Professional Liability Articles

Frequently Asked Questions About Materially Limited Conflicts of Interest

February 11, 2008

Introduction*

Model Rule 1.7 on current client conflicts was substantially reworked in 2002 to separately identify two types of concurrent conflicts:  direct-adversity conflicts (Rule 1.7(a)(1)), and materially limited conflicts (1.7(a)(2)).  The rule then provides a separate standard for obtaining client consent to both types of conflicts.  Rule 1.7(b).[1]  This paper probes the second type of conflict and asks whether the current rule provides an objective standard that can be reasonably enforced.

How Does The Current Rule Compare With The Prior Version Of Rule 1.7?

The materially limited conflict rule currently provides:    

            (a)  Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest.  A concurrent conflict of interest exists if:
            ….
                        (2)  There is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. 
  
Former Rule 1.7(b) provides: 

            (b)        A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless: 
                        (1)        The lawyer reasonably believes that the representation will not be adversely affected; and 
                        (2)        The client consents after consultation.  When the representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

According to the drafters, the current rule was restructured and retitled and the commentary substantially revised in an effort to clarify the rule's provisions on concurrent conflicts.  The basic prohibitions were intended to remain substantially unchanged.[2]  However, under the prior version, a lawyer was prohibited from representing a client if the representation of that client "may be" materially limited by the lawyer's other responsibilities unless the lawyer "reasonably believes" the representation will not be adversely affected and the client consents after consultation.  The current rule more succinctly states that a conflict exists if there is a significant risk that the representation of one or more clients "will be" materially limited by the lawyer's other responsibilities.  If a "materially limited" conflict exists, the lawyer may proceed to represent the client if the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation, the representation is not prohibited by law and does not involve representing opposing parties in the same matter and each affected client gives informed consent, confirmed in writing.

It could be said that the revised version involves more than simply a restructuring of the language.  The current formulation seems to provide a more objective standard of what constitutes a conflict that eliminates what the lawyer reasonably believes.  The lawyer's reasonable belief comes into play once it is determined that a conflict exists.  The use of the term "will" rather than "may" is taken to mean that there must be an element of reasonable probability as distinct from a possibility that the representation of at least one of the clients will be materially limited. 
 
How Does The Model Rule Standard Differ From The Restatement? 

Both Rule 1.7 and Restatement §121 utilize a "risk of harm" approach to conflicts of interest although the Restatement provides a single formulation which requires that the representation be both "materially and adversely" affected while Rule 1.7 employs a two-prong approach that distinguishes "directly adverse" conflicts from "materially limited" conflicts.  Restatement §121 defines a conflict of interest as "a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to another current client, a former client, or a third person."

No difference appears to be intended between a "significant risk" in Rule 1.7 and a "substantial risk" in Restatement §121.[3]  Nor does there appear to be a distinction between a representation that "will be" materially limited by the lawyer's other responsibilities (Rule 1.7)(b)) and a representation that "would be" materially and adversely affected by such responsibilities.  (Rest. §121.)  In fact, it is said that the Restatement approach was incorporated almost verbatim when Rule 1.7 was rewritten in 2002.[4] 

What Are The Origins Of Rule 1.7(a)(2)?

Rule 1.7(a)(2) is a direct descendent of Canon 5 of the Model Code of Professional Conduct ("a lawyer should exercise independent professional judgment on behalf of a client") and DR5-101(A):

            Except with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property or personal interests.

The concept can also be traced to common law, such as Justice Joseph Story's oft-quoted pronouncement in Williams v. Reed[5]:    "An attorney is bound to disclose to his client every adverse retainer, and even every prior retainer, which may affect the discretion of the latter.  No man can be supposed to be indifferent to the knowledge of facts that work directly on his interests, or bear on the freedom of his choice of counsel.  When a client employs an attorney, he has a right to presume, if the latter be silent on the point, that he has no engagements that interfere, in any degree, with his exclusive devotion to the cause confided to him; that he has no interest that may betray his judgment or endanger his fidelity."
 
