Mergers And Attorney Departures: Ethical Pitfalls To Avoid

As anyone connected with the modern law firm can readily attest, lawyers come and lawyers go. As anyone connected with the ethics function at the modern law firm can attest, attorney arrivals and departures create conflict of interest and other issues that sometimes seem unsolvable.

To be sure, the dynamics are readily different when attorneys arrive at the firm, as compared to when they depart. On the front end of a new relationship, everyone is hopeful and excited ' in stark contrast to the mindset of departing attorneys, in many circumstances, toward their soon-to-be former firm, and vice versa. Regardless of the dynamics, however, important ethical rules and principles must be followed. Otherwise, serious economic and reputational harm ' as well as attorney grievance investigations ' can follow.

One factor, in particular, exacerbates the ethical issues that arise when attorneys change firms. Namely, the rules differ dramatically from jurisdiction to jurisdiction on this subject. I am not engaging in hyperbole when I say that conduct that is permitted in one state may not be ethical in an adjacent jurisdiction. Particularly for firms with multi-state practices, the lack of uniformity on these issues can create even more risks and uncertainty.

As is often the case, the best way for prudent firms to address these issues is through education and a centralized ethics function. The ethics partner or committee can monitor attorney arrivals and departures, apply the applicable rules of professional conduct in a consistent and even-handed fashion, teach their colleagues regarding the relevant principles, and make the sometimes difficult decisions to further the best interests of the firm.

The Traditional Rule of Imputed Disqualification

The bedrock principle that governs departing and arriving attorneys is the traditional rule of imputed disqualification. Under the traditional rule, the law firm is treated conceptually as a single attorney ' with everyone presumed to know what every other attorney knows. Taken to the extreme, when Attorney X leaves Law Firm Y (with 150 lawyers) to join Law Firm Z (with 150 lawyers), he is presumed to know everything that 300 lawyers ' all of the attorneys at firms Y and Z ' know. The resulting “imputed disqualification” that can result from this imputed knowledge can lead to extreme results.

Consider this hypothetical. Law Firm Y has represented Acme Corporation in products liability litigation for 10 years. Attorney X did no work for Acme, but Law Firm Z is suing Acme on behalf of Beta Corporation for antitrust violations having nothing to do with the products liability litigation. Under the traditional rule, Law Firm Z could

be disqualified from representing Beta if Attorney X joins the firm. Conceptually, it would be as though Attorney X was radioactive and contaminated everyone at Law Firm Z with the knowledge concerning Acme that he was presumed to have acquired while working at Law Firm Y.

Taken to this extreme, the “imputed disqualification” rule is quite far reaching. Fortunately, many states have made significant inroads upon the traditional rule. Unfortunately, these inroads have been inconsistent and too frequently at cross-purposes with the rules adopted in various states where a firm may operate.

Inroads on The Traditional Rule:
The Departing Attorney

Many states have loosened the imputed disqualification rule in the case of departing attorneys. For example, Rule 1.10 ' in Virginia and Maryland ' provides significant relief to the former law firm. In those two states, the former law firm is only subject to disqualification (assuming the affected clients refuse to consent) if both of two circumstances are present. First, the former firm's matter must be the same matter or substantially related to the work performed by the departing lawyer for the adverse party. Second, at least one lawyer in the former firm must have confidential information that is material to the matter. In other words, if remaining attorneys performed work for the departing lawyer's client, a conflict of interest will almost always arise. If the departing attorney takes a client with him and no one is left at the departing firm that did work for that client, however, disqualification will not result.

Unfortunately, not all jurisdictions have gone this far. In the District of Columbia, for example, even if no attorneys remain at the former firm who worked for the client, disqualification may result if the former firm's new matter “is the same or substantially related to that in which the formerly associated lawyer represented the client during such former association.” See, Rule 1.10(c), District of Columbia Rules of Professional Conduct. While the resulting conflict of interest can be waived by affected clients, consent is not a foregone conclusion. Moreover, under these circumstances, simply crossing the Potomac River from Virginia to the District of Columbia can lead to a diametrically opposite result.

