Advance Conflict Waivers are on Life Support

A recent case about advance conflict waivers reveals that they are probably no longer viable, and here’s why. The issue revolves around the lawyer’s need to get informed consent.

The only way a lawyer can get around a conflict of interest is if (in addition to some other things) they get informed consent from the client. That phrase “informed consent” has a lot of depth and it is discussed in several places throughout the code. Much attention is given to the quality of the conversation between lawyer and client.  A lawyer needs to discuss a bunch of specific items in order to be said to have obtained proper informed consent. Rule 1.0 requires that the lawyer communicate “adequate information,” provide an “explanation about the material risks” and talk about the “reasonably available alternatives to the proposed course of conduct.” Rule 1.7 requires that the communication include: a disclosure of the facts and circumstances giving rise to the situation, any explanation reasonably necessary to inform the client or other person of the material advantages and disadvantages of the proposed course of conduct, and a discussion of the client’s or other person’s options and alternatives.  

So where do advance conflict waivers come into play?  A law firm always has to get informed consent from the client in order to take a conflicting matter. The only question is whether the firm gets that informed consent during a contemporaneous consultation with the client once the conflict becomes apparent, or by advising the client of potential conflicts before they become apparent and obtaining that informed consent before the conflict even arises. That latter situation is essentially what an advance conflicts waiver is all about.  You’re getting your client’s informed consent in advance. But you can probably sense the problem with that. 

The inherent problem with blanket advance conflict waivers is that when you are negotiating the waiver, the future client is not yet known…which means that the exact risks that your client could face from the future conflicting representation are not yet known…which means that you can’t build those risks into the conversation you need to have with the client…which means that you can’t get proper informed consent because you can’t talk about all of the required details set forth in the rules.  So it seems that there is just no way to have an advance conversation that contains the requisite specificity needed to obtain proper informed consent.

This issue came to a head in 2018 in a critical case out of California.

The law firm Sheppard Mullin was asked to represent a client (J-M) who was defending a large False Claims Act suit. FN1 There were 200 plaintiffs suing J-M in that matter.  The problem was that one of those 200 plaintiffs was the City of South Tahoe, an entity that a Sheppard Mullin partner represented on and off for years. The firm had an advance conflict waiver in place with South Tahoe. 

The firm took on the J-M case, despite the fact that it was already representing South Tahoe. The firm included a conflict waiver in the J-M fee agreement, but they did not disclose that they were representing South Tahoe in an unrelated matter. FN2 When South Tahoe found out about the conflict, they moved to disqualify the firm. FN3

It appears that the firm never notified either client about the conflict because the firm thought they were covered already. The new matter wasn’t related to the False Claims Act matter, and the firm also had an advance conflict waiver in place with both clients.  According to a report, “Sheppard Mullin pointed to a provision in the engagement agreement that allowed the firm to engage in conflicting representations ‘provided the other matter is not substantially related to our representation of [J-M] and in the course of representing [J-M] we have not obtained confidential information of [J-M] material to representation of the other client.’” FN4 Regardless, the lower court invalidated the advance conflict waiver and disqualified the firm. The firm later sued J-M to collect the fees that were outstanding, but the client resisted and the court ultimately ruled in the client’s favor. 

The court held that since Sheppard Mullin engaged in an impermissible conflict, their fee agreement was unenforceable because it was contrary to public policy. As a result, the firm couldn’t get the balance of their fee. The court further ordered that the firm had to return the portion of the fee that was paid by J-M as of the date that the impermissible conflict started. The court “made clear that when the conflict surfaced, Sheppard Mullin had a duty to tell the client and obtain its informed consent rather than relying on a broad advance waiver in its engagement agreement.”  FN5 Finally, “The court rejected the firm’s reliance on that provision—or “boilerplate waiver,”…saying the firm’s argument ignored the reality that Rule 3-310(c)(3) requires truly informed consent from the client. ‘Written consent to all potential and actual conflicts in the absence of any knowledge about the existence of such conflicts cannot comply with the requirement of ‘informed written consent’ in Rule 3-310(C),’ the court said.” FN6

At the end of August in 2018, the California Supreme court upheld the lower court.  While the case was remanded for an issue that doesn’t concern us here, they stated:

…“because Sheppard Mullin knew of” its conflicting interest with South Tahoe and failed to inform J-M about it, J-M’s advanced blanket conflict waiver was not supported by consent that was “informed” within the meaning of the Rules of Professional Conduct.  Furthermore, since the consent was not informed, the entirety of the engagement agreement with J-M was unenforceable.

