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Cox: Implement a system of checks to avoid conflicts of interest

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Loyalty and independence of judgment are essential to the effective representation of a client. A conflict of interest may make it impossible to exercise these essentials, or it may create an appearance that is injurious to the health of the lawyer-client relationship. While a violation of the Indiana Rules of Professional Conduct does not equate to legal malpractice, courts are entitled to look to the rules for guidance in considering whether there has been a breach of the lawyer’s duty of care. And, an actual conflict can inflate the jury’s perspective of a malpractice claim when the claim itself could have been easily defended. Trial advocates for clients frame conflicts as issues of loyalty, and juries can react severely to perceived betrayal. As a result, claims of conflict of interest can exacerbate even a small mistake or a “close call” made by the attorney.

Conflicts of interest are not the exclusive headache of large, urban, multi-office law firms. Conflicts arise within law practices of every size and geographic location. Moreover, conflicts of interest spawn an alarming number of disciplinary grievances, disqualification motions and legal malpractice claims. For these reasons, it is essential for every practitioner to implement a conflicts-checking system and procedures that are uniformly followed.

Practitioners cannot pretend to rely exclusively upon attorney memory to check conflicts. The number of clients, adverse parties and interested nonparties with whom attorneys become involved throughout their careers is staggering and invariably underestimated. Also, in today’s world, both individual clients and business entities tend to have more complex relationships (extended families, business subsidiaries, etc.); we cannot rely on our cluttered brains to keep it all straight. While lawyers in smaller firms tend to think they can keep a conflicts-checking system in their head, they’re wrong. A system must be established either on paper or in the firm’s computer system. An actual system is critical.

Any effective conflicts-checking system must be implemented and used firm-wide. One staff person in the office should be responsible for maintaining the system because centralization increases accountability and compliance. Consider one backup conflicts clerk in the event the primary conflicts clerk becomes indisposed. The essentials of any conflicts-checking system include: (1) a firm-wide data bank; (2) a procedure for opening new files; and (3) a procedure for the ongoing checking of conflicts in open or existing files. No new matter should be opened until a conflicts check has been completed and the data entered into the system. While it may be tempting to bypass a preliminary conflicts check if immediate action is required, this temptation must be resisted.

Declined prospective clients should be routinely entered into the conflicts databank when the declined client communicates confidential information during the initial meeting which could create a subsequent conflict. Rule 1.18 imposes a confidentiality obligation upon information imparted by prospective clients. This is true even though an attorney-client relationship may never be established. However, it goes without saying that limited but important information must be gathered in order to perform the preliminary conflict of interest check.

For open files, any new parties or interested nonparties which become known to counsel during representation should be checked against and added to the data bank to monitor any actual or potential conflicts which arise subsequent to the initiation of representation.

The conflicts-checking system is only as good as the information that it contains. Creating a conflict-checking system and maintaining it should be viewed as an ongoing and permanent commitment to securing client trust. Effective conflicts can be checked only if there is a thorough, well-maintained list of client names; if the conflict-checking procedure is part of the firm routine; and everyone in the firm is trained on the system and procedures.

The conflicts-checking system does not have to be high tech. Indeed, it could be as simple as a word document or an index card filing system. The best conflict-checking system is one that will work and that the members of the firm will find easy to use and maintain. There is nothing inherent in a computer-based conflicts program that makes it superior to a well-maintained manual system except for the speed of a thorough conflicts check within a computer-based program. Because of this efficiency, computer-based conflicts program are often more likely to be used on a routine basis, and there is less likelihood of overlooking a single name buried in a large database.

Conflicts of interest are subtle, and there are no hard-and-fast rules to avoid many conflict problems. The rules that do exist are not absolute; they contain conditions, exceptions and discretionary factors. These circumstances make it imperative that each lawyer considering a new matter or representation invest the time and energy necessary to (1) collect the necessary information to perform a conflicts check, (2) oversee the proper performance of a conflicts check, and (3) review and analyze any potential conflicts.

Practical tips for checking conflicts

It is evident that clearly and accurately identifying one’s client is essential to identifying a conflict. But identifying one’s client may be easier said than done. Take, for instance, the situation where the lawyer is asked to represent a closely held corporation with a limited number of shareholders. Is the client the board, the president, shareholders, a general partner or a limited partner? Determine and clearly define (and make sure you understand) who the client is and who you are (and are not) representing.

Clearly define and memorialize in either a letter or in a retainer agreement the exact nature and scope of the representation. Then, work only within the scope of the representation. If additional work outside the scope of the representation is requested, analyze whether any conflicts exist in providing that representation; and, if the representation is undertaken, modify the engagement letter or retainer agreement accordingly.

If representation proceeds despite conflicts based upon client consent, be forewarned that anything less than full disclosure prior to obtaining client consent may result in a malpractice action.

Attorney involvement with corporate clients in any capacity other than as legal counsel is risky and should be avoided. The number of lawsuits filed against officers and directors has increased substantially in recent years, and attorneys and their law firms risk noncoverage in most instances. Attorneys in these situations often maintain that their situations are “different” and that their relationships with their corporate clients are bulletproof. Keep in mind that most attorney-directors who have been sued have had the same confidence in their client relationships.

Prospective lateral hires should provide the firm with a listing of all files that he or she has worked on during the previous two years, as well as a list of files that he or she intends to bring to the firm as active files. This information is critical to check for potential conflicts of interest which could jeopardize existing relationships of both the firm and the prospective hire.

Try to always follow the “one client, one lawyer” rule. It is risky to represent multiple plaintiffs or multiple defendants in litigation, for instance. Be wary if you are asked to represent two parties, such as a divorcing couple, an estate and its beneficiaries, or a buyer and seller who announce “we agree to the property settlement and we just want you to write the agreement.” Avoid representing all parties in a transaction. The “I was only the scrivener” defense rarely works, and both sides can sue the attorney for malpractice.

Refrain from doing business with your clients. Doing business with your clients creates the perception that the attorney has an advantage and the dealings are unfairly weighted in the attorney’s favor.

Refrain from changing the terms of your service or fee agreement. Changes of this nature risk the perception that the client is at a disadvantage and the attorney took advantage to line his pockets.

Avoid continued representation after a conflict develops. This is easier said than done. This is a “sleeper” issue, because even in firms where conflicts are routinely checked at the beginning of the representation, they are sometimes forgotten or ignored as facts unfold by way of discovery and pleading amendment. Make sure the firm has a procedure in place to catch subsequent activity in a case.

The most sophisticated conflicts-check system will be worthless as a risk-management tool if, once identified, conflicts of interest are dismissed as insignificant or if the firm’s course of action is not documented. If an actual or potential conflict of interest is identified, check, read and analyze the applicable Rules of Professional Conduct. Discuss the conflict with a disinterested attorney either within the firm or another member of the bar whose judgment is trusted. An objective analysis is critical, especially when the involved attorney is feeling pressure to accept representation. If you are on the fence as to whether a conflict of interest really does exist, consider advising your prospective client of the relationship you have discovered in your search and let the prospective client decide whether the connection is too close for comfort.•

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Dina M. Cox is an attorney with Lewis Wagner LLP in Indianapolis. She focuses her practice on professional liability defense, drug and medical device/products liability defense, consumer class-action defense, insurance coverage, and insurance bad faith defense litigation. The opinions expressed are those of the author.

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