Advance Waivers Of Conflicts - Real Or Theoretical?

Wednesday, October 1, 2008 - 01:00

To many outside counsel, the use of a conflict waiver letter asking clients to waive conflicts in advance is common, oftentimes done as a matter of routine. However, whether those waivers are enforceable, once an actual conflict arises, is much more complex. Despite considerable commentary addressing the effectiveness of prospective waivers, it is difficult to provide a definitive answer.1Although advance waivers are increasingly viewed as an acceptable means of preserving future business opportunities for lawyers and law firms, the issue is far from settled.

In fact, the question of whether it is appropriate to ask a client or a prospective client to waive a future conflict has proved at times quite provocative.2Those supporting the use of advance waivers focus on the changing landscape of the American law firm and a client's right to select counsel of its choice. Commentators disfavoring the use of advance waivers are dismayed by what they perceive to be an attack on traditional notions of confidentiality and loyalty running through the attorney-client relationship. Still others conclude that regardless of whether they agree with the practice, there is an undeniable trend toward enforcing advance waivers. If there is such a trend, it is hard to predict how it will take shape. And based upon some recent court decisions, the answer may depend less on the information provided by the attorney seeking the advance waiver, and more on the level of sophistication of the party signing the waiver.3

Here, we have selected for our analysis some recent opinions in an effort to provide insight into how courts are currently resolving what should be the threshold issue, namely whether a waiving client has provided informed consent in connection with a future conflict. In analyzing how "informed consent" can be defined when the future conflict itself is imprecise, we look specifically at the extent and scope of the disclosure requirements when an advance waiver is sought from a "sophisticated client," an "accommodation client," or an "experienced user of legal services." We focus our discussion on these three classifications since it seems that courts are enforcing advance waivers most frequently against these types of clients.

ABA Commentary On Advance Waivers

The American Bar Association ("ABA") Model Rules of Professional Conduct indicate that "whether a lawyer may properly request a client to waive conflicts that might arise in the future is subject to the test of paragraph [1.7] (b)."4The most significant element of Rule 1.7(b) for an attorney seeking an advance waiver is ensuring that "each affected client gives informed consent, confirmed in writing."5Consistent with this comment, the ABA Standing Committee on Ethics and Professional Responsibility issued a formal opinion in May 2005 concluding that Model Rule of Professional Conduct 1.7 was broad enough to permit the use of advance waivers.6

Informed Consent

At the heart of any conflict waiver analysis is the question of whether the client provided informed consent. In general, "informed consent" can be achieved when the client has been given "reasonably adequate information about the material risks of such representation."7Consent is not informed unless it is grounded on an adequate understanding of the nature and severity of the lawyer's conflict.8 How, then, is "informed consent" achieved when it is given months or years before the conflict arises?

Seven factors have emerged for evaluating whether a waiving client has provided "informed consent": (1) the waiver's breadth; (2) its temporal scope; (3) the quality of the conflict discussion between attorney and client; (4) the specificity of the waiver; (5) the nature of the actual conflict; (6) the sophistication of the client; and (7) the interests of justice.9Although these factors are helpful, not every court employs them consistently, or completely. In fact, in the cases we examined, these factors appear to be collapsed, applied unevenly, or even confused.

In the advance waiver context, it appears that the issue of "informed consent" may depend more upon the client's level of "sophistication," or in some cases, whether the client is deemed an "accommodation" client, or "an experienced user of legal services" rather than the lawyer's affirmative steps taken to explain the conflict. These terms seem to be frequently used - or misused - as a shortcut to finding that an advance waiver was effective. The informed consent question, then, is being transformed. Instead of asking what the client learned from the attorney seeking the advance waiver, courts are questioning what should the waiving client have known. In the cases discussed here, when the waiving party can be described as "sophisticated" or "experienced" or an "accommodation client," the other six factors mentioned above also appear to be less significant.10Although not necessarily related, these identifiers highlight an important change in focus - away from a review of the information provided by the attorney to the client, and to a discussion of the client's general experience or status.

