Do You Have Adequate Procedures for Identifying and Dealing with Conflicts of Interest?
Do You Have Adequate Procedures for Identifying and Dealing with Conflicts of Interest?
By Thomas P. Sukowicz, director of Lawyers' Risk Management Services at Hinshaw & Culbertson, LLP. The firm's risk management Web site is located at www.lawyeringlaw.com.
An important part of a firm's risk management program is the system for identifying and dealing with conflicts of interest. The purpose of conflicts checking is to learn in advance of any present and past representations that would either conflict with proposed representation or make a proposed representation unattractive to the firm for business reasons.
Conflict avoidance is important because of the potential that conflicts of interest -- in addition to their negative impact on profitability -- may result in professional discipline, liability litigation, and embarrassment for the firm. It is far easier to deal with a possible conflict of interest before the firm commits itself, its resources, and its reputation to an engagement it should never have undertaken in the first place.
The conflicts most likely to lead to litigation with clients, loss of business, or even professional discipline include those:
-- that involve conflicting obligations to multiple clients in the same matter;
-- where the new client is adverse to a current client in the same matter;
-- where the new client is adverse to another current client in a separate matter;
-- where lawyers' responsibilities to another client, a third person, or themselves may materially limit their representation of the client;
-- where the new client is adverse to a former client in the same or a substantially related matter;
-- where the attorney has confidential information from a former prospective client;
-- that involve personal, financial, or business relationships of an individual member or employee of the firm with the client or the transaction; or
-- in which the results sought or economic interests represented are potentially adverse to the results sought or economic interests desired in another matter by another client.
Within the context of these prohibitions, most difficulties with clients seem to arise out of one of the following situations:
-- when one client has a claim against another client;
-- when there is a significant disparity in the relative merits of the clients' cases;
-- when the clients have different goals, ideas, or attitudes toward the legal matter at hand; or
-- when the clients are competing for limited funds.
In each of these situations, it would be easy for one client to perceive that the lawyer favored the other client at the first client's expense. Thus, a complaint, claim, or bar grievance is more likely to occur when one or more of these factors is present.
Conflicts of interest are best dealt with at the outset of the engagement rather than at some later point during the engagement. If an actual or potential conflict can be identified and dealt with at the beginning by obtaining the client's informed consent to the representation notwithstanding the conflict, or by declining to accept the engagement, the client is less likely to feel betrayed by the lawyer and less likely to make a claim.
To identify and deal with conflicts effectively, the following policies and procedures are recommended.
As conflicts of interest pose serious threats to the firm, the firm should have a written policy that no client or matter will be accepted or handled by the firm or its attorneys without a thorough check for conflicts of interest. The procedure for checking for conflicts should include a consideration of the following kinds of conflicts:
a) current client adverse representation
b) former client adverse representation
c) multiple client representation in the same matter
d) business transactions with and/or investments in clients
e) personal interests conflicting with those of clients
f) business conflicts with existing clients
g) positional conflicts
The firm should designate a partner or committee to deal with issues involving conflicts of interest and to oversee the administration of the policies and procedures regarding conflicts; if it is an individual partner, the firm should also designate a back-up to handle conflicts issues when the partner primarily responsible is not available.
The firm's conflicts policy should provide that no client or matter that presents an actual or potential conflict of interest will be accepted or handled by the firm or its attorneys without the prior approval of a partner or committee designated by the firm for that purpose.
All attorneys should be required to report conflicts of interest immediately to the designated conflicts partner or committee.
If attorneys personally have an actual or potential conflict of interest with a firm client on whose behalf they are asked to work, or if the attorneys have any question as to whether they can give a client their undivided loyalty, the attorneys should be required to make any such problem affecting any particular client known to the designated conflicts partner or committee.
Client Data Base Check
The firm should maintain in its computer a data base of all former and current clients. When a prospective client or case is being considered, the name of the new client, the adverse party, and other related parties should be run through the firm's data base of former and current clients.
New Client/New Case Memo Circulation
In addition to running a computer check, information about potential new clients and matters should be communicated periodically throughout the firm to help identify additional potential conflicts. Typically this is done by means of a daily or weekly prospective new client memo that is circulated among the firm's attorneys.
