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Probing the Mysterious “Materially Adverse” Standard for Attorney-Client Conflicts


John B. Harris

Frankfurt Kurnit Klein & Selz PC

One of the most frequent—and most thorny—legal ethics issue involves conflicts of interests between a lawyer’s current clients and former clients. The ABA Model Rules of Professional Conduct (Model Rules) forbid a lawyer from representing a current client whose interests are “materially adverse” to the interests of a former client on the same or a “substantially related” matter. The same standards apply, though less frequently considered, in the context of conflicts between a lawyer’s current client and a prospective client who had previously consulted the lawyer. These issues are significant because—if a disqualifying conflict exists—a client will be deprived of the counsel of its choice, and the disqualified lawyers (and their law firms) will be unable to handle the matter.

The conflicts rules provide plenty of room for disputes. The question may center on who was the former “client”—does it include subsidiaries, affiliates and other related entities? Sometimes, the question may hinge on whether a party is a “former” client—is it reasonable for the party to view opposing counsel as its continuing counsel? And sometimes there is uncertainty about what it means for matters to be “substantially related” to one another.

Less frequently examined, and murkier, is what it means for interests to be “materially adverse.” While adversity is sometimes obvious (such as when clients are litigation adversaries), there are other scenarios when the question of “material adversity” is more subtle, as explored in ABA Ethics Opinion 497, released on February 10, 2020. Although Opinion 497 announces no new approach to conflict analysis, it provides a useful guidepost for assessing the degree of adversity required, especially in situations when a lawyer’s work for a current client could be said to undermine the interests of a former client that the lawyer had been retained to advance.

The Model Rules

Model Rule 1.9(a) deals with former client conflicts. Absent written consent, it forbids a lawyer who has formerly represented a client in a matter from representing another person in the same or a substantially related matter “in which that person’s interests are materially adverse to the interests of the former client.” Put differently, the rule allows a lawyer to proceed against a former client in an unrelated matter or—even if the matter is the same or substantially related—if the former client’s interests are not “materially adverse” to the current client.

Model Rule 1.18(c) addresses conflicts with prospective clients with whom the lawyer consulted, but who did not ultimately retain the lawyer. Rule 1.18 standards of “substantial relationship” and “materially adverse” interests are the same as those in Rule 1.9(a), except additionally require that the lawyer have received information from the prospective client that “could be significantly harmful to that person in the matter.”

The History of “Materially Adverse” Interests

The “materially adverse” standard was first established in Rule 1.9(a) in 1983. The same standard was later engrafted in Rule 1.18 when the ABA adopted it in 2002. Before 1983, this standard did not appear in the Rules. The use of this language also created confusion because it was undefined and because it presents a different standard than the test for assessing conflicts among current clients, which focuses on whether clients’ interests are “directly adverse.” Rule 1.7(a). This differing language presents twin questions: (1) Why not use the same language for all conflicts?; and (2) Does this different wording make any difference?

As to the first question, it’s a mystery. What we know is that the distinction has existed for almost 50 years and has survived various overhauls to the Model Rules.

As to the second question, Opinion 497 notes that, until 2000, the comments to Rule 1.9(a) specifically referred lawyers seeking guidance on what “materially adverse” meant to the principles and jurisprudence developed under the “directly adverse” standard of Rule 1.7. However, in the 2000 amendments to the Model Rules, the reference in Rule 1.9 to the Rule 1.7 standard was inexplicably removed, creating uncertainty as to whether the standards remained the same.

Opinion 497 reasons, based on its review of court decisions and other materials since 2000, that there may be at least a theoretical difference between these standards. While all “directly” adverse interests are necessarily also “materially” adverse, an interest can be “materially” adverse without being “directly” adverse. This interpretation appears to suggest that—at least conceptually—conflicts involving former and prospective clients are judged by a more rigorous standard than conflicts among concurrent clients. Leaving aside the linguistic niceties, the notion that a current client would receive less protection from conflict than a former or prospective client is counter-intuitive. It is also belied by the formulation in states like New York, which follows the “materially adverse” standard for former client conflicts under Rule 1.9(a), but which provides greater protection for current clients, preventing concurrent representation under Rule 1.7(a) anytime there are merely “differing interests” among them—with no mention of “adversity” at all.

Perhaps fortunately, Opinion 497 does not seek to explore this theoretical divide between “materially adverse” and “directly adverse,” but rather considers the more useful question of what kinds of interests are disqualifying under Rules 1.9 and 1.18. In so doing, Opinion 497 generally concludes that the “materially adverse” standard is not satisfied simply because clients compete economically or because the representation of a current client generally affects a former client’s economic or financial interests. Some “specific tangible direct harm” is required.

The Opinion rightly concludes that “material” adversity is uniformly found where a lawyer is bringing or defending against a suit where a former client is the adversary, or where a former client is “across the table” in negotiating a transaction. It is also found when lawyers attack their own prior work in—for example—challenging a patent obtained for the former client, attacking a restrictive covenant that the lawyer previously drafted or seeking to rescind a contract the lawyer negotiated on behalf of a former client.

