Law Firm Disqualified for Failure to Erect Timely and Effective Ethical Screen for "Side Switching" Lawyer

[h/t to Bill Freivogel]. The US District Court in Montana just disqualified plaintiff's counsel in a litigation matter where a lawyer who previously worked on matters for the defendant switched firms. [Stimson Lumber Co. v. International Paper Co., 2011 U.S. Dist. LEXIS 3769 (D. Mont. January 14, 2011).]

The firm representing the plaintiff argued that it set up an ethical screen in accordance with applicable rules and should not be disqualified:

• "Notwithstanding the imputed disqualification, Stimson and Garlington assert they have since screened Brown from any participation in this litigation and, therefore, Garlington should be permitted to continue to represent Stimson. Consequently, the Court must consider whether an ethical screen is permissible under the circumstances of this case."

Importantly, the decision calls out the fact that had a screen been established in a more timely manner, and had the prescriptive measures been more effective (including physical separation), the firm in question would not necessarily have been disqualified. In its decision, the court referenced state rules of professional conduct as well as the recently-updated ABA Model Rule 1.10 and several recent screening/disqualification decisions across multiple jurisdictions:

• "...the Court concludes Stimson and Garlington have not timely screened Brown from participation in this litigation, and have not established that its screening mechanisms are effective."
• "Because Brown has represented Stimson and has actively participated in this litigation since some time prior to July 26, 2010, the ethical screen erected at the end of November, 2010, was not timely. Where screening mechanisms are not immediately implemented, and are instead instituted only after the conflicted attorney's former client asserts the existence [*14] of a conflict, the ethical screen is not timely implemented."
• "Second, despite the ethical screen Stimson and Garlington have erected, Brown continues to work within the Garlington office building. Brown's close proximity to Zlatnik and all other Garlington attorneys who may work on this litigation, supports a conclusion that the ethical screen Garlington has created is ineffective."

A Summary of Top 2010 Legal Risk and Ethics Story Summaries

Several interesting 2010 wrap-ups summarizing news, issues and trends in law firm risk management and ethics:

• [via Legal Ethics Forum] -- The Top Ten Legal Ethics Stories of 2010, based on reader input and editorial review.
• 2010 California Ethics Case Highlights, presented by the Orange County Bar Association, a review of issues "...from the attorney-client privilege to conflicts to supervision of paralegals."
• Covering some risk issues along other important stories and developments in 2010, the Legal Intelligencer provides its 2010 Year in Review issue, and Inside Counsel presents issues facing law firm clients with: "A look back at the top 20 stories that affected in-house counsel."
• Finally, the ABA presented a webinar: Developments in Ethics in 2010, available on its web site for a fee.

Insider Trading: Former Ropes & Gray Lawyer Pleads Guilty

Explored previously, the saga of a former Ropes & Gray attorney accused of insider trading recently entered a new phase. Arthur Cutillo has admitted and plead guilty to charges brought by the SEC. He acknowledged accepting money for sharing confidential, "material, nonpublic information" client information with outside parties.

As reported, this lawyer: "received 'tens of thousands of dollars in cash' for the illegal tips, prosecutors said. Goffer, Goldfarb and several others purchased 884,000 shares of stock with insider information, according to the indictment. Cutillo himself purchased 105,000 shares of 3Com stock..."

When this story and investigation came to light, the firm acknowledged that this: "...represent[s] an extreme breach of their duty of trust to our clients and the firm, as well as gross violations of our policies."

Undisclosed Arbitrator Conflict Results in Vacated Award

The Court of Appeals, Fifth District of Texas just vacated an award in an employment matter because an arbitrator did not disclose a conflict in the form of a prior relationship with a counsel for an adverse party. [Alim v. KBR (Kellogg, Brown & Root) – Halliburton, No. 05-09-00395-CV (Tex. App.—Dallas, Jan. 10, 2011)].

