Conflicting values

As law firms get bigger the scope for conflicts gets greater. Francis Menton asks whether UK firms can learn from their US counterparts' stricter rules

The recent spate of conflict of interest difficulties afflicting large London firms has left some asking: has the US got a better system? In a few respects, the US does have more definite rules than its UK brethren, which may lead to avoidance of some of the most egregious conflict problems, albeit at the cost of some valuable flexibility, but the differences are at the margin.

The majority of the conflict of interest problems faced by both US and UK firms are inherent in a complex modern economy, where large institutions participate simultaneously in different roles and in dozens or hundreds of transactions and lawsuits.

If the US has one notable advantage over the UK in avoiding conflict problems, it is undoubtedly the much greater number of large law firms capable of handling big matters.

On the face of it, the US ethics rules give almost no meaningful guidance on difficult conflict issues. The Code of Professional Responsibility, applicable in New York, instructs that lawyers are to avoid representing “differing interests” or undertaking “multiple employments” that would “adversely affect independent professional judgment”.

So can your firm represent Coca-Cola in one matter and Pepsi in an unrelated matter? Both Coke and Pepsi would tell you that you cannot do it, but legal ethicists would unanimously agree that the ethical rules do not prohibit it, notwithstanding that a straight reading of the rules might leave you unsure as to whether it applied or not.

To find some bright-line rules, one needs to consult court decisions and opinions of bar association ethics committees. This is no easy task when courts come in a bewildering jumble of 50 states, where the text of the ethical rules varies from state to state, and where multiple bar associations are actually competing businesses with overlapping jurisdictions. However, some bright-line principles have emerged with unanimous, or near unanimous, agreement among the competing US authorities.

One such principle is that one firm may not represent both plaintiff and defendant in the same lawsuit. A second such principle is that a firm which represents a client may not, without a waiver, simultaneously conduct a lawsuit against that client on any matter, even if the matters are unrelated. The first of these principles is one of the few things in the world of conflicts that seems obvious to everyone. The second, despite substantially universal acceptance in the US, is by no means established in Europe.

But one quickly gets beyond the bright-line rules. Can a firm represent a corporate client and simultaneously sue the first client's wholly-owned subsidiary on behalf of another client? A contentious opinion from a committee of the American Bar Association – 12 votes in favour, eight dissenting – answered “it depends”. Court decisions from various US jurisdictions reach conflicting results.

Can a law firm represent the debtor in a major bankruptcy, while simultaneously representing some of the creditors in unrelated matters? For the largest bankruptcies – such as the recent cases of Enron, WorldCom, Conseco and Adelphia – only a handful of law firms with the largest restructuring groups have the resources to undertake the matter. Because each of the huge bankruptcies has thousands of creditors, every one of the potentially qualified law firms represents at least dozens of those creditors in many matters.

There does not exist any perfectly clean solution to this problem. In some of the largest bankruptcies, US bankruptcy courts have taken to appointing special 'conflicts counsel' to handle discrete matters when the primary counsel has a conflict due to representation of a particular counterparty. But primary counsel continues to advise on overall strategy. The special counsel approach does not eliminate conflicts, but manages them in the most practical manner under the circumstances.

In a corporate transaction between company A and company B, where B has retained another firm, can your firm represent A, even though your firm represents B in some completely unrelated matters? US lawyers would generally not view this situation as posing an ethical conflict; Europeans even less so. But in the litigious US, some seemingly friendly transactions inevitably descend into war. At that point we confront the bright-line rule that as long as our work for B continues, we may not represent A in a lawsuit against B or any matter. So then may we fire B as client in order to bring a suit against it on behalf of A? Unfortunately, there is another bright-line rule covering that one – we cannot do it. Careful lawyers in the US anticipate these possibilities when beginning a transaction across the table from any regular client.

Even in law firms that treat conflict issues with great seriousness, conflict of interest difficulties can arise from three different sources – insufficient carefulness, unanticipated developments in matters, and the unwise pushing of the ethical boundaries.

It is easy to advocate taking sufficient care to avoid conflicts. But in an era of giant law firms with thousands of clients, avoiding coming up against yourself is easier said than done. Clients are formed, change names, and buy and sell pieces of themselves with dizzying speed. Clients with common names such as American this, or General that, cause the generation of massive conflicts reports, where a significant conflicting matter can be buried on page 43.

Even perfect carefulness cannot eliminate unanticipated developments in ongoing matters. You might represent A in a lawsuit against B. As you learn more about the facts from B, it becomes clear that C must be joined as an additional defendant. But C is an ongoing and important client of your firm. What now? The ethics rules, as interpreted by the US courts, say that you may not, at least without client or court permission, sue C on behalf of A, nor may you fire A, nor may you fire C in anticipation of suing it on behalf of A. Your options are to beg either A or C or both for indulgence, or throw yourself on the mercy of the court. Worse, you can be sure that in hindsight many fair-minded judges would say that it should have been obvious to you from the outset that the claim against C would need to be brought.

Pushing the ethical boundaries should never be the reason to find yourself in a conflict bind, but again it is easier said than done. The pushing may consist of nothing more than convincing yourself, in the preceding example, that the chance of having to bring C into the lawsuit of A against B is exceedingly remote.

Some form of this judgement is inherent in every matter we take on. Every one of our clients is a potential adversary of every other client. Sooner or later we will make an incorrect judgement as to whether a matter is likely to develop so as to demand adversity to one of our other clients.

To some degree, our US bright-line rules may cause us to steer more clear of a developing conflict than one of our UK counterparts would. But our main advantage in avoiding conflicts comes down to no more than the larger number of firms, each with smaller market share, but, in an age of rapid consolidation, this advantage may not last.

Francis Menton is a litigation partner at Willkie Farr & Gallagher