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THE ASSOCIATION OF THE BAR OF THE CITY OF NEW
FORMAL OPINION 2005-02
CONFLICTS ARISING SOLELY FROM POSSESSION OF CONFIDENTIAL INFORMATION OF ANOTHER CLIENT
TOPIC: Conflicts of Interest; Duty of Confidentiality
DIGEST: The fact that a lawyer possesses confidences or secrets that might be relevant to a matter the lawyer is handling for another client but the lawyer cannot use or disclose does not without more create a conflict of interest barring the dual representation. The critical question is whether the representation of either client would be impaired. In particular, the lawyer has a conflict if the lawyer cannot avoid using the embargoed information in the representation of the second client or the possession of the embargoed information might reasonably affect the lawyer’s independent professional judgment in the representation of that client. Whether that is the case depends on the facts and circumstances, including in particular the materiality of the information to the second representation and whether the information can be effectively segregated from the work on the second representation.
Whether the conflict can be waived depends on whether the lawyer can disclose sufficient information to the affected client to obtain informed consent and whether a disinterested lawyer would believe that the lawyer’s professional judgment would not in fact be affected by possession of the information. If the lawyer is required to withdraw from the representation, the lawyer may not reveal the information giving rise to the conflict. Co-client representations present different considerations that are not addressed in this opinion.
CODE: DR 2-110(B)(2), Canon 4, DR 4-101, EC 4-5, DR 5-101, DR 5-105, DR 5-108, EC 5-1, Canon 6, Canon 7, DR 7-101, EC 7-1.
QUESTION: Where a lawyer has confidential information acquired in the course of the representation of one client that would be useful to another client, but their interests are not otherwise in conflict, can the lawyer continue the representation of the second client? If so, may the lawyer use the information in representing the second client? Must the lawyer do so?
In the course of representing one client a lawyer may acquire information that would be of use to another current or future client, even when the interests of the two clients are not otherwise in conflict, in situations in which the lawyer is under an obligation not to disclose the information to the second client or use the information for the second client’s benefit. For example:
Scenario 1: A lawyer represents the underwriters in a securities issuance and in the course of due diligence learns confidential information about the issuer. The lawyer owes a duty to the lawyer’s clients, the underwriters, arising out of the underwriters’ duties to the issuer, to keep the information learned about the issuer in due diligence confidential. After the securities issuance is completed, a long-time client requests the lawyer’s assistance in seeking to acquire or enter into a transaction with the issuer. May the lawyer undertake the representation of the acquirer?
Scenario 2: A law firm represents an insurer in determining whether a claim by Company A for legal fees incurred in connection with an ongoing regulatory investigation is covered by Company A’s “directors and officers” insurance policy. In that connection Company A supplies information about the investigation to the insurer’s law firm under an understanding that the lawyers and the insurer will keep the information confidential. The law firm is then approached by regular Client B for assistance in forming a potential joint venture with Company A to which Company A will contribute the business being investigated by the regulators. May the law firm undertake the representation of Client B?
Scenario 3: A lawyer represents a state transportation agency in connection with planning a new rail line. To avoid land speculation, the agency insists that its deliberations about the route of the rail line be kept confidential. Another client asks the lawyer to assist it in acquiring one of several parcels of land in the general direction of the rail line. May the lawyer undertake the representation of the land purchaser?
Use or Disclosure of Confidences and Secrets of One Client for the Benefit of Another
We discuss first the questions of whether the lawyer may, or must, use information from the first representation for the benefit of the client in the second.
A lawyer has a duty to represent a client “zealously within the bounds of the law.” Canon 7. This duty includes the duty to use all available information for the benefit of the client and to disclose to the client information that the lawyer possesses that is relevant to the affairs as to which the lawyer is employed and that might reasonably affect the client’s conduct. N.Y. State 555 (1984); Spector v. Mermelstein, 485 F.2d 474, 479 (2d Cir. 1973); ABA M ODEL R ULES OF P ROF ’ L C ONDUCT R. 1.3 cmt. 1, rule 1.4, rule 1.7 cmt. 31 (2003); R ESTATEMENT (S ECOND ) OF A GENCY § 381 (1957); Geoffrey C. Hazard, The Would-Be Client II, N AT ’ L L.J., Jan. 29, 1996, at A19. It is clear, however, that the duty to use available information for the benefit of a client is qualified by duties of confidentiality to others, and in particular to other clients.
