BAR ASSOCIATION OF NASSAU COUNTY
COMMITTEE ON PROFESSIONAL ETHICS
Opinion No. 2001-5
(Inquiry No. 688 )
Contlict of interest in dual representation of two defendants, an employer and one of its employees, in a civil proceeding, where, by agreement between them, the employer shall be solely responsible for payment of legal fees and the employee shall be solely responsible for payment of all settlement amounts and/or any award that may result. Applicability of full disclosure and consent of both parties.
In a civil suit against two defendants, where one, “Ms. M”, is a stockbroker employed by the other, “XYZ Company,” and where, by agreement, the employer will be solely responsible for payment of legal fees, and the employee will be solely responsible for payment of any settlement or award, both may be represented by the same attorney provided adequate disclosure of the potential contlict has been made by the attorney to each client and provided the attorney withdraws from representing both clients if an actual contlict arises.
Model Rule 1.7, Comment 10
“Ms. M” is a stockbroker employed by “XYZ Company.” A customer, “Mr. C,” filed a claim against both the XYZ Company and Ms. M. alleging breach of fiduciary duty, unsuitability, breach of contract, negligence, fraud and seeking payment of monetary damages. Inquiring attorney seeks a determination as to whether the dual representation of the two defendants will present a contlict of interest where XYZ Company will be solely responsible for payment oflegal fees, while Ms. M. will be solely responsible for payment of all settlement amounts and/or any award that may result.
DR 5-105 governs contlicts of interest. DR 5-105 (a) provides that “[a] lawyer shall decline proffered employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the lawyer in representing differing interests,” except to the extent permitted under DR 5-105 ( c).
Under DR 5-105 (b) “[a] lawyer shall not continue multiple employment if the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected by the lawyer’s representation of another client, or ifit would be likely to involve the lawyer in representing differing interests, except to the extent permitted under subdivision (c) of this section.”
Subdivision (c) provides: “In the situations covered by subdivisions (a) and (b) of this section, a lawyer may represent multiple clients if a disinterested lawyer would believe that the lawyer can competently represent the interest of each and if each consents to the representation after full disclosure of the implications of the simultaneous representation and the advantages and risks involved.”
Thus, in the hypothetical posed, there are two questions the lawyer must ask before he can proceed with dual representation. First, the lawyer must determine, through the hypothetical eyes of the “disinterested lawyer,” whether one client’s interests in the matter actually or potentially differ from the other’s. If the clients share a unity of interest, then no further inquiry may be necessary and the lawyer may proceed with the dual representation. If the clients’ interests differ or are potentially differing, then a second inquiry is necessary. In that event, the lawyer must determine whether it is “obvious,” in view of the differing interests, again viewed through the eyes of a “disinterested lawyer,” that the lawyer can competently represent the interests of each. Only if the answer to this question is in the affirmative may a lawyer continue the dual representations and, even then, only if each client consents after full disclosure. N.Y. County 707 (1995).
The relevant Ethical Considerations provide some additional guidance. EC 5-15 provides as follows: “If a lawyer is requested to undertake or to continue representation of multiple clients having potentially differing interests, the lawyer must weigh carefully the possibility that the lawyer’s judgment may be impaired or loyalty divided if the lawyer accepts or continues the employment. The lawyer should resolve all doubts against the propriety of the representation. A lawyer should never represent in litigation multiple clients with differing interests; and there are few situations in which the lawyer would be justified in representing in litigation multiple clients with potentially differing interests.”
EC 5-16 provides in pertinent part as follows: “In those instances in which a lawyer is justified in representing two or more clients having differing interests, it is never the less essential that each client be given the opportunity to evaluate the need for representation free of any potential conflict and to obtain other counsel if the client so desires. Thus before a lawyer may represent multiple clients, the lawyer should explain fully to each client the implications of the common representation and otherwise provide to each client information reasonably sufficient, giving due regard to the sophistication ofthe client, to permit the client to appreciate the significance of the potential conflict, and should accept or continue employment only if each client then consents, preferably in writing. Ifthere are present other circumstances that might cause any of the multiple clients to question the undivided loyalty of the lawyer, the lawyer should also advise all of the clients of those circumstances.”
EC 5-17 provides: “Typically recurring situations involving potentially differing interests are those in which a lawyer is asked to represent co-defendants in a criminal case, co-plaintiffs or co-defendants in a personal injury case, an insured and insurer, and beneficiaries of the estate of a decedent. Whether a lawyer can fairly and adequately protect the interests of multiple clients in these and similar situations depends upon an analysis of each case. In certain circumstances, there may exist little chance of the judgment of the lawyer being adversely affected by the slight possibility that the interests will become actually differing; in other circumstances, the chance of adverse effect upon the lawyer’s judgment is not unlikely”
Additionally, EC 5-18 notes that “[0 ]ccasionally a lawyer for an entity is requested to represent a shareholder, director, officer, employee, representative, or other person connected with the entity in an individual capacity; in such case the lawyer may serve the individual only if the lawyer is convinced that differing interests are not present.”
