Law Firm Mergers or
Don’t get burned by a hot potato

Your firm (firm X), which concentrates in the representation of hospitals and nursing homes, is located in a medium sized metropolitan area. You are considering merging with another firm (firm Y) that has a concentration in elder law and estate planning. You believe this practice will complement your firm’s practice, but you are concerned about potential conflicts that may surface between your firm’s clients and clients of the other firm.

• In the event that there are conflicts between client A of firm X and client B of firm Y, can you withdraw from the representation of client A so that the merged firm can continue to represent client B?
• In the event that lawyers in firm X possess confidential information about one of their former clients that would otherwise disqualify the merged firm from continuing to represent client C, one of firm Y’s major clients, can the merged firm avoid disqualification by screening firm X’s lawyers from any participation in matters involving client C?

Law firm mergers pose many complicated conflicts of interest and confidentiality issues concerning present and former clients of both merging firms. To the extent that the two firms have clients that have interests that are adverse, ABA Model Rules 1.7 Conflict of Interest: Current Clients, 1.9 Duties to Former Clients, and 1.10 Imputation of Conflicts of Interest: General Rule may be implicated. Note: in August of 2007, the ABA General Practice Section will be publishing a book that will address myriad issues related to Buying, Selling, Merging, and Closing a Law Practice.

I. The “Hot Potato” Doctrine

A recurring theme in this area is the “hot potato” doctrine, in which a law firm attempts to withdraw from the representation of one client due to a conflict of interest so that it may continue to represent another more lucrative client. The use of the term “hot potato” to describe this scenario appears to have originated in Picker International, Inc. v. Varian Associates, Inc. 670 F.Supp. 1363 (1987). In Picker the court stated:

…A firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more lucrative client. See Bar Assoc. of Nassau City. Comm. on Professional Ethics, Op. No. 86-1, Law.Man. on Prof.Conduct (ABA/BNA), Curr.Rpts.Vol. 2 at 96 (Feb. 19, 1986) (attorney may not drop one client in order to sue that client on behalf of a more lucrative second client, even if the first client consents); H.G. Gallimore, Inc. v. Abdula, No. 85 C 7190, Law.Man. on Prof.Conduct (ABA/BNA), Curr.Rpts.Vol. 3 at 41-42 (N.D.Ill., Jan. 28, 1987) (firm may not cure disqualification by disassociating from adverse party in other matters).

The rationale behind this rule is that a firm owes a client a duty of undivided loyalty. See generally Law. Man. on Prof. Conduct (ABA/BNA) 51:102-103 and cases cited therein. This is true even though a firm may cease representing a client before the disqualification motion is made. Otherwise, a firm could avoid D.R. 5-105 by simply converting a present client into a former one. Picker at 1366.

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Subsequent case law has examined the “hot potato” doctrine and related issues in the context of law firm mergers. See, e.g., Cavender v. US Xpress Enterprises, Inc. 191 F.Supp 2d 962 E.D. Tennessee (2002). Cavender involved a situation where the plaintiff in an employment discrimination suit moved to disqualify opposing counsel because of ongoing merger negotiations between the plaintiff’s former firm and the defendant’s law firm. The plaintiff’s former firm had withdrawn from the representation due to the merger negotiations. Countering the disqualification motion, the defendant’s lawyers stated that they would erect a “Chinese Wall” around the members of the plaintiff’s former firm that were going to be parties to the merger. The court declined to grant the motion, since the merger had not yet been consummated. However, it made it clear that it would grant such a motion once the merger was completed. The court, citing precedent from an earlier Tennessee Supreme Court case, Clinard v. Blackwood, 46 S.W.3d 177 (2001) in which the lawyer representing a party in a matter withdrew and joined the opposing lawyer’s law firm, held that disqualification would be required if the situation in the current case became similar to that described in the Clinard case.

…Under this analysis, then, the establishment of a Chinese Wall is not a complete defense to disqualification but merely a relevant consideration to be taken into account... After considering these factors including the Chinese Wall, the Tennessee Supreme Court stated joining the opposition’s law firm in the middle of a case would appear to the common man as if the attorney “has not only switched teams, [but] has switched teams in the middle of the game after learning the signals.” Id. at 188. The appearance of impropriety was too strong in this instance to allow the law firm to continue to represent a party in the litigation. Id. at 188-89. In Penn Mut. Life Ins. 841 F.Supp. at 817, Chief Judge R. Allan Edgar held the same (“For all practical purposes, the lawyers have switched sides. Clients must feel free to share confidences with their lawyers. This will not occur if we permit lawyers to be today’s confidants and tomorrow’s adversaries.”). Based upon the reasoning expressed in Clinard and Penn Mut. Life Ins., the Court holds that in situations similar to those in these two cases disqualification is required. Cavender at 967.