Subtle changes in circumstances can lead to different results, depending upon which jurisdiction's ethics rules will apply. For firms with offices in Maryland or Virginia and the District of Columbia, fact-intensive inquiries must be undertaken before an informed decision will be possible. The same is true for any firms that operate in multiple jurisdictions where different imputed disqualification rules apply from state to state.

Hypothetical illustrations are easy to imagine. For example, assume that Attorney X leaves a Virginia law firm with the entire labor practice and all of Acme Corporation's labor work goes with them. Six months later, the old firm sues Acme for employment discrimination on behalf of a former employee whose administrative charge was defended by the departing lawyers while they were still at the old firm. Even though the administrative charge is substantially related to the discrimination lawsuit, the old firm will not be disqualified because no one at the old firm worked on the matter while the departing attorneys were affiliated with the old firm.

The hypothetical in the preceding paragraph assumed that a Virginia law firm was involved. The same result would hold true if the labor practice left a Maryland firm. If it were a District of Columbia firm that sought to represent the former employee against Acme, however, the fact that the administrative complaint was substantially related to the discrimination probably would require disqualification.

The hypothetical becomes even harder to unravel if the old law firm operated in Virginia and the District of Columbia. Also assume that the departing labor practice has attorneys licensed to practice in both jurisdictions ' and that the administrative charge and later lawsuit involved a District of Columbia employer and employee, and was brought in the District of Columbia. Under that hypothetical, DC ethics principles probably would apply, and disqualification would probably be warranted. I will leave it to the reader's imagination to make further adjustments to the hypothetical in order to see whether the outcome would change.

Inroads on The Traditional Rule:
The Arriving Attorney

As compared to the departing employee scenario, fewer states have loosened the imputed disqualification rule with respect to the arriving attorney, and those that have modified the traditional rule have not done so in a uniform manner. The applicable rules in Virginia, the District of Columbia, and Maryland again provide a good example of this.

In the District of Columbia and Virginia, with limited exceptions, the traditional rule applies. Unless the affected client consents, the new law firm will probably be disqualified ' even if the arriving lawyer stops representing the client ' when the attorney has represented that client at the prior law firm in the same or a substantially related matter that is adverse to the new firm's client.

But if the lawyer did not work personally for the adverse client at the former firm, the DC and Virginia ethics rules will not result in disqualification for the attorney or the new law firm. In other words, the new firm will only be disqualified under these circumstances with respect to those clients of the old firm “with whom the newly affiliated lawyer in fact personally had a lawyer-client relationship ….” See, Comment 19 to Rule 1.10 of the District of Columbia Rules of Professional Conduct. Accord, Comment 8 to Rule 1.9 of the Virginia Rules of Professional Conduct.

A different outcome results in Maryland and any states with similar, more liberal rules. In Maryland, even when the arriving attorney previously worked on a matter at his prior firm, the new firm can represent clients on that same matter, adverse to the prior firm's client, if the new firm does two things. First, the new firm must screen the arriving attorney from any participation in the matter, pursuant to the mechanisms set forth in the rule itself. Second, the new firm must ensure that the arriving attorney receives no part of the fee from the screened matter. As long as both steps are taken by the new firm, even if the client of the former firm vehemently objects, the new firm can be adverse to the client of the former firm.

If every jurisdiction had a rule like Maryland's, life would be a lot easier for law firms. Until that day arrives, though, firms in jurisdictions like Virginia and the District of Columbia will need to carefully analyze the facts before proceeding against a client of the prior firm for which the arriving lawyer performed any work. If the arriving attorney's work was substantially related to the matters that the new firm wants to accept adverse to the arriving attorney's former client, in states like Virginia and the District of Columbia, disqualification is likely to occur.

Practical Considerations

The potential pitfalls are much more difficult to avoid for the new firm than for the prior firm with which an attorney was previously associated. For the prior firm, it is important to determine and document, as early in the process, which clients and matters are leaving with the departing attorney, and which ones are staying with the prior firm. Then the old firm can monitor new matters as they arise. For the new firm, even more steps ' some of which are not popular for hiring partners ' are required.