DR 7-101(A)(1) requires a lawyer “to seek the lawful objectives of the client through reasonably available means permitted by law and the Disciplinary Rules.” (Emphasis added.) EC 7-1 likewise states, “The duty of a lawyer . . . is to represent the client zealously within the bounds of the law, which includes Disciplinary Rules and enforceable professional obligations.” (Emphasis added.) Among the enforceable professional obligations set forth in the Disciplinary Rules is the duty not to use a confidence or secret for the advantage of any third person unless the client consents. DR 4-101(B)(3); DR 5-108(A)(2). It is thus clear that a client has no legitimate expectation that a lawyer will use confidential information of another client for the first client’s benefit. See, e.g., R ESTATEMENT (T HIRD ) OF THE L AW G OVERNING L AWYERS § 20 cmt. d (2000) (hereinafter, “R ESTATEMENT ”) (“Sometimes a lawyer may have a duty not to disclose information [to a client], for example because it has been obtained in confidence from another client . . . .”); N.Y. City 2001-1 (holding that a lawyer may not use information imparted by a prospective client for the benefit of an existing client, and noting that “there are many circumstances where a lawyer comes into possession of an adverse party’s information and cannot use it”); ABA Formal Op. 358 (1990) (“It is not reasonable . . . for an existing client to expect that the lawyer will use, in connection with the representation, information relating to the representation of another client or a would-be client to the disadvantage of the other client.”); N.Y. State 555 (1984) (“generally, the lawyer has no duty (and, indeed, no right) to disclose to one client confidential information learned from, or in the course of representing, another client”); N.Y. City 108 (1928-29) (holding that lawyer who had represented a creditor with an uncollected judgment could thereafter represent the debtor against another creditor “if the attorney does not divulge or use the secrets or confidence of his former client”).
This conclusion is supported by the rules governing when a client is charged with a lawyer’s knowledge. While a client is usually charged with a lawyer’s knowledge relating to a representation, “[a] client is not charged with a lawyer’s knowledge concerning a transaction in which the lawyer does not represent the client.” R ESTATEMENT § 28 cmt. b. See also R ESTATEMENT (S ECOND ) OF A GENCY § 272 (1958) (providing that liability of a principal is affected by the knowledge of an agent “concerning a matter as to which he acts within his power to bind the principal or upon which it is his duty to give the principal information”).
This does not mean that a lawyer cannot use any information
learned in one representation for the benefit of another client. Indeed,
what a lawyer learns in a representation necessarily becomes part of
the storehouse of knowledge and experience that the lawyer may draw on
in the lawyer’s career and that is part of the value the lawyer
brings to each successive representation. We do not here attempt to define
what information may not be used in a subsequent representation absent
consent, beyond noting that, in general, any prohibition on using for
one client’s benefit information gained in representing another
extends only to “confidences” and “secrets.” See DR
4-101(B)(3); DR 5-108(A)(2). It is clear that not all information gained
in the course of the professional relationship is either a “confidence” or
a “secret.” A “confidence” is information protected
by the attorney-client privilege; a “secret” is information
gained in the professional relationship that the client has, explicitly
or implicitly, “requested be held inviolate or the disclosure of
which would be embarrassing or would be likely to be detrimental to the
client.” DR 4-101(A). See also R ESTATEMENT § 60
cmt. j (permissible to use one client’s confidential information
for the benefit of another client if no “material risk of harm
to the original client”); ABA M ODEL R ULES OF P ROF ’ L
Conflicts Created by Possession of Information from Another Representation
The next question is whether a conflict arises where a lawyer has confidential
information of one client that would be of use to, but cannot be disclosed
to, or used for the benefit of, another client. We are not considering
situations in which the clients’ interests are otherwise in conflict
with respect to the matter, because then the lawyer would generally not
be able to represent the two clients at all. If they are concurrent clients,
DR 5-105 bars the lawyer from representing one against the other, absent
consent. If the confidential information was acquired in the representation
of a former client and would be useful to a current client whose interests
are adverse to the former client, the two matters will often be substantially
related so as to preclude the current representation (again, absent consent)
under DR 5-108(A). See, e.g., N.Y. State 723 (1999) (“The
most important factor [in determining whether two matters are substantially