What Are The Policies Underlying The Rule?

Rule 1.7 seeks to preserve loyalty and independent judgment which are considered essential elements in the lawyer's representation of a client.[6]  The Model Code's formulation was thought to be deficient because it failed to clearly articulate the distinction between the two concepts and was preoccupied with the loyalty issue while giving inadequate attention to the independent professional judgment issue.[7]  In providing a two-prong approach, Rule 1.7 attempts to correct this imbalance by requiring lawyers to consider whether there is a significant risk that the lawyer's other responsibilities will materially limit the client's representation.

This type of problem is sometimes referred to as a lawyer "pulling his punches" or "soft-pedaling" the representation.  Thus, the focus of a "materially limited" conflict is on the quality of the representation and the lawyer's incentive to act or not act as a result of the conflict in ways that could be detrimental to the interests of at least one of the clients.

In an academic sense, Rule 1.7(a)(2) reflects the "instrumental" justification for conflicts of interest rules.[8]  Instrumental concerns focus on the quality of the representation that will likely be provided in the event of a conflict of interest, such as whether the client will receive the diligent and zealous representation the client bargained for and whether the lawyer will be less likely to keep inviolate the client's confidential information.[9]

The Restatement articulates these policies in terms of five rationale:  loyalty ("a client is entitled to be represented by a lawyer whom the client can trust"), enhancing the effectiveness of the representation, protecting confidential client information, preventing lawyers from exploiting their clients, and promoting diligence and advocacy that enhances the quality of decision-making in the judicial process.[10]
 
Where Is The Intersection Between A "Directly Adverse" Conflict And A "Materially Limited" Conflict? 

The two-prong approach under Rule 1.7(a) is not intended to state distinctly separate rules but, like Restatement §121, is meant to be considered as points along a continuum.[11]  Rule 1.7(a)(1) states the basic rule against representing two or more clients whose interests are directly adverse to each other without each client's informed consent.  Rule 1.7(a)(2) provides that even if no direct adversity exists among current clients, a conflict nevertheless exists if there is a significant risk that the lawyer's ability to consider, recommend or carry out an appropriate course of action for one or more clients will be materially limited as a result of the lawyer's other responsibilities or interests.[12]  

Rule 1.7 envisions that in many cases both directly adverse and material limitation concerns will be present.  It is probably for this reason that the Restatement dispenses with the distinction between the two and merges both concepts into a single standard.  According to Hazard & Hodes, "virtually no situations arise in which a 'direct adversity' is not also a 'material limitation' conflict."[13]  Comment [6] to current rule 1.7 demonstrates the close relationship between the two concepts.  For example, the comment explains that simultaneous representation in unrelated matters of clients whose interests are only economically adverse does not constitute a "directly adverse" conflict; yet, it may constitute a "material limitation" conflict depending on the facts.  Comment [26] points out that in the non-litigation context the "question is often one of proximity and degree."
 
Is There An Objective Way To Ascertain What Constitutes A "Significant Risk" Or Is It Something A Lawyer Is Supposed To Know When He or She Sees It?
 
The 1983 version of Rule 1.7(b) was criticized as creating a standard that is largely subjective and too difficult to enforce.[14]  The proponents of the current standard argue that the modern approach to conflicts involves an assessment of the likelihood that the risks that will materially limit the quality of the representation will actually materialize.[15]  A conflict exists if the risk is significant, whether there is actual harm now or in the future.[16]

This risk analysis requires consideration of the positions and options the lawyer should recommend and advocate for the affected client or clients and then an evaluation whether an appreciable risk exists that the lawyer's ability to pursue those positions and options will be materially restricted.  According to Comment [8], "[t]he critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client."  Thus, the lawyer must evaluate both the likelihood of the conflict ever materializing and the extent to which it will interfere with the lawyer's representation.[17] 

