Representing Joint Clients (Special Credit)
Representing more than one party in a given matter is permissible, but it can raise a host of ethical issues, including those that involve potential—and actual—conflicts of interest.
Notwithstanding all the cautionary tales about conflicts of interests arising under California Rule of Professional Conduct 3-310 (Avoiding the Representation of Adverse Interests,) there are still many situations in which two or more clients have such a compelling identity of interests that requiring them to work through multiple lawyers does not meet their legal needs.
When all requirements of the rule are met, and the worst foreseeable consequences of the conflict never ripen, the lawyer can achieve an optimum outcome at the least expense to the clients.
But the risk is proportionately higher for such rewards.
If the joint clients’ interests become irreparably adverse, there may be no choice for the lawyer but to withdraw from representation of both joint clients and no choice for the clients but to retain separate lawyers and start over.
The denouement can involve much more than estrangement between the jointly-represented clients. It exposes the lawyer to allegations of confidentiality breaches under rule 3-100 (Confidential Information of a Client) and Business & Professions Code 6068(e)(1); failure to return client files under rule 3-700 (Termination of Employment); or even incompetence under rule 3-110 (Failing to Act Competently). It also raises the specter of messy litigation featuring disqualification motions and assertions of privilege under Evidence Code Section 958 by understandably disgruntled former clients.
Rule 3-310 & Informed Consent
Rule 3-310 of the California Rules of Professional Conduct actually contemplates those hazards and provides direction for lawyers. Section (C) expressly allows the representation of more than one client in a matter in which the clients’ interests potentially or even actually conflict, so long as all clients represented by the lawyer in the matter have given informed written consent. Section (A)(2) of the rule defines “informed written consent” as the clients’ written agreement to the representation following written disclosure. Section (A)(1) defines “disclosure” as informing each client of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences. Section (A)(3) states that a “writing” is any writing as defined in Evidence Code 250, which includes e-mail and faxes.
In cases of joint representation, it is especially important to note the difference between potential and actual conflicts, because the rule requires two separate informed written consents: section (C)(1) requires it for a potential conflict, and (C)(2) requires it for an actual conflict. Clients entering a joint representation agreement may readily waive conflicts that are only potential, but the calculus will change dramatically when an actual conflict hardens into reality. Furthermore, while full compliance with rule 3-310 goes a long way in making the world safe for joint clients and their lawyers, it is not enough.
Implicit in the rule is the assumption that the lawyer can represent both clients competently. In Flatt v. Superior Court, 9 Cal. 4th 275 (1994), the court addressed this question for purposes of all conflicts, not just joint representation. Whether or not joint clients provide informed written consent to representation with known conflicts, the lawyer has an undivided duty of loyalty to each and must protect their individual interests in every possible way. “By virtue of this rule an attorney is precluded from assuming any relation which would prevent him from devoting his entire energies to his client’s interests.” Flatt, 9 Cal. 4th at 289 ( italics in the original).
What is unknowable to the client and therefore unwaiveable is whether the lawyer is competent to perform the joint legal matter under rule 3-110(B): can the lawyer apply the necessary diligence, learning and skill, and mental, emotional and physical ability reasonably necessary for the performance of the service? Lawyers who enter joint representation must be able to answer that question objectively and affirmatively.
While the hazards of representing joint clients are not avoidable, they are manageable. Careful planning by the lawyer when the joint representation is created, combined with the lawyer’s close attention to the rules, will not only protect the lawyer but will also provide solutions for clients whose interests suddenly diverge while their legal matter remains pending.
Guidance from Case Law
Fortunately, the very fact that joint representation is so common means there is a great deal of guidance available for practitioners on most, if not all, of these thorny issues. In a divorce case in which a lawyer represented both husband and wife, having drafted an agreement for custody and child support and obtained written waivers, the court overturned the lower court’s refusal to allow the joint representation. See Klem v. Superior Court, 75 Cal.App.3rd 893, 899 (1977). The court in the Klem case held that when a conflict is merely potential, then with full disclosure and informed consent, a lawyer may represent both spouses even at a hearing or trial. The Los Angeles County Bar included a discussion of Klem in its Formal Opinion 471 (issued in 1992) and determined further that when a law firm proposes to jointly represent two clients who are co-defendants in a lawsuit, it is not improper for the firm to seek advance consent to its later representing one client against the other in litigation arising out of the same transaction, provided the lawyer can do so competently and the clients have given informed written consent. See http://www.lacba.org/docs/default-source/ethics-opinions/archived-ethics-opinions/ethics_opinion_471.pdf.