The information in the memo should include the following:
a) the client's name
b) the client's parent (or higher) entities
c) the client's subsidiary entities
d) associated or affiliated entities
e) names of all officers and directors of client
f) names of all officers and directors of parent, subsidiary, or related entities
g) names of all providers of information
h) adverse party
i) adverse party's parent, subsidiary, or related companies
j) adverse counsel
k) the nature of the prospective representation
This information should be reviewed by all firm attorneys to determine whether there are any conflicts that are not apparent by merely looking at the parties involved. For example, attorneys should try to identify any potential "issues" conflicts between the prospective client and an existing client.
Conflicts Arising during the Engagement
Sometimes during an engagement, new parties are joined to litigation or become involved in a transaction. The firm's conflicts procedures should include updating conflicts data and performing conflicts checks when new parties become involved in the matter or when the identity of a party has changed (such as with a merger or acquisition of a corporation).
In cases where circumstances cause additional adversaries to come to an attorney's attention after a representation has started, the attorney should be required to submit an amended New Client/Matter Form identifying those additional adversaries. This will ensure that the additional adversaries do not involve the firm in a conflict of interest and that the additional names are added to the conflicts data base.
Financial and Entrepreneurial Conflicts
The firm should have a written policy regarding financial and entrepreneurial arrangements between firm attorneys and firm clients. The policy should either:
a) absolutely prohibit any such arrangements between firm lawyers and firm client, or
b) require the prior consent of the firm and the client to any such arrangements after full disclosure of the terms of the arrangements and the conflict of interest involved.
Officers, Directors, and Trustees of Corporate Clients
Sometimes attorneys are invited to be members of boards of directors of both publicly and privately held corporations, trustees of not-for-profit corporations, and officers of corporations. When such an invitation is extended, whether or not from a client of the firm, the following procedures should be mandatory:
-- No such invitation can be accepted by any attorney of the firm without the prior approval of the managing partner and another partner designated by the firm to consider such matters.
-- When an attorney serves on a board of directors, the organization may consider the attorney to be the corporation's attorney and/or may ask the attorney to render legal advice to the corporation or the board. However, given the dual nature of this relationship, the organization may be found not to have the protection of the attorney-client privilege because of the attorney's separate role as a member of the board. For this reason, an attorney desiring to accept a board position must demonstrate to the firm that the attorney has advised the board of the existence of this issue and the advisability of the attorney attending board meetings only in the capacity as a board member.
-- Unless the firm is satisfied that the holding of such board membership or office is not likely to create a conflict of interest for the firm in its representation of the organization or its other clients, or jeopardize the firm in any way, and that the corporation involved is providing at no cost to the firm and to the attorney appropriate Directors' and Officers' liability insurance and indemnities in an amount satisfactory to the managing partner and another partner designated by the firm to consider such matters, the firm will not approve and will not permit the holding of such membership or office.
Investments in/with Clients
Investments in and with clients may create conflicts of interest and appearances of conflicts of interest that should be avoided. The inherent conflict involved in transactions with clients is recognized by ABA Model Rule 1.8(a), which prohibits the lawyer from entering into a business transaction with a client or knowingly acquiring an ownership, possessory, security, or other pecuniary interest adverse to a client unless:
-- the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood by the client;
-- the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
-- the client consents in writing.
The firm should have a written policy regarding investing in or with firm clients. The policy should either:
a) absolutely prohibit any investments in or with firm clients, or
b) require the prior consent of the managing partner of the firm and the written consent of the client after full disclosure of the terms of the investment and the conflict of interest involved, and after the client is advised in writing to seek the advice of independent counsel.
The essential elements of an effective system for identifying conflicts of interest involves a comprehensive, centralized data base of clients and former clients, and a written firm policy against accepting engagements involving conflicts without the prior approval of a partner designated by the firm to deal with conflicts issues. The final essential element is the firm's commitment to policies like the ones described in this article and its enforcement of those policies.
This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association, Aon and its affiliates, nor the author assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is made available by Aon Direct Insurance Administrators, administrators of the LACBA Sponsored Aon Insurance Solutions Program, to the LACBA members. www.aonsolutions.com
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