According to the Restatement, the "materiality" of the adverse effect is determined by reference to the impact on the client in light of the duties the lawyer has assumed, suggesting that limiting the scope of the representation may be one way of avoiding the conflict.[18]  The Restatement defines a "substantial risk" as one that is "significant and plausible," which means more than "a mere possibility of adverse effect."[19]  The standard that is intended to apply is an objective "reasonable lawyer" standard—one that is based on the facts and circumstances that the lawyer knew or should have known at the time of undertaking or continuing the representation.[20]  Both the Restatement and Rule 1.7 make clear that the "appearance-of-impropriety" standard alluded to in Canon 9 of the ABA Model Code no longer applies.[21]  The current formulation also means that it is no longer appropriate to look at conflicts as either "potential" or "actual."[22]  However, at least one commentator questions whether this is the case.[23] 
 
Okay, So What Kinds of Conflict Situations Are Covered Under Rule 1.7(a)(2)? 

Rule 1.7(a)(2) is intended to apply to all situations in which a conflict arises in connection with the representation of a current client and is not limited to situations in which two or more clients are jointly or concurrently represented.  A significant risk that the representation may be materially limited can also occur based on the interests of a former client, the interests of a third party or the lawyer's own interest.[24]  There is no requirement that the other client, the third party or the lawyer be "directly adverse" to the affected client's interests.  "Any significant competing interests that threatens to 'materially limit' the representation is sufficient."[25]

            Situations that are commonly analyzed under Rule 1.7(a)(2) include: 

  • Joint or multiple client representation in litigation and transactional matters.  See Rule 1.7, Cmt. [26]—[33]; Restatement §§128-130; Hazard & Hodes §§11.11—11.15.  Former Rule 2.2 (lawyer as "intermediary") has been eliminated and that situation is now covered under Rule 1.7.
  • Lawyers' responsibilities to former clients and other persons.  See Rule 1.7, Cmt. [9]; Restatement §§134,135; Hazard & Hodes §11.16.
  • Lawyers representing lawyers.  See ABA Formal Opinion 97-406; Hazard & Hodes §11.7.
  • Lawyers who are related to one another by blood or marriage.  See Rule 1.7, Cmt. [11]; Hazard & Hodes §11.7.  Compare California Rule of Professional Conduct 3-320.  Former Rule 1.8(i) prohibited a lawyer, absent client consent, from representing a client in a matter directly adverse to a person whom the lawyer knows is represented by another lawyer who is related to the first lawyer as parent, child, sibling or spouse.  That rule was eliminated in 2002 and the concept is now contained in Rule 1.7, Cmt. [11], which broadens the prohibition by making it clear that it is not limited to matters that are directly adverse or to specifically identified relationships.
  • A lawyer for a corporation who sits on its board of directors.  See Rule 1.7, Cmt. [35].
  • Issue or positional conflicts.  See Rule 1.7, Cmt. [24]; Restatement §128 Cmt. f.;  ABA Formal Opinion 93-377; Hazard & Hodes §10.10.
  • Lawyers having employment or merger discussions with their current adversaries.  See Rule 1.7 Cmt. [10]; ABA Formal Opinion 96-400; Restatement §125, Cmt. d.
  • A lawyer's personal or financial interests.  See Hazard & Hodes §11.17; Model Rule 1.7, Cmts. [10] and [13]; Restatement §125.  This may include disputes with current clients over fees.  See Los Angeles County Bar Association Formal Opinion 521 (2007) (attached).

How Effective Is Rule 1.7(a)(2) As A Disciplinary Standard?  

