Ethics: Advance waivers of future conflicts

By Thomas P. McGarry and Thomas P. Sukowicz
Hinshaw & Culbertson

Rule 1.7 states that a lawyer shall not represent a client if the representation of that client will be directly adverse to another client, or if the representation of that client may be materially limited by the lawyer’s responsibilities to another client, or to a third person, or to the lawyer’s own interests.

The exception to the rule allows the representation of clients with actual or potential conflicts of interest when ”the lawyer reasonably believes the representation will not adversely affect the relationship with the other client and each client consents after disclosure.” The client consent is usually referred to as a waiver of the conflict.

Is it possible to obtain an advance waiver of future conflicts of interest? The answer is a qualified yes. Typically, the effectiveness of the waiver depends on the sufficiency of the disclosure, so that the waiver or consent is ”informed.”

Generally speaking, a waiver is a knowing relinquishment of a right. Thus, a client’s simple consent without adequate disclosure of the nature of the conflict may not be effective. Westinghouse v. Gulf Oil, 588 F.2d 221, 229 note 9 (7th Cir. 1978).

ABA Ethics Opinion 05-436 (May 11, 2005) states that an ”open-ended” advance waiver may be effective when the person giving it is sophisticated or is represented by other counsel on the waiver issue.

Even with sophisticated clients, however, the extent of the disclosure may make the waiver ineffective. In a 2006 case, McKesson Information Systems, Inc. v. Duane Morris, LLP, Fulton County, Ga., Super. Court Civ. No. 2006 CV 121110, the court found that a future waiver was invalid because it was not a knowing waiver that identified the specific adverse clients and details of the adverse representation.

Two months after the firm began its representation of two McKesson subsidiaries in a bankruptcy matter in Pennsylvania, it agreed to represent two clients against a third subsidiary of McKesson in Georgia. The engagement agreement with McKesson included a waiver of the firm’s representation of parties with interests adverse to McKesson and waived any actual or potential conflict of interest as long as those other engagements were not substantially related to the firm’s services to McKesson.

The court found that the future waiver was invalid because it did not identify the specific adverse clients and the details of the adverse representation, and did not refer to any particular parties or circumstances under which adverse representation would be undertaken.

It concluded that the McKesson companies could not have reasonably anticipated that the law firm would actually consider representing clients who would attack McKesson products and accuse it of fraudulent conduct, as the plaintiffs alleged in the Georgia case.

A similar analysis can be applied to the representation of a current client in a matter adverse to a former client. In Hasco, Inc. v. Roche, 299 Ill.App.3d 118, 700 N.E.2d 768 (Ill.App. 1st Dist., 1998), a law firm represented a limited partnership, Arauca, in a dispute with First Options of Chicago, Inc. (FOC). Later, it underIllegal ‘X-value’ for character STYLs voided here took to represent two subordinate lenders to Arauca in their claims against FOC in West Virginia circuit court.

The subordinate lenders signed a retainer agreement that contained a conflict waiver, which provided that the clients have a claim against Arauca, that the firm represents Arauca in claims against FOC, and that there is a conflict between the clients and Arauca. The clients ”waive[d] any conflict of interest associated with the representation by [the firm] of Arauca and the representation of Clients by [the firm] with respect to their claims against FOC.”

That matter resulted in a settlement, but FOC later initiated a NASD arbitration proceeding against Arauca and the subordinate lenders in a dispute over the settlement agreement. The firm appeared for Arauca and filed a cross-claim on its behalf against the subordinate lenders.

The subordinate lenders moved to disqualify the firm. The firm relied on the waiver to oppose the motion.

The court disqualified the law firm because its representation of Arauca against its former clients, the subordinate lenders, in a matter that was substantially related to the matter in which it formerly represented the subordinate lenders violated Rule 1.9 of the Rules of Professional Conduct.

The court found that the waiver signed by the subordinate lenders was limited to the West Virginia lawsuit and did not extend to the NASD arbitration dispute.

While the waiver referred to claims by the subordinated lenders ”against FOC” and ”against Arauca,” it did not address the firm’s representation of Arauca regarding Arauca and FOC claims against the subordinated lenders. Although the firm asserted that the purpose of the waiver ”was to waive all future conflicts of any nature,” the court found that such a broad intention was not contained in the language of the waiver.

When seeking a client’s waiver of a future conflict, try to be as detailed as possible in disclosing the nature of the conflict being waived and the parties involved in any such conflicts.