Lastly, EC 5-19 provides that “[a] lawyer may in a single matter represent several clients whose interests are not actually or potentially differing. Nevertheless, the lawyer should explain any circumstances that might cause a client to question the lawyer’s undivided loyalty. Regardless of the belief of a lawyer that he or she may properly represent multiple clients, the lawyer must defer to a client who holds the contrary belief and withdraw from representation of that client.”
At the outset, the lawyer must determine whether the clients have differing interests such that an actual conflict exists. The determination of whether the clients have differing interests is not necessarily a straightforward task. Some guidance is provided by EC 5-14 which measures “differing interests” as interests that are “conflicting, inconsistent, diverse, or otherwise discordant.” ABA Canon 6 defines “differing interests” as follows: “within the meaning of this canon, a lawyer represents conflicting interests when, in behalf of one client, it is his duty to contend for that which duty to another client requires him to oppose”
Additionally, a lawyer must examine each client’s relationship to and knowledge of the underlying circumstances in order to determine ifthere are significantly differing interests of the parties. N.Y. County 707 (1995). For example, if the situation is such that the employee’s interest might be advanced by his or her disclosure of certain conduct of the employer, then the interests of the parties differ too significantly for dual representation to be permitted. See Wood v Georgia, 450 U.S. 261 (1981).
Again, the degree to which the differences are measured should be one of “obviousness” to the “disinterested” lawyer. Such a determination will largely depend on the nature of the conflict between the two clients. While DR-5-1 05( c) provides that after full disclosure, a client may consent to dual representation, such consent may not always be deemed an effective granting of consent. It has been held that it must be obvious to the lawyer that, notwithstanding the potential conflict, the lawyer can adequately represent the client. N.Y. State 660 (1994); NY. State 621 (1991), and N.Y. State 619 (1991). If the implied “obviousness test” of DR 5-105(c) is not satisfied, the client’s consent may be deemed ineffective. NY State 660 (1994).
The factual situation presented is further complicated by the parties’ payment arrangement. DR 5-107 deals with Avoiding Influence by Others Than the Client, and provides:
(a) Except with the consent of the client after full disclosure a lawyer shall not:
“( 1 ) Accept compensation for legal services from one other than the client.
(2) Accept from one other than the client any thing of value related to his or her representation of or employment by the client.
(c) … a lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal service for another to direct or regulate his or her professional judgment in rendering such legal services.”
Additionally, EC 5-18 states that “a lawyer employed or retained by a corporation owes his allegiance to the entity.
Further guidance is offered by ABA Model Rule 1.7 – Conflict of Interest: General Rule Comment 10 – Interest of Person Paying for a Lawyer’s Service, which states,
“A lawyer may be paid from a source other than the client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer’s duty ofioyalty to the client. (See Rule 1.8(£)). So when a corporation and its directors or employees are involved in a controversy in which they have conflicting interests, the corporation may provide funds for separate legal representation of the directors or employees, if the clients consent after consultation and the arrangement ensures the lawyer’s professional independence.
Of paramount importance is the lawyer’s ability to represent the interests of the client irrespective of the source of payment of the lawyer’s fees.
The fact that the employee has agreed to be solely responsible for payment of any settlement or award also complicates the situation presented. With XYZ Company responsible for payment of fees and Mrs. M. responsible for payment of any award, it is possible that the parties, at some point in the litigation, may have divergent interests. On the one hand, it could be in the interest of XYZ Corp to urge an early settlement so as to minimize its legal fee expense, notwithstanding the size ofthe settlement to be paid by Ms. M. Conversely, it could be in Ms. M’s best interest to pursue a trial, convinced she could win, irrespective of the cost of her defense. XYZ Company may want to conclude the matter quickly for reasons of minimizing potentially negative publicity or for other business concerns. Ms. M. May not have that concern and may actually have an interest in delaying the proceeding. The facts presented, however, do not indicate that any such circumstances or conflict is present at this time.
In this case, the inquiring lawyer must ascertain, based upon the facts, as presented by the two clients, whether they have a “unity of interest” or whether they have differing interests . While generically speaking each has the same interest in being found not liable, given the unusual payment arrangement, their “interests” in the manner in which the litigation is conducted may, at some point, differ considerably. At this time, however, it does not appear that an actual conflict exists which might otherwise prevent the attorney from representing both clients. As long as the clients are in accord as to the manner in which the litigation is conducted, as well as the objectives of each, both long and short term, the lawyer may represent both clients. Prior to entering upon the representation of both clients, however, the lawyer must advise each client of the potential conflict and its implications and the consequences of an actual conflict should an actual conflict become manifest, including the advise that should an actual conflict become manifest, the lawyer may have to withdraw from the representation of both clients and the potential cost if there is need to retain new counsel as the result of an after developed conflict. Counsel would be wise to put all such disclosure in writing and secure each clients written acknowledgment of same and each client’s written consent to the dual representation. See EC 5-16.