For a conflict waiver to be “informed,” the Court reasoned, “the client’s consent to dual representation must be based on disclosure of all material facts the attorney knows and can reveal.”  The Court stated that “An attorney or law firm that knowingly withholds material information about a conflict has not earned the confidences and trust the rule is designed to protect.”

Applying this standard, the Court noted that the Sheppard Mullin advanced waiver to J-M “did not disclose any particular conflict, or even any area of potential conflict, and did not mention” the Firm’s concurrent representation of South Tahoe.  Accordingly, the Firm’s advanced waiver was insufficient to inform J-M’s consent to the representation where, as here, the Firm was aware of a more specific and concrete conflict that already existed when the engagement agreement was executed.  The representation of South Tahoe “was not merely a future possibility; it was a present reality.”  Informed by this legal standard, the Court had no trouble concluding “the conflicts waiver here was inadequate.” FN7

Now, it’s true that the court said they were not invalidating all advance conflict waivers in this decision.  Defenders of advance conflict waivers will further argue that the Supreme Court’s decision is tailored. They will argue that the decision only relates to that category of conflicts where the conflict is known to the parties when they enter into the representation.  But I would not feel very comfortable relying on that narrow interpretation of the decision. 

I think the reason the court didn’t invalidate advance conflict waivers in general is because they didn’t have to go that far, given the facts of the case. They took the typical appellate court approach— limit the opinion to the facts before you.   I believe that the court narrowed their decision because of appellate court protocol, not because of the substance.  In fact, if one looks at the substance, one can see that advance blanket conflict waivers are very much on life support.  

This case is about a client feeling that they didn’t have adequate information about a conflict and that their advance waiver should be ineffective because of that lack of information.  This case is about a client who lacked enough information to provide adequate informed consent.  It is not going to be very difficult for a client in the future to extend the underlying logic in this decision from a case where the conflict is known at the time the representation commenced, to a case where a conflict is not known at the time the representation commenced.  That’s because the heart of the decision is about informed consent. 

Of course, one might think: But we’ve already had blanket waivers. They’ve been around forever. Why are they under attack now? 

The answer is money.

I’m guessing that past cases where a client disputed the efficacy of an advance conflict waiver were settled.  The lawyer and the client simply negotiated a settlement and they moved on with their lives. But this was very likely the first case where the fee was so high and the consequences of losing the case were so costly to both parties that there was no way for the parties to settle.

Here’s the takeaway: One day there is going to be a client who wants a lawyer out of a case really badly (and they’ll want to avoid paying the large legal fee, too). They are going to try to achieve their goal by arguing that the fee agreement with the lawyer should be void because of the firm’s failure to obtain genuine informed consent before entering into a blanket advance conflict waiver.  They will argue that a blanket advance waiver can not, by definition, confer the informed consent required in the rules. Mark my words— they will win. 

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FN1 Unless otherwise cited, the synopsis of the case throughout this section is summarized from the article found at https://www.bna.com/advance-conflict-waiver-n57982067178/, last checked by the author on March 8. 2019. 

FN2 https://biglawbusiness.com/sheppard-mullin-conflict-waiver-case-puts-4m-fee-at-stake, last checked nether author on March 8, 2019. 

FN3 https://www.ipethicslaw.com/leaving-south-tahoe-will-your-advance-conflict-waiver-survive-sheppard-mullin-v-j-m-manufacturing/, last checked by the author on March 8, 2019. 

FN4 https://www.bna.com/advance-conflict-waiver-n57982067178/, last checked by the author on March 8, 2019. 

FN5 https://www.bna.com/advance-conflict-waiver-n57982067178/, last checked by the author on March 8, 2019. 

FN6 https://www.bna.com/advance-conflict-waiver-n57982067178/, last checked by the author on March 8, 2019. 

FN7 https://www.ipethicslaw.com/leaving-south-tahoe-will-your-advance-conflict-waiver-survive-sheppard-mullin-v-j-m-manufacturing/, last checked by the author on March 8, 2019.

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