First, the new firm must obtain a list of all clients of the arriving attorney ' including a complete description of all matters and a list of all parties. The new firm can then analyze this information for conflicts of interest and move toward obtaining necessary consents. If the conflict of interest is serious enough, it may even need to be elevated to the level of a deal breaker.

Often, during the negotiations process, prospective lateral candidates supply a list of top clients to the new firm. While these top clients should be carefully analyzed, that preliminary analysis is no substitute for the complete analysis that needs to be undertaken on all clients, all matters, and all parties in those matters. Moreover, the complete analysis really needs to be completed before the lateral candidate starts work at the new firm. In appropriate cases, the new firm should even consider a contingent offer letter to the lateral candidate ' pending completion of the detailed analysis of the candidate's matters.

Oftentimes, the goal of recruiting new practice groups requires actions that are at odds with the goal of identifying conflicts of interest early in the process. This is because, in my experience, lateral practices often are seeking new firms because the old firm's client base created too may conflicts of interest. If the new firm keeps identifying conflicts that might require the lateral group to disengage from clients, that can make the new firm less attractive to the lateral group. Because of that consideration, firms sometimes make the business decision to press lateral candidates less rigorously in order to avoid scaring them away with conflicts of interest. If that approach is followed, of course, the conflicts still need to be addressed at some point once the new attorney begins working at the new firm.

Second, the new firm should have the lateral candidate disclose all matters on which the candidate previously worked, where the new firm represented a client regarding that matter. The new firm can then analyze that list to make sure that there are no lurking “imputed disqualification” problems that could lead to the loss of business if the candidate joins the new firm.

Because of conflicting ethics rules from jurisdiction to jurisdiction, and the fact that the new firm will usually not have complete access to all the necessary information, there are no bullet-proof systems that will insulate the new firm from all issues. Nevertheless, firms which pay attention to the considerations described in this article will be far ahead of those that don't.

As anyone connected with the modern law firm can readily attest, lawyers come and lawyers go. As anyone connected with the ethics function at the modern law firm can attest, attorney arrivals and departures create conflict of interest and other issues that sometimes seem unsolvable.

To be sure, the dynamics are readily different when attorneys arrive at the firm, as compared to when they depart. On the front end of a new relationship, everyone is hopeful and excited ' in stark contrast to the mindset of departing attorneys, in many circumstances, toward their soon-to-be former firm, and vice versa. Regardless of the dynamics, however, important ethical rules and principles must be followed. Otherwise, serious economic and reputational harm ' as well as attorney grievance investigations ' can follow.

One factor, in particular, exacerbates the ethical issues that arise when attorneys change firms. Namely, the rules differ dramatically from jurisdiction to jurisdiction on this subject. I am not engaging in hyperbole when I say that conduct that is permitted in one state may not be ethical in an adjacent jurisdiction. Particularly for firms with multi-state practices, the lack of uniformity on these issues can create even more risks and uncertainty.

As is often the case, the best way for prudent firms to address these issues is through education and a centralized ethics function. The ethics partner or committee can monitor attorney arrivals and departures, apply the applicable rules of professional conduct in a consistent and even-handed fashion, teach their colleagues regarding the relevant principles, and make the sometimes difficult decisions to further the best interests of the firm.

The Traditional Rule of Imputed Disqualification

The bedrock principle that governs departing and arriving attorneys is the traditional rule of imputed disqualification. Under the traditional rule, the law firm is treated conceptually as a single attorney ' with everyone presumed to know what every other attorney knows. Taken to the extreme, when Attorney X leaves Law Firm Y (with 150 lawyers) to join Law Firm Z (with 150 lawyers), he is presumed to know everything that 300 lawyers ' all of the attorneys at firms Y and Z ' know. The resulting “imputed disqualification” that can result from this imputed knowledge can lead to extreme results.