Material adversity is less clear in two other circumstances: (1) when lawyers do not directly attack their own prior work, but otherwise seek to undermine the benefit of that work; and (2) when a lawyer examines a former client or seeks discovery from them.

(1) Undermining the Lawyer’s Prior Work

To illustrate the range of considerations found in determining material adversity in the context of a subsequent representation, Opinion 497 analyzes three conflict cases from around the country in which the former client was not a direct adversary.

The Opinion first considers Zerger & Mauer LLP v. City of Greenwood, 751 F.3d 928, 933 (8th Cir. 2014), in which a lawyer represented the City of Greenwood, Missouri in a suit against a company (Martin Marietta); the City claimed the company’s truck traffic to a local quarry created a nuisance. The settlement of the case allowed the City to designate specific travel routes for the company’s trucks. The same lawyer later brought a new lawsuit against Martin Marietta, this time on behalf of property owners bothered by the new truck routes. Although the City was not a party to the second suit, it moved to disqualify. Granting the motion, the court found that the lawyer was advocating a position that would “contradict” or disrupt aspects of the City’s settlement, which he had negotiated, and that the subsequent suit could have the effect of embroiling the City in renewed litigation with Martin Marietta. Accordingly, the lawyer’s advocacy on behalf of the property owners created an actual, identifiable detriment to the interests of his former client.

National Medical Enterprises, Inc. v. Godbey, 924 S.W.2d 123 (Tex. 1996) involved a lawyer’s representation of a hospital employee in civil and criminal matters involving alleged mistreatment of patients and fraud against insurers. The employee denied culpability and was never charged criminally or found civilly liable for wrongdoing. More than a year after its representation of the employee ended, the lawyer’s firm sued the hospital for the same alleged wrongs on behalf of dozens of former patients. Although the suit did not name or refer to its former client (and the lawyer who represented the employee was walled off from involvement in the case), the suit referred to wrongdoing at facilities overseen by the former client. The appellate court sustained the former client’s motion to disqualify; it concluded that, while the risk of indictment, renewed criminal inquiry or other focus on the former employee’s conduct arising from the new lawsuit might be slight, the risk was sufficient to constitute material adversity. The Opinion also cites Ill. State Bar Op. 16-03 (representation of second wife in child support proceedings was “materially adverse” to the interests of the first wife, whom lawyer had previously represented, because recovery for second spouse could reduce husband’s ability to pay the first).

The third case presents a contrast to Zerger and National Medical Enterprises. In Simpson Performance Products, Inc. v. Robert W. Horn, P.C., 92 P.23d 283 (Wyo. 2004), a seatbelt manufacturer (SSP) retained a lawyer to investigate and evaluate a potential lawsuit against NASCAR over NASCAR’s claim that SSP’s defective product contributed to the death of driver Dale Earnhardt. SSP ultimately chose not to proceed in order to maintain NASCAR’s goodwill. Thereafter, SSP’s retired founder hired the same lawyer to sue NASCAR on his own behalf. The court denied SSP’s motion to disqualify based on a finding of no material adversity, concluding that the founder’s lawsuit had not, in fact, resulted in the feared adverse effect on SSP’s relationship with NASCAR and that SSP was “doing just fine.”

The ABA Opinion expresses no view as to whether SSP was correctly decided, but one could readily question whether the assessment of material adversity should be viewed in hindsight. Is the right question whether the lawsuit actually created a tangible detriment to SSP, or was it enough that the lawyer’s suit —regardless of the actual effect—undermined SSP’s decision that it was better not to do so? By parallel logic, the result in National Medical Enterprises should have hinged on whether the lawsuit actually resulted in the former client’s indictment. Perhaps the result in SSP is better understood by focusing on the serious and tangible nature of the potential harms—indictment in National Medical Enterprises versus mere loss of goodwill between two corporate entities in SSP.

(2) Examining a Former Client

Model Rule 1.9(c) prohibits using information received from a former client during the course of a representation to the subsequent “disadvantage” of that client unless that information has become generally known. This prohibition is often the primary reason why a former client’s lawyer cannot be involved in the cross-examination of the former client. However, as the Opinion notes, the examination theoretically could be separately barred—even if confidential information is not used—if the matter is substantially related and material adversity exists. In such circumstances, the Opinion notes, having the current client retain separate counsel to examine the former client may avoid the issue, provided the conflicted attorney is properly screened.

Conclusion

Conflicts of interest involving former clients remain a frequent source of litigation. As ABA 497 points out, the “materially adverse” standard, while obvious in many situations, can still be controversial when the former client is not directly on the other side of a legal dispute. The careful practitioner should look carefully at the nature and extent of tangible harm to a former client’s interest before acting to advance a current client’s interests.

John Harris is a partner in the Litigation Group of Frankfurt Kurnit Klein & Selz PC. He is a recognized leader in the professional responsibility and white collar defense bars. In his legal ethics and professional responsibility practice, Mr. Harris defends law firms, lawyers, and other professionals against claims of legal malpractice, breach of fiduciary duty and fraud.

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