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  Los Angeles Lawyer
The Magazine of the Los Angeles County Bar Association
 
  November 2006     Vol. 29, No. 9

 
 

MCLE Article: Dangerous Liaisons

Relationships between associated firms may be scrutinized under the same standards that apply to of counsel

By Andrew I. Dilworth

Andrew I. Dilworth is a partner at Cooper, White & Cooper LLP in San Francisco, where he specializes in professional responsibility.

 
 

By reading this article and answering the accompanying test questions, you can earn one MCLE credit. To apply for credit, please follow the instructions on the test.

 
 

In today's increasingly consolidated marketplace, more lawyers and law firms are entering into strategic relationships that differ from classic merger or employee/shareholder models. These relationships are cast in various terms such as affiliations, alliances, associations, and joint ventures. Information about the existence of these relationships is communicated to the public through press releases, media statements, firm letterhead, and other public representations. While these relationships can offer obvious benefits to the parties involved and to their clients, they may also carry increased burdens regarding conflicts analysis and the ethical obligations imputed to the parties to the relationship.

In California a lawyer who is of counsel to a law firm is deemed part of the law firm for conflicts purposes. This includes the imputation of conflicts.1 Lawyers and their of counsel affiliates are effectively regarded as a single de facto firm. The current and former clients of each lawyer therefore become relevant to all the lawyers' respective ethical obligations and potential disqualification motions. The State Bar of California Standing Committee on Professional Responsibility and Conduct has opined that an entire firm, not just an individual lawyer, can be of counsel to another firm--and the treatment of the parties as a de facto firm affects the analysis of conflicts.2 De facto firm treatment can exponentially increase the conflicts applicable to each party's conduct.

The analysis of the situation involving of counsel lawyers does not resolve whether lawyers or law firms who enter into affiliations, associations, alliances, and other strategic relationships but do not present themselves as of counsel to one another carry similar burdens regarding conflicts or are insulated from treatment as a de facto firm. While California courts have not directly addressed the issue, some observations can be made based on existing case law and related ethics opinions. Indeed, if the relationship of the lawyers or law firms is deemed "close, personal, continuous and regular" by a court--either as a matter of presumption or as a matter of fact--the parties may be treated as a de facto firm notwithstanding the designation they place on their relationship.

The term "of counsel" has specific meaning under California law. It requires, at a minimum, a relationship that is "close, personal, continuous, and regular"3--a definition embodied in case law and in the California Rules of Professional Conduct.4 A communication that states or implies that a party is of counsel is presumptively false and misleading if the relationship cannot be characterized by the four-word definition.5

The SpeeDee Oil Standard

In People v. SpeeDee Oil Change Systems, Inc., the California Supreme Court held that the essence of the relationship between a firm and an attorney of counsel "is the closeness of the 'counsel' they share on client matters."6 According to the court, "This close, fluid, and continuing relationship, with its attendant exchanges of information, advice, and opinions, properly makes the of counsel lawyer subject to the conflict imputation rule, regardless of whether that attorney has any financial stake in a particular matter."7 This type of relationship, the court concluded, is distinguishable from a cocounsel relationship and "justif[ies] a presumption that client confidences will be disclosed and exchanged in informal consultations. Hence, the conflict of interest of one will be imputed to the other, with the consequence that disqualification must follow."8 The broad sweep of the court's decision in SpeeDee Oil is captured in its treatment of the of counsel attorney as a de facto member of the other party's practice:

From the clients' and the public's perspective, the of counsel attorney can hardly be distinguished from other attorneys who may be more closely tied to a firm financially. As a result, the need to preserve confidentiality and public confidence in the integrity of the legal profession and judicial process require that of counsel attorneys be regarded as the same as partners, associates, and members of law firms for conflict of interest issues.9

While SpeeDee Oil involved concurrent representation of adverse interests in the same matter (albeit for a very brief period),10 the language of the opinion suggests that the imputation of conflicts in close, personal, continuous, and regular relationships may be equally applicable to former representations involving substantially related matters and the attendant concerns regarding confidentiality.11