Consider this hypothetical. Law Firm Y has represented Acme Corporation in products liability litigation for 10 years. Attorney X did no work for Acme, but Law Firm Z is suing Acme on behalf of Beta Corporation for antitrust violations having nothing to do with the products liability litigation. Under the traditional rule, Law Firm Z could

be disqualified from representing Beta if Attorney X joins the firm. Conceptually, it would be as though Attorney X was radioactive and contaminated everyone at Law Firm Z with the knowledge concerning Acme that he was presumed to have acquired while working at Law Firm Y.

Taken to this extreme, the “imputed disqualification” rule is quite far reaching. Fortunately, many states have made significant inroads upon the traditional rule. Unfortunately, these inroads have been inconsistent and too frequently at cross-purposes with the rules adopted in various states where a firm may operate.

Inroads on The Traditional Rule:
The Departing Attorney

Many states have loosened the imputed disqualification rule in the case of departing attorneys. For example, Rule 1.10 ' in Virginia and Maryland ' provides significant relief to the former law firm. In those two states, the former law firm is only subject to disqualification (assuming the affected clients refuse to consent) if both of two circumstances are present. First, the former firm's matter must be the same matter or substantially related to the work performed by the departing lawyer for the adverse party. Second, at least one lawyer in the former firm must have confidential information that is material to the matter. In other words, if remaining attorneys performed work for the departing lawyer's client, a conflict of interest will almost always arise. If the departing attorney takes a client with him and no one is left at the departing firm that did work for that client, however, disqualification will not result.

Unfortunately, not all jurisdictions have gone this far. In the District of Columbia, for example, even if no attorneys remain at the former firm who worked for the client, disqualification may result if the former firm's new matter “is the same or substantially related to that in which the formerly associated lawyer represented the client during such former association.” See, Rule 1.10(c), District of Columbia Rules of Professional Conduct. While the resulting conflict of interest can be waived by affected clients, consent is not a foregone conclusion. Moreover, under these circumstances, simply crossing the Potomac River from Virginia to the District of Columbia can lead to a diametrically opposite result.

Subtle changes in circumstances can lead to different results, depending upon which jurisdiction's ethics rules will apply. For firms with offices in Maryland or Virginia and the District of Columbia, fact-intensive inquiries must be undertaken before an informed decision will be possible. The same is true for any firms that operate in multiple jurisdictions where different imputed disqualification rules apply from state to state.

Hypothetical illustrations are easy to imagine. For example, assume that Attorney X leaves a Virginia law firm with the entire labor practice and all of Acme Corporation's labor work goes with them. Six months later, the old firm sues Acme for employment discrimination on behalf of a former employee whose administrative charge was defended by the departing lawyers while they were still at the old firm. Even though the administrative charge is substantially related to the discrimination lawsuit, the old firm will not be disqualified because no one at the old firm worked on the matter while the departing attorneys were affiliated with the old firm.

The hypothetical in the preceding paragraph assumed that a Virginia law firm was involved. The same result would hold true if the labor practice left a Maryland firm. If it were a District of Columbia firm that sought to represent the former employee against Acme, however, the fact that the administrative complaint was substantially related to the discrimination probably would require disqualification.

The hypothetical becomes even harder to unravel if the old law firm operated in Virginia and the District of Columbia. Also assume that the departing labor practice has attorneys licensed to practice in both jurisdictions ' and that the administrative charge and later lawsuit involved a District of Columbia employer and employee, and was brought in the District of Columbia. Under that hypothetical, DC ethics principles probably would apply, and disqualification would probably be warranted. I will leave it to the reader's imagination to make further adjustments to the hypothetical in order to see whether the outcome would change.

Inroads on The Traditional Rule:
The Arriving Attorney

As compared to the departing employee scenario, fewer states have loosened the imputed disqualification rule with respect to the arriving attorney, and those that have modified the traditional rule have not done so in a uniform manner. The applicable rules in Virginia, the District of Columbia, and Maryland again provide a good example of this.