A knowing violation of either prong of Rule 1.7 can result in discipline.  In one case, two criminal defense lawyers had a longstanding policy not to represent clients who cooperate with the government.  The defense lawyers nevertheless continued to represent a client who was indecisive about cooperating with the authorities.  The lawyers' representation in the face of their stated beliefs, coupled with the fact that their fees were paid by third parties who were alleged accomplices of the defendant, resulted in the two lawyers being suspended from practice for 30 days for having a personal interest conflict with their client that could interfere with their ability to exercise independent professional judgment.[26]

As a practical matter, disciplinary authorities would find it difficult to enforce many conflict situations unless there is some other ethical violation such as self-dealing or dishonesty.[27]  Many situations that can materially limit a lawyer's representation are also prohibited under other rules such as Rule 1.8(a) (entering into a business transaction with a client), 1.8(c) (soliciting a substantial gift from a client, 1.8(d) (negotiating an agreement for literary or media rights), 1.8(f) (accepting compensating from one other than the client), 1.8(i) (acquiring a proprietary interest in the action), 1.8(j) (having sexual relations with a client) and Rule 3.7 (lawyer as a witness).

Even though the rule has been refined to reflect a professional disciplinary norm that, in the words of the Restatement, is reasonably susceptible of objective assessment by tribunals,[28] it is still the case that civil courts regulate conflicts of interest, particularly in litigation matters, rather than disciplinary authorities after the fact.[29]
 
Can "Materially Limited" Conflicts Be Imputed To Other Lawyers In The Law Firm?

The answer depends on the particular conflict situation covered by Rule 1.7(a)(2).  Rule 1.10(a), as amended, exempts from imputation "personal interest conflicts" that do not present a "significant risk of materially limiting the representation of the client by the remaining lawyers in the firm."  For example, a lawyer who has a financial interest in an opposing party, or who is personally related to opposing counsel, which would require that lawyer's personal disqualification, would not be imputed to other lawyers in the firm.[30]  The disqualification of a lawyer arising from a close family relationship would also not ordinarily be imputed to other members of the firm.[31]  However, if a lawyer has a "materially limited" conflict because he or she represents an opposing counsel in a separate matter, the lawyer's conflict is imputed to other members of the representing lawyer's firm.[32]  Whether the conflict that the represented lawyer may have, because of his or her personal interest in the separate matter, is imputed to others in that lawyer's firm in dealing with the representing lawyer depends on the nature of the separate matter and the knowledge of the other lawyers in the firm.[33] 

As a further example, Rule 1.7(a)(2) applies to a lawyer in a firm who could not effectively represent a client because of the lawyer's strong political beliefs.  Yet, the personal beliefs of the lawyer would not materially limit the representation by other lawyers in the firm.[34]  On the other hand, if a lawyer in the firm has an ownership interest in the opposing party in the case and others in the firm would be materially limited in pursuing the matter because of loyalty to that lawyer, a personal disqualification of the lawyer would be imputed to others in the firm.[35] 

Conflict situations covered by Restatement §§125-135 are imputed to lawyers with whom the conflicted lawyer is affiliated.[36]  The Restatement suggests that even a "personal interest" conflict can be imputed unless the personal interest conflict was not known to the other lawyers handling the matter and cannot be determined by the use of a reasonable conflict-checking system.[37] 

Rule 1.8(k) provides that specific prohibitions in Rule 1.8 apply to other lawyers in the firm with the exception of lawyer-client sexual relations under Rule 1.8(j), in which case that Rule rather than Rule 1.10 applies.[38]  Imputation under Rule 1.8(k) differs from imputation under Rule 1.10 in that Rule 1.8(k) prohibits the other lawyers in the firm from engaging in conduct that the personally prohibited lawyer can engage in, whereas Rule 1.10 prohibits the other lawyers in the firm from undertaking a representation that the personally conflicted lawyer could not undertake.
 
How Does A Lawyer Or Law Firm Check For "Materially Limited" Conflicts?