In an ethics opinion that predates SpeeDee Oil by almost 15 years, the American Bar Association's Committee on Ethics and Professional Responsibility12 concluded that a statement on firm letterhead that a firm is "affiliated" or "associated with" another firm or lawyer also implicates a de facto firm standard for disqualification purposes.13 Although California has no case law directly on point, at least one federal decision has adopted the ABA's view.14

Given the rationale in SpeeDee Oil and the opinions prior and subsequent, it is foreseeable that a California court could apply a de facto firm standard to affiliations, associations, alliances, and other strategic relationships that are deemed to be close, personal, continuous, and regular. Parties entering into these types of relationships would be well advised to incorporate each other into their conflicts-checking systems and apply the necessary conflicts analysis. Similarly, attorneys wanting to avoid broad de facto firm treatment should give careful consideration to the representations they make about the scope and nature of their relationships with other attorneys.

In Formal Opinion 1993-129, the State Bar of California Standing Committee on Professional Responsibility and Conduct distinguished three types of relationships as not meeting the of counsel standard: 1) a collaboration for an individual or occasional matter, 2) forwarding or receiving legal business, and 3) infrequent, independent consulting.15 Because SpeeDee Oil considered Formal Opinion 1993-129 in determining that parties in an of counsel relationship should be treated as a de facto firm,16 California courts may not be inclined to apply de facto firm treatment to relationships not meeting the of counsel definition.

At least one federal court has suggested that these three types of non-of counsel relationships--which could be described as "internal" or "case specific" relationships--do not carry the same presumption of shared confidences. They also do not have the same implications as of counsel relationships for the capacity to impair public perceptions of the judicial system.17

SpeeDee Oil contains some support for this view. The SpeeDee Oil court highlighted the significance of making public representations and the corresponding impact these representations have on the perceptions of clients and the public.18 In its opinion the court expressly stated that the of counsel attorney's conflict had to be imputed to the firm "because of the public designation of their relationship."19

Moreover, the court in the SpeeDee Oil case found that a close and personal relationship was "inherent in designating an attorney as of counsel to a firm."20 "Close" and "personal," however, are not terms that automatically describe all other relationships between attorneys about which no public statement was made--through letterhead or otherwise--that would give rise to any implication regarding the availability of the affiliated lawyers' resources to their clients or the sharing of confidences between those lawyers.21

Clearly lawyers who are affiliated in some way but do not publicly broadcast their strategic relationship are still capable of sharing confidential information. If this information is shared, disqualification may still result. Moreover, if the lawyers, as a factual matter, have a close, personal, continuous, and regular relationship, their mutual obligations regarding conflicts may exist despite a lack of any public pronouncements about the relationship.

However, by presenting the relationship to the public via firm letterhead or other public representations, lawyers face an increased likelihood that a court will make certain presumptions, perhaps irrebuttable, about public perceptions despite the actual nature of the lawyers' relationship and any evidence of shared confidences. This danger is particularly acute in matters of concurrent representation. California applies a per se rule of disqualification in such situations--even if the subject matter of the concurrent matters is unrelated.22

Lawyers entering into publicly announced affiliations should be cognizant of the increased burden they may incur as a result of broadcasting their relationship and give careful consideration to what is said publicly about the scope and nature of their work together. Similarly, lawyers who have not made public representations about their relationship should emphasize this fact in marshaling their arguments against being treated as a de facto firm.

Ethical Walls

Lawyers should not rely on the structure of their practices and the placement of ethical walls as a guarantee against the application of a de facto firm conflicts standard. The physical location and arrangement of the parties' practices is not decisive in California. The maintenance of separate staff, different office space, and the absence of any sharing in one another's profits is not a guarantee against de facto firm treatment when the lawyers' relationship is otherwise close, personal, continuous, and regular.23 This fact is underscored by the court's conclusion in SpeeDee Oil that lawyers with a close, personal, continuous, and regular relationship are treated "the same as partners, associates, and members of law firms for conflict of interest issues."24