related] is whether the . . . lawyer did or could have obtained confidences
and secrets in the former representation that should be used against
the former client in the current representation.”). 1
Similarly in the second scenario, the insurance company may acquire relatively detailed information about the insured that might be useful to the acquirer (e.g., the significance of the investigation, the insurance company’s position on coverage). The insurance company may be indifferent to whether the business is transferred to the joint venture. In the third scenario, the lawyer is likely to know in advance of the general public the precise route of the rail line, information that would be very valuable if known to the land purchaser. 3
Conflicts Created by Possession of Information in Concurrent Representations
The Code expressly addresses whether the simultaneous or successive representations of clients results in a conflict of interest that would bar representation of one or both clients in two provisions: DR 5-105, dealing with conflicts between current clients, and DR 5-108, dealing with conflicts between a current client and a former client. In addition, DR 2-110(B)(2), which requires withdrawing from a representation if “continued employment will result in violation of a Disciplinary Rule,” and DR 5-101, which addresses conflicts of interest arising from personal interests of a lawyer, play a role.
Under DR 5-105, a conflict arises between concurrent clients if the concurrent representation would “involve the lawyer in representing differing interests” or if “the exercise of independent professional judgment in behalf of a client will be or is likely to be adversely affected.”
The mere fact that the lawyer possesses information from another representation that would be useful to the client is not the representation of “differing interests.” This is because, as set forth above, the second client does not have any legitimate expectation that the lawyer will use confidential information of the first client for the benefit of the second. 4
There are situations, however, where information that the lawyer has in his or her mind from the first representation is so material to the second representation that the lawyer cannot avoid using the information. In that situation, the lawyer can be said to represent “differing interests” in the sense that the representation of one client cannot be accomplished without violating the rights of another. Alternatively the lawyer can be said to be unable to proceed under DR 2-110(B)(2), because continued employment will mean violating a disciplinary rule, namely the requirement of DR 4-101(B)(3) that a lawyer may not use a confidence or secret for the advantage of another client. Regardless of how the conflict is characterized, the lawyer cannot proceed unless one client agrees to permit disclosure and use of the information or, in some circumstances, the other client agrees to limit the scope of the engagement. This last point is discussed further below.
Scenario 3 illustrates this problem. If the lawyer learns the precise routing of the rail route in advance of the public but at a time when it would be useful to the prospective land purchasing client, the lawyer could not pretend not to know that information in advising the client on which parcel to buy. 5
The second test set forth in DR 5-105 is whether the lawyer’s exercise of independent professional judgment, which must be exercised zealously in the interests of the lawyer’s client, will be or is likely to be adversely affected by the lawyer’s possession of the information and the restriction on its disclosure or use. The issue is that a lawyer may steer so far clear of disclosing or using the embargoed information that the lawyer will not pursue other avenues that another lawyer might pursue to obtain the information. The lawyer, for example, may not recommend a course of conduct that he or she otherwise might, or not investigate a situation, for fear that the impetus was tainted by confidential information. The Los Angeles Bar Association explained this concept in responding to an inquiry in which the lawyer knew facts about former Client A’s dishonesty that would be highly material to Client B, who was contemplating entering into a transaction with Client A:
Knowing of A’s dishonesty, Law Firm might be tempted to recommend that B take special precautions to protect itself, but would be forbidden from using A’s confidences to its detriment in this manner. Thus, Law Firm would constantly have to second-guess whether its advice to B was affected by Law Firm’s secret knowledge of A’s dishonesty. As the court stated in Goldstein v. Lees, 46 Cal. App. 3d 614, 620 (1975): “It is difficult to believe that a counsel who scrupulously attempts to avoid the revelation of former client confidences --i.e., who makes every effort to steer clear of the danger zone --can offer the kind of undivided loyalty that a client has every right to expect and that our legal system demands.”