It is safe to say that a standard computerized conflicts checking system would be insufficient by itself to identify many of the situations that give rise to a "materially limited" conflict under Rule 1.7(a)(2).  A "positional" conflict, for example, would not be discovered by the mere matching of names.  Conflicts involving the personal interests of lawyers in a firm, particularly firms with many lawyers and branch offices, would be extremely difficult to detect unless a tremendous amount of personal data is entered into the firm's data base.  For this reason, most firms do not rely exclusively on the computerized check but utilize email and other forms of daily communication of potential clients and matters to enable everyone in the firm to identify possible conflicts of interest.  Such procedures are only as effective as the diligence of the lawyers and employees in the firm in analyzing and responding to the information provided.

Another common problem that prevents most firms from having a fail-safe conflicts system involves information derived during the representation that does not find its way into the firm's conflicts system.
 
Can Conflicts Under This Rule Be Waived Prospectively?

The current formulation of Rule 1.7 contemplates that a client can waive "material limitation" conflicts that might arise in the future provided the requirements of paragraph (b) can be satisfied.  The factors discussed in Comment [22] on the effectiveness of such waivers would seem to apply to both prongs of the rule.[39]  However, an important distinction should be made between "advance consent" to presently unknown conflicts of interest and consent to the reasonable likelihood that a lawyer's other duties and responsibilities will materially limit the representation now or in the foreseeable future.  Obtaining consent to presently unknown conflicts is different from obtaining consent to significant risks that could materially limit the representation of the client.
 
Hypotheticals

1.         A lawyer represents a liability insurer as a named defendant in a civil action for "bad faith".  While that matter is pending, the lawyer undertakes to represent a plaintiff-client in an unrelated civil action against a defendant to whom a defense is being provided under a policy issued by the liability insurer.[40]

2.         A lawyer had a sexual relationship with a client that pre-dates the lawyer-client relationship.[41]

3.         A county's contract with the public defender provides that $50,000 is deposited annually in an account to pay for defense counsel who are appointed when the public defender is disqualified from representing a criminal defendant.  The public defender pays for any deficiencies in the account, but at the end of the year any remaining balance is returned to the public defender's office.[42] 

4.         Lawyers Able, Baker & Charlie agree to represent 25 mentally retarded citizens who reside at a state owned and operated facility in an action against the state for improvement of their care and treatment at the facility.  The law firm is handling this case as a part of its pro bono program.   Lawyers Della, Ellen and Francis in the same firm are prosecuting a class action brought by 23 female prison inmates challenging the state's failure to establish a facility for incarceration of female inmates with programs and services equivalent to those provided to male inmates at the state prison.  The state offers to settle the class action litigation by establishing a suitable facility for incarcerated female inmates on the grounds of the facility that houses the 25 mentally retarded citizens and plans to relocate those residents to another institution across the state.[43]

5.         A client disputes her lawyer's bill in the midst of the representation and the parties are unable to amicably resolve their dispute.[44]

*This article was initially presented at the Association of Professional Responsibility Lawyers' Meeting on February 7-9, 2008 in Pasadena, California.

Footnotes

[1] In addition, Rule 1.0 includes definitions of the terms "informed consent" (Rule 1.0(e)), "confirmed in writing" (Rule 1.0(b)) and "reasonably believes" (Rule 1.0(i)). 

[2]  Margaret Love, The Revised ABA Model Rules of Professional Conduct:  Summary of the Work of Ethics 2000, 15 Geo. J. Legal Ethics 441, 451-52 (2002).

[3]  Interestingly, the Model Rules define "substantial" (Rule 1.0)(l)) but not "significant."

[4]  Hazard and Hodes, The Law of Lawyering, 10-13 (3d Ed. Aspen Publishers 2004 Supp.).

[5]  29 F. Cas. 1386, 1390 (C.C. Maine 1824).

[6]  Model Rule 1.7, Cmt. [1].

[7]  See Nancy J. Moore, Conflicts Of Interest In The Simultaneous Representation Of Multiple Clients:  A Proposed Solution To The Current Confusion And Controversy, 61 Tex. L. Rev., 211, 217 (1982).

