that point.
While the fact patterns are diverse, a number of other courts have taken a common sense approach to conflict issues in analogous circumstances, permitting the matter to be resolved by withdrawal from representation of a client, where little or no prejudice will result to that client. See, e.g., Monaghan v. S2S 33 Associates, L.P., 1994 WL 623185 (S.D.N.Y. Nov. 9, 1994); In re Wingspread Corp., 152 B.R. 861 (Bankr. S.D.N.Y. 1993); Pearson v. Singing River Medical Center Inc., 757 F. Supp. 768 (S.D. Miss. 1991); Gould, Inc. v. Mitsui Min. & Smelting Co., 738 F. Supp. 1121 (N.D. Ohio 1990); Hartford Accident & Indemnity Co. v. RJR Nabisco, Inc., 721 F. Supp. 534 (S.D.N.Y. 1989); Penwalt Corp. v. Plough, Inc., 85 F.R.D. 264 (D. Del. 1980).
In responding to the instant inquiry, we adopt the “common sense” approach of the Alabama Supreme Court in AmSouth, encouraged in this course by the recent adoption of D.C. Rule 1.7(d). We believe that the same four factors used by the AmSouth Court should be analyzed and balanced in cases when the conflict between two clients is unforeseen and does not arise during the course of a discrete ongoing matter.
On the other hand, we also strongly agree that the important values of client loyalty and confidence of the public in the bar preclude an interpretation of the rules that would enable a lawyer or a law firm to abandon a client during an active representation in anticipation of pursuing another, perhaps more lucrative, conflicting representation. If, for example, a lawyer were in the midst of representing a client when a prospective client came along seeking the lawyer’s assistance in bringing a potentially rewarding lawsuit against the existing client in an unrelated matter, we believe that withdrawal from the existing representation under those circumstances would not be permissible under Rule 1.16. Our analysis of such a situation would be that virtually by definition the existing client would suffer material adverse harm by the withdrawal.
Thus we would view the situation quite differently if A were a prospective new client who had approached the law firm to seek the firm’s services in a suit against B, an existing client of the firm. In that situation, there is the specter that the law firm was chosen precisely because it had represented the prospective defendant and thus the firm may presumptively be aware of certain facts or attitudes of the prospective defendant that could be useful to the potential new client. Second, in such a situation there is by definition no prior relationship between the prospective client and the law firm and thus there would be no apparent prejudice in requiring the prospective client to find other counsel. Third, the withdrawal of the firm from providing ongoing services for the existing client would almost certainly result in some prejudice, disruption or additional expense for the existing client. Each situation must be analyzed on its facts. In general, we suggest that the more the potential conflict was caused by the actions of the attorney for the benefit of the attorney and/or a prospective or other client, the less justifiable will be the firm’s effort to withdraw and to treat the conflict under the principles applying to former clients. If, as a result, the firm is unable to withdraw, the conflict will have to be analyzed under Rule 1.7. Where, however, as here, A is an existing client with a legitimate and longstanding claim to his lawyer’s loyalty and services; where the unrelated matters for Client B had been completed, and the withdrawal can be made without material adverse effect on Client B; where the conflict was precipitated by Client B without any participation by the law firm; and where Client A would suffer material adverse effect by withdrawal, we believe a common sense reconciliation of the competing principles of professional responsibility permits the lawyer to terminate representation of Client B and to treat B as a former client under Rule 1.9. Of course, the withdrawal would have to be effected in a manner conforming to Rule 1.16, which includes a clear communication to the former client. It is also assumed that no confidential information obtained from Client B would be used in any way in the representation of Client A.
It is important to emphasize that in the question presented by the inquiry it is clear that the law firm was required to withdraw from at least one representation. The law firm either had to forego representing Client A in the administrative proceeding or cease representing Client B in the unrelated matters. Because the firm faced that choice and because at least one client was going to lose the firm’s services for some purposes, it is pertinent to consider the competing equities, including the relative potential prejudice to each client from withdrawal of the representation of that client.
Practical Considerations
The inquiry highlights the importance of distinguishing between existing and former clients. We are aware that in many situations the relationship between an entity and a lawyer or law firm is ambiguous. For example, a corporation, not providing a retainer, may call upon a law firm from time to time for legal advice, paying on a per hour basis for services rendered. During the hiatus between the last call and before another possible request for advice, it may be unclear whether the corporation is an existing client or simply a former and prospective client. Absent an express termination, a court will likely examine the subjective expectations of both parties, as evidenced by their relevant conduct, to determine whether the attorney-client relationship continues. See, e.g., Manoir-Electroalloys Corp. v. Amalloy Corp., 711 F. Supp. 188 (D.N.J. 1989); Derrickson v. Derrickson, 541 A.2d 149 (D.C. App. 1988).
For a variety of reasons, including but not limited to the differing conflict rules applicable to existing and former clients, lawyers would be well advised to take steps to delineate the relationship clearly. This may be addressed in part by clearly defining in writing the project or services to be rendered at the outset of the retention. A termination clause may be included in the engagement letter, providing that upon completion of the described services and payment, the attorney-client relationship will be concluded. Alternatively, a law firm may deem it advisable to send close-out letters, politely concluding the relationship, when the assignment is completed. Similarly, it may be prudent for a law firm to comb its client list periodically and advise in writing entities or individuals for whom it has not performed legal work for a substantial period of time that the law firm deems the person or entity to be a former client. While such clarity, even if diplomatically communicated, may not always serve the best business interests of the law firm, an unambiguous statement of the relationship prior to the development of a potential conflict will serve both parties’ interests better when a potential conflict is raised in the courts or before an ethics committee.
Conclusion
For the reasons discussed above, we believe that after Client B initiated an administrative proceeding with separate counsel against Client A, the law firm was entitled to withdraw from the unrelated representation of Client B, to treat Client B as a former client under the conflict rules and to continue to represent Client A, which it had long counseled in this area of the law, in the administrative proceeding.
Inquiry No. 96-5-14
Adopted: May 21, 1997
1. Made effective by the D.C Court of Appeals as of November, 1996, Rule 1.7(d) provides:
If a conflict not reasonably foreseeable at the outset of a representation arises under paragraph (b)(1) after the representation commences, and is not waived under paragraph (c), a lawyer need not withdraw from any representation unless the conflict also arises under paragraphs (b)(2), (b)(3), or (b)(4).
2. Under new Rule 1.7(d) and its commentary, the law firm should promptly inform both clients of the situation and seek their informed consent. Comment [22] to the Rule states: “Where a conflict is not foreseeable at the outset of the representation and arises only under Rule 1.7(b)(1), a lawyer should seek consent to the conflict at the time that the conflict becomes evident, but if such consent is not given by the opposing party in the matter, the lawyer need not withdraw.”
Accordingly, even if the client/opposing party does not consent, the law firm may continue both representations if it concludes that neither representation will be adversely affected by the simultaneous representation of the clients in the separate matters. Of course, either client is free to terminate the representation.
3. The prototypical situation covered by Rule 1.7(d) is where a lawyer represents a client in a litigation in which a second client, represented on unrelated matters, is at the outset neither a party nor a contemplated party. If, without any reasonable foreseeability, the second client takes an adverse position in that litigation, it would be quite unfair to disqualify the lawyer from representing the client that he had been representing in the ongoing litigation. Thus, under Rule 1.7(d), even if the second client refuses to consent, the lawyer may continue to represent the first client in the litigation.