As documented in the written decision, the arbitrator testified that he was aware of his conflicts management responsibilities in accordance with the Code of Ethics for Commercial Arbitrators:

• "...he also represented that he had diligently conducted a conflicts check, although that check appears to be nothing more than an exercise he conducted from memory."
• "In his notice of appointment, Rosuck answered 'No' to the following question: 'Have any of the party representatives, law firms or parties appeared before you in past arbitration cases?' In that same notice, Rosuck then attested, under oath, that he had 'diligently conducted a conflicts check.'"

But a relationship did exist, as the arbitrator had previous interaction with counsel on an unrelated past arbitration. Adding weight to the decision, upon specific inquiry about the past relationship, the arbitrator did not acknowledge his error or oversight:

• "The Court held that the arbitrator’s nondisclosure and his failure to amend his answer to the question specifically inquiring about that fact constituted evident partiality."

International Conflicts Management Challenges Facing Law Firms

As reported by several sources, Howrey has suffered several high profile defections in Europe. The firm is now reframing its approach to this market:

• "Howrey global managing partner and CEO Robert Ruyak said the firm has made a conscious decision to scale back its European presence in favor of operating through a network of other firms... As of 1 January, we have spun off a number of our IP partners and associates into a new independent law firm on the continent with whom we will continue to cooperate."

This week, in its excellent analysis, The Lawyer explained why conflicts rules and practices are at the root of the problem. They suggest that international conflicts issues pose similar challenges for US firms operating internationally. Former Howrey Managing Partner noted that the strict enforcement of US conflicts rules in London created significant barriers for the local team:

• "He estimates that they were losing a third of all potential instructions as a result and says that, although the team was busy, it could have been busier."
• "According to Hoyng, Howrey applied the rules with the strictest possible interpretation. That meant that, even if there was a small possibility of a conflict occurring in the future with a potential client, work was turned down, even if a European case did not affect the US side of the firm."

The use by US firms of conflicts rules as tactical weapons was also a frustration:

• "Hoyng describes cases where a US firm on an IP case will begin a battle by trying to use the rules to get rid of the ­opponent’s firm. This, he says, has led to the rules being used as a 'kind of tool for anticompetitive behaviour in the litigation arena.'"

The article includes interviews with representatives from other international firms including Hogan Lovells and Baker & McKenzie who discuss how those firms manage the complex conflicts landscape.

"The Soprano Scenario" -- New Opinion on Confidential Information from Potential Clients, Disqualification and Screening

 

Tthe State Bar of Wisconsin’s Professional Ethics Committee recently published Formal Ethics Opinion EF-10-03. A Bar legal writer summarizes the new policy which explores situations in which clients share confidential information with potential lawyers (sometimes as a tactical maneuver to prevent them from representing adverse parties):

• "Remember the episode from The Sopranos when Tony and Carmela contemplate divorce? Tony goes to every good divorce attorney in the area and reveals information that ethically prevented those attorneys from representing Carmela when she came to them seeking a divorce lawyer."

Under rules adopted by the Wisconsin Supreme Court (20:1.18):

• "...a lawyer that receives information 'that could be significantly harmful to that person in the matter' cannot represent another client 'with interests materially adverse to those of a prospective client in the same or a substantially related matter.'"

The ethics opinion clarifies "significantly harmful":

• "Those situations involve cases in which sensitive personal information is exchanged, when a lawyer obtains possession of a prospective client’s financial information, learns of a prospective client’s settlement position, the client’s personal thoughts on litigation strategies or impressions regarding the facts of the case, and any other information that could be used to the detriment of the prospective client in the matter."

The opinion references ABA Ethics Opinion (90-358), which provides general guidance regarding prudent pre-client information exchanges and notes that:

• "Under SCR 20:1.18, a lawyer can also avoid disqualification by informing the prospective client that no information disclosed will prohibit the lawyer from representing a different client in the matter. The prospective client can also consent to a lawyer using the information obtained."

Finally, if confidential information is communicated, such that an individual lawyer would be disqualified from representing an adverse party, the opinion formally recognizes the suitability of ethical screens as a prophylactic measure which would enable others within the firm to act, so long as the screen is timely, effective and notice is properly executed:

• "The disqualified lawyer must be timely screened from participation, and may not receive any fee derived from the matter. The law firm must also give the client prompt written notice, which allows the client to challenge the sufficiency of the screening process."