Word to the Wise: Plan Ahead!
In the formative, honeymoon stage of a joint representation, the clients themselves may not fully appreciate how a rupture of the relationship can impact their future legal options, even if they are parties to subsequent litigation that is not on the same matter as the joint representation.
For example, California Evidence Code section 958 provides that there is no attorney-client privilege as to a communication relevant to an issue of breach, by the lawyer or by the client, of a duty arising out of the lawyer-client relationship. No client considering such action would be surprised by that, certainly not after their first meeting with malpractice counsel. However, when only one of joint clients brings such action against their former lawyer, the privilege is waived as to all, and a former client who is not a party to the malpractice litigation may find that confidential information arising from the former joint representation is waived. Thus the court in Anten v. Superior Court, 233 Cal.App.4th 1254 (2015), found that, even though only one of the joint clients sued the law firm for malpractice, the nonsuing client was unable to prevent the parties to the lawsuit from discovering or introducing otherwise privileged attorney-client communications made in the course of the joint representation. Citing Croce v. Superior Court, 21 Cal.App.2d 18, 20 (1937), the court held that communications made by clients to their joint counsel, while privileged against strangers, are not privileged between the joint clients themselves or any of their counsel when they later assume adverse positions. Anten, 233 Cal.App.4th at 1259.
Restriction on Waiver
Outside of malpractice litigation, a joint client generally cannot waive attorney-client confidentiality for the other. See American Mut. Liab. Ins. Co. v. Superior Court, 38 Cal.App.3d 579, 595 (1974) (this case was cited in Anton, supra.) But in a corporate setting, the roles of the parties matter, and the authority to waive may impact a suing joint client. Formal Opinion No. 1999-153 of the State Bar of California’s Standing Committee on Professional Responsibility and Conduct considered two relevant conflict questions that arise when Shareholder B sues both the Corporation and Shareholder A, where Shareholder A is also an officer authorized to hire counsel. The opinion found, first, that a lawyer may represent both the Corporation and Shareholder A, subject to obtaining informed written consent from both parties for potential conflicts under rule 3-310(C)(1), and an additional informed consent in the event an actual conflict arises under rule 3-310(C)(2) and the parties decide to proceed. As the officer authorized to act for the Corporation, Shareholder A executes authorizations for the Corporation as well as for itself.
The lines are brighter for the lawyer in this situation than in jointly representing individuals, because the lawyer is also bound by rule 3-600 (The Organization as Client). The lawyer’s loyalties are clear: so long as the corporation is a client, it claims the lawyer’s duty of loyalty as against all others. That means that Shareholder B has no claim on the duties of the lawyer representing the Corporation, and Shareholder A’s limited claims end when the conditions of rule 3-310(C) are not met.
If the conflicts require the lawyer to resign, the lawyer must comply with rule 3-700(D)(1) in delivering the funds and property of the clients. The situation may be further complicated if Shareholder B also has some authority to act for the corporation and if both Shareholders demand original files or property of the Corporation to which they are both entitled (which could lead to the lawyer’s having to file an interpleader action under California Code of Civil Procedure Section 386, or a declaratory relief action under CCP section 1060. See Formal Opinion 493 issued bt the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee (available at http://www.lacba.org/docs/default-source/ethics-opinions/archived-ethics-opinions/ethics-opinion-493.pdf).
So when a lawyer jointly represents a corporation and its shareholders, the road ahead may be bumpy, but the path is clear: assuming the corporation is not violating the law, it comes first.
Family-Owned Business Dispute
Joint representation is virtually built into the DNA of in trusts and estates practice, since often an individual client has multiple interests as testator, beneficiary, trustor, trustee, or even principal in an underlying asset, such as a business–as well as respective duties to others. It stands to reason that the most comprehensive guidance for joint representation arises from that area.
The gold standard for successful joint representation is Zador Corporation, N.V. v. C.K. Kwan, 31 Cal.App.4th 1285 (1995). Plaintiff Zador was a family-owned business for which Kwan acted as an agent in a real property transaction. At some point, one of the partners who sold the property to Zador sued Zador, Kwan, and the other partner/seller for alleged fraud and collusion in the sale transaction. Both Zador (the business) and Kwan (the individual agent) turned to a law firm (“Firm 1”) to represent them jointly as defense counsel.