In the District of Columbia and Virginia, with limited exceptions, the traditional rule applies. Unless the affected client consents, the new law firm will probably be disqualified ' even if the arriving lawyer stops representing the client ' when the attorney has represented that client at the prior law firm in the same or a substantially related matter that is adverse to the new firm's client.

But if the lawyer did not work personally for the adverse client at the former firm, the DC and Virginia ethics rules will not result in disqualification for the attorney or the new law firm. In other words, the new firm will only be disqualified under these circumstances with respect to those clients of the old firm “with whom the newly affiliated lawyer in fact personally had a lawyer-client relationship ….” See, Comment 19 to Rule 1.10 of the District of Columbia Rules of Professional Conduct. Accord, Comment 8 to Rule 1.9 of the Virginia Rules of Professional Conduct.

A different outcome results in Maryland and any states with similar, more liberal rules. In Maryland, even when the arriving attorney previously worked on a matter at his prior firm, the new firm can represent clients on that same matter, adverse to the prior firm's client, if the new firm does two things. First, the new firm must screen the arriving attorney from any participation in the matter, pursuant to the mechanisms set forth in the rule itself. Second, the new firm must ensure that the arriving attorney receives no part of the fee from the screened matter. As long as both steps are taken by the new firm, even if the client of the former firm vehemently objects, the new firm can be adverse to the client of the former firm.

If every jurisdiction had a rule like Maryland's, life would be a lot easier for law firms. Until that day arrives, though, firms in jurisdictions like Virginia and the District of Columbia will need to carefully analyze the facts before proceeding against a client of the prior firm for which the arriving lawyer performed any work. If the arriving attorney's work was substantially related to the matters that the new firm wants to accept adverse to the arriving attorney's former client, in states like Virginia and the District of Columbia, disqualification is likely to occur.

Practical Considerations

The potential pitfalls are much more difficult to avoid for the new firm than for the prior firm with which an attorney was previously associated. For the prior firm, it is important to determine and document, as early in the process, which clients and matters are leaving with the departing attorney, and which ones are staying with the prior firm. Then the old firm can monitor new matters as they arise. For the new firm, even more steps ' some of which are not popular for hiring partners ' are required.

First, the new firm must obtain a list of all clients of the arriving attorney ' including a complete description of all matters and a list of all parties. The new firm can then analyze this information for conflicts of interest and move toward obtaining necessary consents. If the conflict of interest is serious enough, it may even need to be elevated to the level of a deal breaker.

Often, during the negotiations process, prospective lateral candidates supply a list of top clients to the new firm. While these top clients should be carefully analyzed, that preliminary analysis is no substitute for the complete analysis that needs to be undertaken on all clients, all matters, and all parties in those matters. Moreover, the complete analysis really needs to be completed before the lateral candidate starts work at the new firm. In appropriate cases, the new firm should even consider a contingent offer letter to the lateral candidate ' pending completion of the detailed analysis of the candidate's matters.

Oftentimes, the goal of recruiting new practice groups requires actions that are at odds with the goal of identifying conflicts of interest early in the process. This is because, in my experience, lateral practices often are seeking new firms because the old firm's client base created too may conflicts of interest. If the new firm keeps identifying conflicts that might require the lateral group to disengage from clients, that can make the new firm less attractive to the lateral group. Because of that consideration, firms sometimes make the business decision to press lateral candidates less rigorously in order to avoid scaring them away with conflicts of interest. If that approach is followed, of course, the conflicts still need to be addressed at some point once the new attorney begins working at the new firm.

Second, the new firm should have the lateral candidate disclose all matters on which the candidate previously worked, where the new firm represented a client regarding that matter. The new firm can then analyze that list to make sure that there are no lurking “imputed disqualification” problems that could lead to the loss of business if the candidate joins the new firm.

Because of conflicting ethics rules from jurisdiction to jurisdiction, and the fact that the new firm will usually not have complete access to all the necessary information, there are no bullet-proof systems that will insulate the new firm from all issues. Nevertheless, firms which pay attention to the considerations described in this article will be far ahead of those that don't.