In James v. Teleflex, Inc., 1999 WL 98559 (E.D.Pa.) the District Court for the Eastern District of Pennsylvania disqualified the plaintiff’s lawyer after he merged with a law firm that had represented the defendant in matters that the court found to be substantially related to the current case. After the merger, the firm withdrew from the representation of the defendant. Pennsylvania Rule 1.10(b) [PDF] permits screening, but the court held that the firm had not complied with the Rule.

I conclude that the Court’s interest in protecting the integrity of the proceedings and maintaining public confidence, as well as Teleflex’s interest in attorney loyalty, would best be served by disqualification in this case. The fact that Duane Morris and Dunham purportedly have withdrawn their representation of Teleflex does not cure the conflicts presented by Duane Morris’ representation of James in this lawsuit. The fact that Dunham withdrew, or at least told Teleflex that he was withdrawing, as counsel for Teleflex in the Aeroutfitters and other matters when the conflict of interest was brought to his attention indicates behavior that violates an attorney’s duty of loyalty to his client. See International Longshoremen’s Association, 909 F.Supp. at 293 (“However, an attorney may not drop one client like a ’hot potato’ in order to avoid a conflict with another, more remunerative client.”); Harte Biltmore Ltd. v. First Pennsylvania Bank, N.A., 655 F.Supp. 419, 422 (S.D.Fla.1987) (“Public confidence in lawyers and the legal system must necessarily be undermined when a lawyer suddenly abandons one client in favor of another.”) James v. Teleflex, Inc., 1999 WL 98559 (E.D.Pa.)

For scholarly analysis of the ethics issues implicated in law firm mergers, See, Rotunda & Dzienkowski, The Hot Potato Doctrine, Legal Ethics, Law. Deskbk. Prof. Resp. § 1.7-5 (2006-07 ed.), Merger of Law Firms, 91 Law. Man. Prof. Conduct 901, Sylvia Stevens, Hot Potatoes—When Can a Lawyer Drop a Client? 58 Or. St. Bar Bull. 27 (1998), Note, Imputed Disqualification? Law Firm Mergers and the Need for Change, 8 Revlitig 93 (1998).

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II. Screening

The ABA Model Rules do not permit screening where a lawyer(s) from one of the merging firms has confidential client information about a former client that would otherwise disqualify the merged firm from the continued representation of one of the other firm’s major clients as a means to avoid imputed disqualification under Model Rule 1.10. (They do, however recognize screening in circumstances involving former judicial officers, arbitrators and third party neutrals or former or current government lawyers under Rules 1.11 Special Conflicts of Interest for Former and Current Government Officers and Employees and 1.12 Former Judge, Arbitrator of Third Party Neutral. Model Rule 1.0(k) defines screening as follows: (k) “Screened” denotes the isolation of a lawyer from any participation in a matter through the timely imposition of procedures within a firm that are reasonably adequate under the circumstances to protect information that the isolated lawyer is obligated to protect under these Rules or other law.)

In 2002, the Ethics 2000 Commission (E2K) proposed an amendment to Rule 1.10 that would have permitted screening, but it was not approved. For a discussion of the debate concerning this proposed amendment, See Shapiro, If It Ain’t Broke . . . An Empirical Perspective On Ethics 2000, Screening, and the Conflict-Of-Interest Rules 2003 U. Ill. L. Rev. 1299 (2003). Further information on the proposed amendment is available on the ABA E2K Web site.

Some jurisdictions permit screening either by court decision or by provisions in their rules of professional conduct. States that have adopted screening rules include Arizona, Illinois, Ohio, Oregon, Massachusetts, Michigan, Pennsylvania and Washington. As of the date of this publication, a screening rule has also been proposed in Wisconsin that is due to go into effect on July 1, 2007.