Los Angeles Formal Op. 463 (1990). 6 See also In re Compact Disc Minimum Advertised Price Antitrust Litig. , MDL No. 1361, 2001 WL 243494, at *3 (D. Me. Mar. 12, 2001) (holding that law firm in consumer class action against retailers had a conflict where firm had undertaken not to sue or seek discovery from former retailer client, or use information obtained in that representation, because those undertakings “carry the distinct potential of reducing [the law firm’s] effectiveness in representing the putative consumer plaintiff class vigorously”); N.C. Formal Op. 2003-9 (2004) (holding that lawyer had a conflict where lawyer could not use information from prior representation of another plaintiff against the same defendant because the “[a]ttorney’s failure to use Plaintiff’s confidential information would materially limit his representation of the other employees”).
Under either test, whether the possession of the information will create a conflict will depend on the totality of the circumstances. A critical factor is the materiality of the information to the second representation. The more material the information, the more likely that a lawyer cannot avoid using it or, at least, that the lawyer’s professional judgment on behalf of the client may be affected by knowledge of it. One element of materiality is whether the information in question would be uncovered in the ordinary course of the other matter. If so, then the information would be material only if it was important to have the information earlier than it would have been obtained in the ordinary course. In Scenarios 1 and 2, it may be that the information possessed by the lawyer from the prior due diligence and from the insurance company representation would inevitably be sought in conducting due diligence for the first transaction (either because there are standard questions that would uncover the information or because publicly available information about the target would signal the need to make such inquiry). 7 In that case, unless when the information is known is important, the possession of the information would not likely affect the representation. In Scenario 3, however, the value of the information about the rail routing is in its early possession, so the fact that the routing will eventually be public would not mitigate the conflict presented.
A second factor is the ease with which the information can be segregated from the work on the second matter to ensure that the information is not used. Here a significant consideration is the specificity of the information and whether it is of a kind that the lawyer will likely recall. The rail routing in Scenario 3 or the identity of the thief in N.Y. State 525 are examples of information that, once learned, cannot be pushed from the mind. The existence of financial projections in due diligence files that were not focused on in the earlier matter and are not recalled is unlikely to have any effect on the lawyer’s judgment as long as the lawyer does not look at the files and the files are effectively sealed.
Conflicts Created by Possession of Information of a Former Client
The Code’s rule with respect to former clients --the situation presented by Scenario 1 --does not include a provision that refers to the effect on the independent judgment of the lawyer in representing the current client. DR 5-108 contains two prohibitions: the lawyer may not represent a client “in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client”; and the lawyer may not “[u]se any confidences or secrets of the former client.” In the situations we are considering, there is no conflict because the clients’ interests are aligned or not adverse. While DR 5-108 does not itself contain a provision barring representation where the exercise of professional judgment would be affected because of duties to a former client, we believe that the same test of whether possession of the information might have an effect on the lawyer’s judgment applies by virtue of DR 5-101. That rule bars a lawyer (absent consent) from accepting or continuing employment “if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer’s own financial, business, property, or personal interests.” If the lawyer’s professional judgment on behalf of a client would be affected by knowledge of information from a prior representation that the lawyer cannot use or disclose, that is a “personal interest” under DR 5-101. See N.Y. State 628 (1992) (holding that lawyer has a conflict under DR 5-101 if his professional judgment in behalf of a client would be affected by possession of information arising out of a prior representation). Cf. ABA Formal Op. 358 (holding that where lawyer has information derived from a prospective client, “[t]he principal inquiry . . . is whether, as a result of the lawyer’s duty to protect the information relating to the representation of the would-be client, the lawyer’s representation of the existing client may be materially limited”). 8
Contrary Reasoning in Ethics Opinions and Court Cases
We are aware that there is language and reasoning in ethics opinions
and some court cases that treat the mere possession of information that
might be of use to one client, but that is protected as a confidence
or secret, as creating a conflict requiring withdrawal. See, e.g.,
N.Y. State 605 (1989) (“‘absent considerations of waiver
or client consent, no lawyer may ever undertake to represent an adverse
party where information acquired in the course of a prior representation
might be used to his former client’s detriment’”) (citation
omitted); N.Y. State 492 (1978) (same). See also Bank of Tokyo,
650 N.Y.S.2d at 665 (“Absent a substantial relationship between
the two matters, the party seeking disqualification must demonstrate
that the attorney received confidential information about the party that
is ‘substantially related’ to the current litigation.”).