When the waiving party is deemed an "experienced user of legal services," or an "accommodation" client, the waiver document may be held to a lower standard, and may be effective even if the waiver language is quite broad.11At least one court - the Eastern District of Pennsylvania District Court - has relied upon language in the Restatement (Third) of the Law Governing Lawyers § 132, to find that an executive gave informed consent to an advance waiver even though he claimed that he never had the opportunity to speak directly with outside counsel, and never was provided with a copy of the engagement letter.12

The informed consent standard may have dropped to its lowest point for what is known as an "accommodation client." The term, which appears in the Restatement's Law Governing Lawyers §132, refers to the client "a lawyer might undertake representation of . . . as an accommodation to the lawyer's regular client, typically for a limited purpose in order to avoid duplication of services and consequent higher fees." The Restatement goes on to warn, however, that "[i]f adverse interests later develop between the clients, even if the adversity relates to the matter involved in the common representation, circumstances might warrant the inference that the 'accommodation' client understood and impliedly consented to the lawyer's continuing to represent the regular client in the matter."13(Emphasis added). Notably, this same comment indicates that the burden is on the attorney to show that the appropriate circumstances exist for inferring the waiving client's understanding and implied consent.14

In Rite Aid Corp. Securities Litigation , Rite Aid's general counsel retained a law firm to defend Rite Aid and its chief executive officer ("CEO").15In the engagement letter, the attorney noted that it was "possible . . . that . . . a conflict [between the corporation and the executive] may arise or become apparent in the future, in which case, it is understood that [the CEO] would retain separate counsel and that the firm would continue to represent [Rite Aid]."16Although the court found that the language included in the engagement letter "could not have been clearer with respect to the relationship of Rite Aid and its representation of [the CEO]," there was no evidence that the CEO saw the letter, or ever had any direct communication with outside counsel.17All communications regarding the advance waiver took place between Rite Aid's general counsel and the firm that prepared the advance waiver.18

Although the burden is typically on the lawyer to demonstrate that "circumstances exist to warrant an inference of understanding and implied consent,"19in Rite Aid the burden was shifted to the client CEO even though he had no direct communication with the counsel representing him in his corporate capacity, and stated that he had never seen the engagement letter. The Rite Aid court did not hesitate to consider, or consider fully, the remaining factors. According to the District Court of Pennsylvania, because the CEO agreed to engage counsel through the corporation he worked for, he was bound by the engagement letter's provisions.20Running throughout the Rite Aid decision is an implicit conclusion that the decision to uphold the waiver was justified because the CEO was merely "an accommodation client."21

Thus, the result in In re Rite Aid Corp. Securities Litigation seems to be in direct conflict with the Restatement's proclamation that, "[a] lawyer who does not personally inform the client assumes the risk that the client is inadequately informed and that the consent is invalid."22It is also at odds with the other decisions upholding advance waivers - in that it moves without explanation from support for reduced disclosure requirements when the waiving client is sophisticated, or an experienced user of legal services, to a complete erasure of the attorney's duty to obtain informed consent.

Although not explicitly discussed in St. Barnabas Hospital v. New York City Health and Hospitals Corporation , St. Barnabas also would be considered an "accommodation" client because it retained the firm seeking to enforce the waiver after the firm was already representing the Health and Hospitals Corporation ("HHC").23 In St. Barnabas , the retention letter was upheld because, among other things, it clearly advised St. Barnabas that in the event of an actual conflict between St. Barnabas and HHC, the firm reserved its right to discontinue the representation of St. Barnabas "as to the particular matter in issue or generally," and to continue its representation of HHC.24

In Concat LP and Chelator, LLC v. Unilever, the court noted that the waiving client's "education and business experience are strongly indicative of a high degree of sophistication" and therefore, was one factor weighing in favor of finding informed consent.25 Although the advance waiver in Concat was ultimately found ineffective, the court's commentary on the client's "sophistication" was misapplied and not exactly relevant. According to the Restatement, courts should not be looking at a client's education and business experience in a vacuum, but instead should be considering whether the client has experience dealing with questions of conflict and has had the opportunity to "receive independent legal advice about the consent."26 Although education and business experience may make a client "sophisticated" in a certain sense, it does not necessarily mean that the client has the requisite experience dealing with conflict issues.

