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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: January 18, 2015

Client Bound by Conflict Waiver With Counsel

On January 9, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in GEM Holdco, LLC v. Changing World Technologies, L.P., 2015 NY Slip Op. 50014(U), denying a motion to disqualify counsel.

[NOTE: The authors of this blog, Schlam Stone & Dolan LLP, are the counsel at issue in this decision]

In GEM Holdco, defendants Danzik and Ridgeline (the “Ridgeline Defendants”) were co-defendants with the CWT Defendants. In May 2013, the Ridgeline Defendants signed a conflict waiver acknowledging that if a conflict arose between Schlam Stone’s representation of them and the CWT Defendants, the Ridgeline Defendants consented to Schlam Stone’s withdrawal from representing them and continuing to represent the CWT Defendants in that litigation. The engagement letter also provided that during the course of the representation Schlam Stone would be sharing with each client the privileged and confidential information that the other clients provided it.

As the litigation progressed, it became apparent that the Ridgeline Defendants were not truly aligned with the CWT Defendants. About 14 months after the engagement letter was signed, Schlam Stone withdrew from representing the Ridgeline Defendants because of this now apparent conflict. Thereafter, the Ridgeline Defendants brought claims against the CWT Defendants in Canada and settled with the plaintiffs in the action before Justice Kornreich. In turn, the CWT Defendants asserted cross-claims against the Ridgeline Defendants in that litigation.

The Ridgeline Defendants moved to disqualify Schlam Stone based on the conflict, which the Ridgeline Defendants argued was un-waivable, created by Schlam Stone representing the CWT Defendants against the Ridgeline Defendants. In so moving, they primarily argued that while as technical matter they may have waived a conflict, they did not waive the separate obligation by Schlam Stone not to use the confidential information that it had obtained from them in the course of the representation against them now that they were former clients. The trial court rejected this argument, explaining:

The Ridgeline Defendants argue that Schlam Stone may not represent the CWT Defendants because doing so would run afoul of Rules 1.7 and 1.9 of the New York Rules of Professional Conduct. As the CWT Defendants correctly aver, Rule 1.7 governs conflicts of interest between current clients and, hence, is inapplicable because the instant motion concerns conflicts between current and former clients. The Ridgeline Defendants concede this point. Rule 1.9, however, is applicable, since it governs duties to former clients. . . .

It is undisputed that Rule 1.9 applies. It is further undisputed that, in the absence of a conflict
waiver, Rule 1.9 would prohibit Schlam Stone from further representing the CWT Defendants in
this action.

The issue here is whether the conflict wavier in the Retainer Letter permits Schlam Stone to continue representing the CWT Defendants. The Ridgeline Defendants aver that the sort of confidential information shared with an attorney in a joint representation inherently gives rise to the very unfair advantages that Rule 1.9 seeks to prohibit. This concern, they argue, warrants disqualification. In opposition, the CWT Defendants rightly explain that the Ridgeline Defendants have it backwards for reasons best articulated in Zador:

[W]hen the prior representation involves joint clients, and the subsequent action relates to the same matter, the substantial relationship test adds nothing to disqualification analysis. This is because a substantial relationship between the former representation and the subsequent action is inherent in such situations. In other words, clients A and B are jointly represented by C until C discovers a conflict between the legal position of A and B. Client B retains separate counsel. Client A then sues Client B. In these circumstances, a substantial relationship will always exist between C’s prior representation of B and the litigation between A and B. In addition, although the substantial relationship test determines whether confidences were likely disclosed, in a joint client situation, confidences are necessarily disclosed. In fact, the joint client relationship is an exception to the attorney-client privilege.

Though the parties dispute whether confidential information was transmitted, this is both unremarkable and irrelevant for the reasons set forth in Zador. If the transmission of confidential information in a joint representation vitiated the validity of conflict waiver, notwithstanding the Retainer Letter’s disclaimers to the contrary, virtually all conflict waivers would be ineffectual.

Unsurprisingly, as a result, New York courts have recognized that, where a valid conflict wavier exists, the traditional concerns about confidential information are inapposite. Indeed, the validity of conflict waivers is well established. For a conflict waiver to be valid, the former client must provide informed consent.

The Ridgeline Defendants further argue that the alleged fraud at issue in the new Canadian lawsuit merits deeming the conflict waiver unenforceable. the very point of a conflict waiver is that some future, unforeseen conflict may arise, misaligning the incentives underlying the joint defense. That was made clear in the Retainer Letter.

Indeed, if the conflict was expected, it is unlikely a joint defense agreement would have been entered into. It is to no avail to allege that the other defendant secretly knew about a conflict, since if that mere allegation warranted disqualification, disqualification would be a fait accompli. Prior knowledge of the conflict is inherently intertwined with the merits of the claim giving rise to it, making it virtually impossible to adjudicate on a disqualification motion. Since, as here, it is premature to reach the merits on a disqualification motion, there is no way to rebut the alleged conflict. Ergo, if a claim of knowledge of the conflict were enough to warrant disqualification, disqualification would almost always result.

The Ridgeline Defendants, nonetheless, argue this does not matter and that equity militates in favor of disqualification in this case. The court disagrees. As the CWT Defendants persuasively argue, if disqualification were warranted in this case, it would follow that virtually all conflict waivers would be unenforceable, a result which is at odds with this state’s legal policy. Such a result would significantly impair the ability of co-defendants to mount a joint defense, leading to significant litigation inefficiencies and increased legal costs for litigants, who would unnecessarily have to hire
more lawyers to perform duplicative and expensive work.

(Internal quotations and citations omitted). The text of the conflict waiver in the Schlam Stone
engagement letter is repeated in full in the court’s opinion.

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