As noted above, many of these authorities address situations in which
the interests of the two affected clients are adverse (beyond the interest
in having access to the information in question), and thus the results,
or tests discussed, can be understood as elaborations of the basic conflicts
rules. One of these opinions, however, N.Y. State 638 (1992), explains
these results in terms that conflict with our analysis here. In addressing
conflicts arising from possession of information derived from a former
client, that opinion states:
We believe this analysis ignores the express qualification of DR 7-101 that limits the obligation of zealous representation by duties contained elsewhere in the disciplinary rules, including the duty of confidentiality under Canon 4. 9 Moreover, the implications of such an analysis are boundless, because the duty to use information for the benefit of a client is very broad. It makes little sense to disqualify a lawyer because he or she has information that might be useful to the second client, regardless of materiality or significance. A more sensible result, at least where the interests of the clients are not adverse, and one more faithful to the language of the Code, (1) recognizes that lawyers regularly have information that they cannot use for the benefit of a client, and (2) focuses on the effect that possession of the information has on the representations in question.
The United States Court of Appeals for the Second Circuit also suggested an expansive test in Bank Brussels Lambert v. Fiddler Gonzalez & Rodriguez, 171 F.3d 779 (2d Cir. 1999), and Bank Brussels Lambert v. Fiddler Gonzalez & Rodriguez, 305 F.3d 120 (2d Cir. 2002), but there were in that case conflicts of interest and other factors that distinguish it from the situations addressed in this opinion. In that case, a bank consortium that included both Bank Brussels Lambert and Chase Manhattan Bank (as agent for the lending group) hired a Puerto Rican law firm to provide an opinion letter with respect to security the banks were obtaining as part of a loan transaction. During the representation, the law firm allegedly learned in the context of an unrelated representation of Chase that the borrower had been manipulating the borrower’s accounting procedures and financial reports. In the context of a ruling on personal jurisdiction over the Puerto Rican law firm, the court affirmed the district court’s holding that, under the Puerto Rico Canons of Professional Ethics, the law firm would have a conflict that required it to withdraw if it learned in the course of one representation information that would be material to another representation that it could not disclose to the second client. 305 F.3d at 125-26. 10 The Second Circuit suggested that the result would be the same under New York law. Id. at 125.
We note that the parties had not argued the law of New York or any jurisdiction other than Puerto Rico. Id. at 125. 11 But in any event, under the allegations recounted in the opinions, the law firm may have had a conflict of interest that would have necessitated withdrawal regardless of possession of information of use to Bank Brussels Lambert, since the plaintiff alleged that the law firm had “helped” Chase prepare documents “in order to sanitize the record of these activities.” 171 F.3d at 783-84. 12 Even without this factor, however, it appears that the information allegedly withheld -that the clients’ borrower was engaged in accounting fraud --may have been so material that the firm could not have continued the representation under the standards applied in this opinion.
Consent to Waive Conflict Created by Possession of Information
If there is a conflict, the question becomes whether the conflict is consentable. This will typically turn on two questions: whether sufficient information can be disclosed to each of the clients to obtain their informed consent; and whether a disinterested lawyer would conclude that the representation of each current client would in fact not be adversely affected by possession of the information. See DR 5-101; DR 5-105(C).
As to the first question, the ability to obtain consent may be hampered by the inability to disclose the information in question. In Scenario 2, for example, if the fact that the joint venture is being considered is itself confidential, the lawyer could not approach the insurance company for permission to use the information derived from the earlier representation.