In California, it is well-settled that conflicts are imputed firmwide.25 This concept was emphasized in a California bankruptcy court ruling three years before SpeeDee Oil. In that case, a lawyer's disqualification was imputed to a firm of approximately 400 lawyers with practices in 16 offices, including 7 foreign countries. The court concluded that the fact the lawyer with the conflict was located in an office in a different state from the location of the of counsel lawyer handling the litigation at issue was "of no consequence" and that "[l]ike an infectious disease, the disqualification affects every lawyer in the law firm, wherever located."26

The imposition of an ethical wall also provides no assurance against de facto firm treatment. In SpeeDee Oil, the court distinguished a number of out-of-state cases in which disqualification was not granted because of ethical walls. The SpeeDee Oil court noted that those cases involved discrete, successive conflicting representations in substantially related matters, not overlapping periods of time in which material confidential information was obtained from parties on opposite sides of the same litigation.27 The court further noted that the out-of-state cases "applied a more lenient approach to conflicts disqualification than prevails in California." The firm at issue, according to the SpeeDee Oil court, had failed "to demonstrate that any formal screening procedure [had] prevented attorneys working on respondents' behalf from being exposed to Mobil's confidences."28 Although actively distinguishing nonbinding authority involving ethical walls, the court did not directly hold that ethical walls could prevent conflict imputation under California law.

Nevertheless, the court's analysis suggests that courts may be willing to consider the impact of an ethical wall in appropriate circumstances. If a conflict arises in the context of successive rather than concurrent representations, parties may argue that they should be allowed to rebut the presumption of shared confidences by showing the establishment of a promptly constructed and effective ethical wall. Lawyers entering into strategic relationships should follow the practice of imposing ethical walls, even though these devices are not a guarantee against disqualification under California law and may be unlikely to have any effect in the context of concurrent representations.

Lawyers who publicly announce their strategic relationship must be cognizant of California's rules regarding attorney advertising and solicitation. The position taken by lawyers entering into affiliated relationships regarding their potential conflicts should be consistent with the actual nature of their relationship and the representations, if any, that they make about it to the public, including any prospective clients. California lawyers are required under Rule 1-400(D) of the Rules of Professional Conduct not to make false or misleading statements to the public. A lawyer who has made public representations suggesting a close, personal, continuous, and regular relationship with another lawyer may be at a disadvantage in a disqualification proceeding if he or she makes inconsistent statements while seeking to avoid the application of a de facto firm conflicts standard. A court is likely to find that the lawyer was less than forthright in arguing that the relationship actually was not close, personal, continuous, and regular--or the lawyer made false or misleading statements to the public about the nature of the relationship. Either way, the lawyer's interests will not be well served. Lawyers involved in strategic relationships should therefore give careful consideration to any public representations they have made about their relationship when addressing conflicts or the applicable conflicts standard in any disqualification proceeding.

Strategic relationships between individual lawyers or law firms can be beneficial to all parties involved, including clients. When lawyers affiliate with one another, they can benefit from increased resources, take advantage of the availability of knowledge from specialized practice areas or geographical locations, and realize cost savings. Lawyers entering into these relationships, however, need to be aware of the increased burdens they may acquire for conflicts purposes. Those lawyers who maintain a close, personal, continuous, and regular relationship would be well advised to incorporate each other into their respective conflicts systems and consider themselves a single firm for conflicts purposes. If a conflict waiver is required by the circumstances of a single firm, prudence would dictate obtaining one. Absent the waiver, the affiliated lawyers are vulnerable to disqualification and potential violations of ethics rules. Lawyers who wish to avoid single firm treatment should give careful consideration to what, if anything, they say publicly about their relationship, since public pronouncements--and any lack of precision in those statements--could increase the likelihood of a more onerous conflicts standard. The use of ethical walls is advisable but should not be considered a guarantee against a finding that the lawyers are a de facto firm.