(Note: This blog ranks the Wisconsin Bar's web site highly not only for its writer's skillful incorporation of pop cultural analogies, but also for the prominent display of a cow in its header graphic.)

Risk News & Updates: Conflicts, Disqualifications and Electronic Discovery

1. The disqualification Bratz counsel due to a lateral-conflict has been upheld by the 9th Circuit [previously coverage]:

• "The judge found that the Los Angeles-based firm, which stepped into the case in November, had a potential conflict representing MGA because it had just hired a former associate from Quinn Emanuel Urquhart & Sullivan, Mattel's lead counsel."
• Additional background on this ongoing doll-fight: "The disqualification was the latest legal headache for MGA, which has replaced its lawyers numerous times during the copyright dispute. The trial will be the second go-round for the two companies over whether Mattel owns the work and ideas of a former employee who designed the Bratz dolls."

2. Following a post last week highlight discussion of the suitability of advanced conflicts waivers in the Boston Bar Journal, comes the results of a study of Massachusetts Bar Admonitions. A law firm reviewed all 57 admonitions from 2008-2010 and called out trends.

3. The Wall Street Journal reports on a study (conducted by King & Spalding and published in the Duke Law Journal) showing lawyer sanctions tied to e-discovery problems are on the rise:

• "Sanction motions and sanction awards for e-discovery violations have been trending ever-upward for the last 10 years and have now reached historic highs. "
• "One interesting finding from the study: lawyers were rarely sanctioned without their clients also getting sanctioned. Judges, it seems, often find fault in both clients and lawyers: clients for failing to turn over the goods, and lawyers for failing to provide proper oversight of the discovery process, which can, admittedly, be a huge burden to a corporate defendant."

Advanced Conflicts Waivers -- More Discussion

Last October, we referenced a debate documented by the Boston Bar Journal concerning advanced conflicts waivers. Some believe advanced waivers benefits clients, some believe they reflect poorly on the legal industry (and some take a neutral point of view).

This month, the Journal continues the debate with a "pro" article by J. Charles Mokriski, currently of counsel at Proskauer, and formerly president of the Association of Professional Responsibility Lawyers. Mokriski argues that advanced waivers can benefit sohpisticated clients in situations where they would like to take advantage of a law firm's particular expertise, but that firm is hesitant to take on the matter, fearing future conflicts:

• "Company X’s in-house lawyers conclude that it wants Law Firm A's appellate team... Firm A’s management tells its appellate lawyers that they can take on Company X’s appeal only if Company X will consent to future conflicts in unrelated matters in which Company X might be an adverse party. Company X, advised by its in-house counsel, and desperate to have Law Firm A’s appellate team in its corner, thinks this is a small price to pay to get that team working on its appeal. Should Company X and its in-house lawyers be unable to make this rational calculation and sign on to the consent? Does it afford no benefit to Company X?"
• "So long as law firms do not routinely request advance conflict consents as a standard provision in all engagement letters, and so long as protections are built into advance consents by providing for mandatory ethical screens to protect confidential information, consents to future conflicts make sense in appropriate circumstances."

Conflicts Waiver Language at Root of Law Firm Malpractice Suit

[via Courthouse News Service.] From California comes the story of a malpractice suit against Proskauer Rose. In this case, an executive and his employer were jointly represented by the firm. The executive and firm are now at odds, and he is alleging that the firm was conflicted and acted in violation of the terms of a conflicts waiver he executed previously:

• "Frazee says that Proskauer Rose sent him a conflict of interest waiver letter in December 2006, asking him to consent to joint representation of him and Ascent in the Zuzenak arbitration at Ascent's expense. He says he agreed and reasonably relied on the assurances in the letter, 'that defendants were unaware of any conflict of interests between Ascent and plaintiff, but that if a conflict between Ascent and plaintiff did arise, defendants would cease representing plaintiff and plaintiff would be provided an opportunity to obtain separate representation at his own expense.'"

There's more interesting history underlying this one. Given the known facts, it's unclear if this is case of repeated procedural manipulation, or a case of one party falling short of its obligations. It will be interesting for the court to sort it out...