Kwan additionally sought indemnity from Zador, since Kwan had acted as the company’s agent in the transaction. Firm 1 agreed to represent Kwan, but presented to Kwan a written disclosure that is quoted at length in the decision. After studying the document for 20 minutes, Kwan signed it and thereafter consulted with Firm 1 during the course of the litigation. T
Although the disclosure may have appeared cumbersome and overcautious in the beginning, subsequent events proved it to be worth every word. In summary, it addressed the following issues:
- Firm 1 did not believe the representation involved an actual conflict of interest between Zador and Kwan at that time, but if one arose, Firm 1 would advise Kwan so that he could decide whether to consult independent counsel.
- Multiple representation may have tactical or economic advantages, but it also involves significant risks that can include divided or shared attorney/client loyalties. Firm 1’s representation of Kwan could be materially affected by its duties to other co-defendants.
- In the event of a dispute between Kwan and the other co-defendants, the attorney/client privilege will not protect communications shared among the attorneys and the co-defendants. Anything that Kwan disclosed to Firm 1 may be disclosed to the other co-defendants.
- In the event of a dispute or conflict between Kwan and the other co-defendants, the Firm could be disqualified from representing all of them absent written consent by all at that time. If such a conflict arose, Firm 1 anticipated it would continue to represent Zador and its related companies. Firm 1 expressly requested Kwan’s consent to that continued representation. Notwithstanding that waiver and consent, there remained some risk that Firm 1 could be disqualified in the future.
- Regardless of the described risks, Kwan acknowledged that he advised Firm 1 he did not want to seek other counsel but instead desired that Firm 1 represent the multiple interests of Kwan himself and his co-defendants. Because the interests of the co-defendants may become inconsistent with Kwan’s, ethical standards require that Firm 1 obtain this written consent.
- Firm 1 requested that Kwan signify his informed written consent by signing and returning the disclosure letter. Firm 1 also encouraged Kwan to seek independent counsel regarding the import of the consent and emphasized that Kwan is free to consult independent counsel at any time, even if he decides to sign. See Kwan, 31 Cal.App.4th at 1289-90.
Less than two months later, discovery from the plaintiff suggested that its allegations as to Kwan were well-founded. Firm 1 met with Kwan and told him that an actual conflict may have arisen, and it advised Kwan to seek independent counsel. At that time, Kwan reaffirmed his prior consent to joint representation by Firm 1 with the other co-defendants. Two days later, Firm 2 advised Firm 1 that it represented Kwan, and that if Zador sued Kwan, then Kwan would move to disqualify Firm 1, which is precisely what happened.
The disqualification motion became the litmus test for the sufficiency of Kwan’s informed written consent to Firm 1’s joint representation. The opinion of the court of appeal is a textbook discussion of how ethics and conflicts of interest intersect.
When a former client seeks to disqualify an attorney in litigation based on the former representation, courts use the “substantial relationship test.” As described by Zador, that test determines whether client confidences were likely disclosed. If there is a substantial relationship between the pending suit and the prior representation, then such disclosure is assumed and disqualification is justified. Zador, 31 Cal. App. 4th at 1294.
However, the Zador court rejected the substantial relationship test in matters where the former representation involved joint clients and the subsequent action relates to the same matter. This is because a substantial relationship between the two is inherent and, for this reason, the substantial relationship test doesn’t actually test anything. The court therefore rejected the usual test in determining the disqualification motion.. Instead, the court tested the scope of the client’s consent to the joint representation. Zador, 31 Cal. App. 4th at 1295.
In the final analysis, there is no reason for a lawyer to hesitate in accepting a joint representation when that is the best strategy for serving closely aligned client interests efficiently and economically. Rule 3-310, formal ethics opinions, and cases such as Zador provide all the tools necessary for counsel to make it an appropriate strategy of choice to achieve an optimum outcome for all parties.
Even so, knotty situations arise and sometimes they are difficult to unravel. That is what ethics hotlines are for. If you confront an ethical issue and are not certain how to proceed, contact your local bar association for assistance. The key is recognizing the problem and seeking sound advice before—not after—proceeding into perilous terrain.
Teresa J. Schmid is a partner in the firm of Schmid & Watson LLP. She is a consulting expert in legal ethics, lawyer regulation, and bar association administration. A member of the State Bar of California Committee on Professional Responsibility and Conduct and a members, she is also a member and past Chair of the Professional Responsibility and Ethics Committee for the Los Angeles County Bar Association.