[8]  See Developments In The Law—Conflicts Of Interests In The Legal Profession, 94 Harv. L. Review Rev. 1244 (1981).

[9]  See Hazard & Hodes, The Law of Lawyering, supra, §10.2.  The "intrinsic" justification for regulating conflicts of interest is directed at maintaining "the moral integrity of the client," which ensures that the lawyer will not betray the client's trust and confidence in the relationship.  Although there is significant overlap between these two academic policies, Rule 1.7(a)(1) seems more directed at the "intrinsic" concerns underlying Rule 1.7.

[10]  Restatement §121, Cmt. b.

[11]  W. Bradley Wendel, Conflicts of Interest Under the Revised Model Rules, 81 Neb. L. Rev. 1363, 1368 (2003).

[12]  Model Rule 1.7, Cmt. [8].

[13]  Hazard & Hodes, The Law of Lawyering, supra, §11.4 endnote 1.

[14]  Charles W. Wolfram, Modern Legal Ethics, 341 (1986)—Model Rule 1.7 "gives rise to impermissible difficulties of interpretation and application."

[15]  Hazard & Hodes, The Law of Lawyering, supra §11.4.

[16] See Kevin McMunigal, Rethinking Attorney Conflict Of Interest Doctrine, 5 Geo. J. Legal Ethics 823 (1992).

[17]  Annotated Model Rules of Professional Conduct p. 124 (6th Ed. 2007).

[18]  Restatement, supra, §121, Cmt. (c)(ii).

[19]  Restatement, supra, §121, Cmt. (c)(iii).

[20]  Restatement, supra, §121, Cmt. (c)(iv); Hazard & Hodes, supra, §10.6 at 10-17.

[21]  See Rest. §121 Cmt. c(iv) and Reporter's Notes.

[22]  See Hazard & Hodes, The Law Of Lawyering, supra, §11.4.

[23]  Rotunda & Dzienkowski, Legal Ethics: The Lawyer's Desk Book On Professional Responsibility, §1.7-1 (2007-2008).

[24]  Hazard & Hodes, The Law of Lawyering, supra, at 11-21; Rotunda & Dzienkowski, supra, note 25—"Material limitation conflicts arise in an incalculable number of ways."

[25]  Id., at 11-21, 22. (emphasis is in the original).

[26]  In re Maternowski, 674 N.E. 2d 1287 (Ind. 1996).

[27]  See e.g., Codiga v. State Bar of California, 20 Cal.3d 788, 144 Cal.Rptr. 404 (1978) (lying to conceal conflicts).

[28]  Rest., supra, §121, Cmt. c.

[29]  See Hazard & Hodes, supra, §10.11 at 10-4; §10.11 at 10-34-35.

[30]  See also Rule 1.7, Cmt. [10].

[31]  Rule 1.7, Cmt. [11].

[32]  See ABA Formal Opinion 97-406.

[33]  Id.

[34]  Rule 1.10, Cmt. [3].

[35]  Id.

[36]  Rest. §123.

[37]  See Rest., §125, Cmt. g.

[38]  Rule 1.10, Cmt. [8].

[39]  See generally, Hazard & Hodes, The Law of Lawyering, supra, §10.9 and ABA Formal Opinion 05-436.

[40]  See ABA Formal Opinion 05-435; and see State Farm Mut. Auto Ins. Co. v. Federal Ins. Co., 72 Cal.App.4th 1422, 86 Cal.Rptr.2d 20 (1999), and California Rule 3-310, Discussion.

[41]  See, Model Rule 1.7 Cmt. [12].

[42]  People v. Barboza, 29 Cal.3d 375 (1981).

[43]  See, Fiandaca v. Cunningham, 827 Fed.2d 825 (1st Circuit 1987).

[44]  Los Angeles Bar Association Formal Opinion 521 (2007).

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