Finally, the term "experienced user of legal services" can be found in Comment 22 to the Model Rules of Professional Conduct 1.7. As this comment instructs, while open-ended language in an advance waivers ordinarily will not be effective, when "the client is an experienced user of legal services involved and is reasonably informed regarding the risk that a conflict may arise, such consent is more likely to be effective . . ." Clearly, the RPCs contemplate a careful balancing of competing interest. However, with the current trend of cases, this balance is not always being achieved.

Conclusion

Relatively few cases have considered the enforceability of advance waivers. Those that have suggest that the attorney's burden to provide "reasonably adequate information" to the client who may ultimately be harmed by the advance waiver is being shifted to clients - but so far, mainly to those clients who may be deemed "sophisticated" or an "accommodation" clients. 1See, e.g ., Diane Karpman , Advice And Consents: The Uncertain Effectiveness Of Advance Consents Is Due, At Least In Part, To A Misunderstanding Of Their Purpose and Use, 30 Los Angeles Lawyer 23 (June 2007)(noting that "[f]or more than 30 years, lawyers have been grappling with California's stringent rule governing advance consents - frequently without success").

2Compare , Jonathan J. Lerner , Honoring Choice by Consenting Adults: Prospective Waivers as a Mature Solution to Ethical Gamesmanship - A Response to Mr. Fox, 29 Hofstra L. Rev. 971, 972 (2001)(finding that advance waivers are necessary to protect "one of the most sacrosanct client rights - the right to select counsel of choice"); Lawrence J. Fox, All's OK Between Consenting Adults: Enlightened Rule on Privacy, Obsence Rule on Ethics, 29 Hofstra L.Rev . 701 (2001).

3See Mary E. Borja , Recent Ethics Developments Affecting Insurers, Insureds, and Their Counsel: Advance Waiver - Under What Circumstances Can This Be Done? , 2008 Insurance Coverage Litigation Committee CLE Seminar (February 28 - March 1, 2008).

4ABA Model Rules of Professional Conduct, comment 22 on Rule 1.7(b) (2008).

5Id .

6 ABA Standing Committee on Ethics and Professional Responsibility Formal Opinion 05-436(6).

7Restatement (Third) of the Law Governing Lawyers § 122(1)(2000).

8Id. at comment (c)(i)(2000).

9Concat LP and Chelator, LLC v. Unilever, 350 F.Supp.2d 796, 820 (N.D. Ca. 2004).

10 See, e.g., In re Rite Aid Corp. Securities Litigation, 139 F.Supp. 2d 649, 660 (E.D. Pa. 2001).

11ABA Model Rules of Professional Conduct , comment 22 on Rule 1.7(b) (2008).

12In re Rite Aid Corp . , 139 F.Supp. 2d at 659-660.

13Restatement (Third) of the Law Governing Lawyers § 132, comment (h)(i)(2000).

14Id.

15In re Rite Aid Corp ., 139 F.Supp.2d at 652.

16 Id. at 652-53.

17 Id. at 660.

18 Id. at 658.

19 Restatement (Third) of the Law Governing Lawyers § 132 comment i (2000).

20 In re Rite Aid Corp. , 139 F.Supp. 2d at 660.

21 Id.

22 Restatement (Third) of the Law Governing Lawyers § 122 comment c(i)(2000).

23 St. Barnabas Hospital v. New York City Health and Hospitals Corporation , 7 A.D. 3d 83, 85 (New York App. Div. 2004).

24 Id. at 86

25 Concat LP , 350 F.Supp.2d at 820.

Irvin M. Freilich is a Partner and Meghan O. Murray is an Associate at Robertson, Freilich, Bruno & Cohen, LLC. Mr. Freilich may reached at (973) 848-2105 and Ms. Murray may be reached at (973) 848-2124.

Please email the authors at ifreilich@rfbclaw.com or mmurray@rfbclaw.com with questions about this article.