 
 

Endnotes

1 People v. SpeeDee Oil Change Sys., Inc., 20 Cal. 4th 1135, 1155 (1999).
2 State Bar of Cal., Standing Comm. on Prof'l Responsibility & Conduct, Formal Op. 1993-129.
3 SpeeDee Oil, 20 Cal. 4th at 1153.
4 Cal. Rules of Prof'l Conduct R. 1-400(E), Standard (8).
5 Cal. Rules of Prof'l Conduct R. 1-400(D), (E), Standard (8).
6 SpeeDee Oil, 20 Cal. 4th at 1153.
7 Id. at 1154; see also L.A. County Bar Ass'n Prof'l Responsibility & Ethics Comm., Ethics Op. No. 516.
8 SpeeDee Oil, 20 Cal. 4th at 1155.
9 Id.
10 Id. at 1147.
11 Id. at 1139-40, 1156.
12 See State Comp. Ins. Fund v. WPS, Inc., 70 Cal. App. 4th 644, 656 (1999) (Ethics opinions issued by the ABA Committee on Ethics and Professional Responsibility are not binding in California but may be considered for guidance on proper professional conduct, particularly when California law is silent on an issue.); see also Cal. Rules of Prof'l Conduct R. 1-100(A) (same).
13 ABA Comm. on Ethics & Prof'l Responsibility, Formal Op. 84-351; see also ABA Comm. on Ethics & Prof'l Responsibility, Formal Op. 94-388; but see L.A. County Bar Ass'n Prof'l Responsibility & Ethics Comm., Ethics Op. Nos. 392 & 430.
14 Mustang Enters., Inc. v. Plug-In Storage Sys., Inc., 874 F. Supp. 881, 888-89 (N.D. Ill. 1995); see also Mustang Enters., Inc. v. Plug-In Storage Sys., Inc., No. 94 C 6263, 1995 WL 55226 (N.D. Ill. Feb. 8, 1995) (reconfirming the court's opinion following issuance of ABA Comm. on Ethics & Prof'l Responsibility, Formal Op. No. 94-388).
15 State Bar of Cal., Standing Comm. on Prof'l Responsibility & Conduct, Formal Op. 1993-129.
16 SpeeDee Oil, 20 Cal. 4th at 1154.
17 Mustang Enters., 874 F. Supp. at 889.
18 SpeeDee Oil, 20 Cal. 4th at 1153.
19 Id. at 1156; Mustang Enters., Inc., 874 F. Supp. at 889.
20 SpeeDee Oil, 20 Cal. 4th at 1155.
21 Contrast Speedee Oil with ABA Comm. on Ethics & Prof'l Responsibility, Formal Op. 84-351 ("When a law firm lists another as 'affiliated' or 'associated' with it, potential clients of the listing firm are led to believe that lawyers with the 'affiliated' or 'associated' firm are available to assist in the representation, at least in matters that the designation may describe. The client ordinarily also expects that lawyers of the 'affiliated' or 'associated' firm will not simultaneously represent persons whose interests conflict with the client's interests, just as would be true of lawyers who occupy an 'Of Counsel' relationship with the firm.").
22 See Flatt v. Superior Court, 9 Cal. 4th 275, 284-86 (1994).
23 SpeeDee Oil, 20 Cal. 4th at 1155.
24 Id.; ABA Comm. on Ethics & Prof'l Responsibility, Formal Op. 84-351.
25 Flatt, 9 Cal. 4th at 283; Truck Ins. Exch. v. Fireman's Fund Ins. Co., 6 Cal. App. 4th 1050, 1060 (1992); Henriksen v. Great Am. Sav. & Loan, 11 Cal. App. 4th 109, 117 (1992); Chadwick v. Superior Court, 106 Cal. App. 3d 108, 116 (1980); Trone v. Smith, 621 F. 2d 994, 999 (9th Cir. 1980); Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F. 2d 1311, 1318 (7th Cir. 1978).
26 In re Mortgage & Realty Trust, 195 B.R. 740, 755 (Bankr. C.D. Cal. 1996).
27 SpeeDee Oil, 20 Cal. 4th at 1151.
28 Id. at 1151-52; see also Henriksen, 11 Cal. App. 4th at 115; In re Mortgage & Realty Trust, 195 B.R. at 756 (rejecting application of an exception to the imputation of a conflict to an of counsel lawyer, noting that the rule in California regarding ethical walls permits them only for former government attorneys entering into private practice).

 
 
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Copyright 2006, Los Angeles Lawyer magazine. All Rights Reserved.

 

   
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