The second test for consent is different from the second test for whether a conflict exists that is discussed above because the test for whether a conflict exists is whether the lawyer’s professional judgment will be or might be affected, DR 5-101(A) (“will be or reasonably may be”); DR 5-105(A) (“will be or is likely to be”), while the test for whether the conflict is consentable is whether a disinterested lawyer would believe the representation would not in fact be adversely affected, DR 5-101(A) (“a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby”); DR 5-105(C) (“a disinterested lawyer would believe that the lawyer can competently represent the interest of each”).
One other resolution of the conflict would be to limit the scope of the representation of the affected client going forward. This would require the informed consent of the client, to the extent that can be accomplished without disclosure of the protected information. N.Y. City 2001-3 (“In this connection, it is critical that the client whose engagement is being limited fully understands the implications of the limitation, including any restriction on communication with any separate counsel and the impact, if any, on the cost of handling the matter.”).
Duties in Withdrawing from the Representation
If the possession of information that may create a conflict is identified at the outset of the representation, the lawyer must either obtain consent or decline the representation. If the lawyer declines the representation there will be no need to disclose the reason for the conflict. If the lawyer comes into possession of the information during the representation, or if the information becomes material only during the representation, and consent cannot be obtained, the lawyer must withdraw (or, in the case of matters before a tribunal, seek to withdraw) from the affected representation. DR 2-110(B)(2) (requiring withdrawal if “[t]he lawyer knows or it is obvious that continued employment will result in violation of a Disciplinary Rule”).
The question of what the lawyer can or must say to the affected client upon withdrawing has arisen in the context of co-client representations and has split the authorities that have considered it. In N.Y. State 555 (1984), a majority of the New York State Bar Association ethics committee held that where one partner in a joint representation discloses to the lawyer in confidence that he was “actively breaching the partnership agreement,” the lawyer could not disclose the information to the other co-client. A minority dissented, opining that the lawyer has the discretion, if not duty, to disclose the information in the course of withdrawing. The Restatement adopted the position of the New York State Bar minority. The Restatement concludes:
In the course of withdrawal, the lawyer has discretion to warn the affected co-client that a matter seriously and adversely affecting that person’s interests has come to light, which the other co-client refuses to permit the lawyer to disclose. Beyond such a limited warning, the lawyer, after consideration of all relevant circumstances, has the further discretion to inform the affected co-client of the specific communication if, in the lawyer’s reasonable judgment, the immediacy and magnitude of the risk to the affected co-client outweigh the interest of the communicating client in continued secrecy.
R ESTATEMENT § 60 cmt. l.
Whatever may be the correct result in the co-client situation, the Code does not contemplate an exception to the duty of confidentiality simply because the information may be highly relevant to another client. Rather, as we have said, the duty to use all available information for the benefit of the client is qualified by obligations of confidentiality to others. We conclude that where a lawyer is forced to withdraw from a representation because the lawyer cannot disclose or use material information of another client’s, the lawyer is not at liberty to disclose the information. The lawyer should simply state that a conflict has arisen that requires withdrawal for professional reasons. As long as doing so does not effectively disclose the information, the lawyer may state that he or she has acquired information that raises a conflict that requires the lawyer to withdraw. Where identifying the client that “created” the conflict is not tantamount to disclosing the information, that client may be revealed.
In the course of representing clients, lawyers frequently come into possession of information that would be of use to other clients but that they cannot use for the latter clients’ benefit. The possession of that information does not, without more, create a conflict of interest under the Code. The critical question is whether the representation of either client would be impaired. In particular, the lawyer has a conflict if the lawyer cannot avoid using the embargoed information in the representation of the second client or the possession of the embargoed information might reasonably affect the lawyer’s independent professional judgment in the representation of that client. Whether that is the case will often depend on the materiality of the information to the second representation and the extent to which the information can be effectively segregated from the work on the second representation. Even if the lawyer has a conflict, it may be possible in certain circumstances for the clients to waive the conflict without revealing the information in question. If the lawyer must withdraw, the lawyer should not reveal the embargoed information.
305 F.3d at 125.