For an analysis of the case law and other authorities on screening, See Rotunda and Dzienkowski, Waiver and Screening Under the Model Rules, Legal Ethics: The Lawyer’s Deskbook on Professional Responsibility (2006-2007) § 1.10-2 . See Also the chapter entitled, “Merger of Law Firms” that appears at page 91:901 of the ABA/BNA Lawyers’ Manual on Professional Conduct and the annotations that follow Rule 1.10 in the 2003 edition of the ABA Annotated Model Rules of Professional Conduct, Note, Working With What We’ve Got: Toward a Modern Approach to Ethical Screens, 18 Geo. J. Legal Ethics 823 (2005).

For information on how to put together an effective screen, see, Dunnigan, The Art Formerly Known as the Chinese Wall: Screening in Law Firms – Why, When, Where and How, 11 Geo J. Legal Ethics 291 (1998), and for suggested forms including internal firm procedures and sample consent letters to clients concerning screens, see the ABA Task Force on Conflicts of Interest, Conflicts of Interest Issues, 50 Bus. Law. 1381 (1995).

In view of the varied approach taken towards screening state by state, it is crucial to check your local rules of professional conduct and caselaw before attempting to use screening as a method to cure a conflict of interest.

III. ABA Ethics Opinions

ABA ethics opinions, while not directly addressing law firm mergers, have touched on some of the issues implicated. See, e.g., ABA Formal Opinion 90-357 [PDF] (1990), which discusses the consequences of a lawyer being of counsel to more than one firm and the consequent linking together of all of the firms for the purposes of imputed disqualification:

A lawyer can surely have a close, regular, personal relationship with more than two clients; and the Committee sees no reason why the same cannot be true with more than two law firms. There is, to be sure, some point at which the number of relationships would be too great for any of them to have the necessary qualities of closeness and regularity, and that number may not be much beyond two, but the controlling criterion is “close and regular” relationships, not a particular number.

As a practical matter, nonetheless, there is a consideration that is likely to put a relatively low limit on the number of “of counsel” relationships that can be undertaken by a particular lawyer: this is the fact that, as more fully discussed below, the relationship clearly means that the lawyer is “associated” with each firm with which the lawyer is of counsel. In consequence there is attribution to the lawyer who is of counsel of all the disqualifications of each firm, and, correspondingly, attribution from the of counsel lawyer to each firm, of each of those disqualifications. See Model Rule 1.10(a). In consequence, the effect of two or more firms sharing an of counsel lawyer is to make them all effectively a single firm, for purposes of attribution of disqualifications. (emphasis added) Formal Opinion 90-357 at page 5

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Formal Opinion 94-388 [PDF] (1994) discussed the conflicts that can arise when law firms belong to a “network” of firms and the necessity of disclosing to clients the existence of conflicts that may arise when different members of the network represent clients with adverse interests:

At some point the client of law firm A is entitled to know whether law firm B, with whom law firm A has a relationship, represents interests adverse to the client of law firm A. This is certainly so if a client, in going to law firm A, will have law firm B working on its matter. In this situation the client is the client of both firms, and is entitled to the full protections of Model Rule 1.7 as to both firms. A client is also entitled to know of conflicting commitments where, as described in Formal Opinion 84-351, the relationship between the two firms is “close and regular, continuing and semi-permanent, and not merely that of forwarder-receiver of legal business.” In that relationship one firm was “available to the other firm and its clients for consultation and advice.” Formal Opinion 94-388 at page 7.

In the context of negotiating for employment with a law firm that represents an adverse party, ABA Formal Opinion 96-400 [PDF] (1996) states that a lawyer may avoid such conflicts by withdrawing from the particular matter that gives rise to it.

A means that may be available, in some circumstances, to avoid the conflict that would be presented by a lawyer’s employment negotiations with a firm he opposes in a matter is for the lawyer to withdraw from the adverse representation before having a substantive discussion of employment with the firm. Such withdrawal is clearly permitted if the client consents. Alternatively, such withdrawal could be made without consent pursuant to Model Rule 1.16(b), if applicable. Under Rule 1.16(b), a lawyer may withdraw from a representation “if withdrawal can be accomplished without adverse effect on the interests of the client.” [FN11] Rule 1.16(b) may be invoked, for example, in some situations in which the lawyer is one of several on the engagement, and not the one in charge.

Law firms involved in mergers sometimes try to avoid conflicts problems by withdrawing from the representation of the client who has the conflict pre-merger so that the client would be considered to be a former client under Rule 1.9. Such an approach is generally disfavored. See, Merger of Law Firms 91 Law Man. Prof. Conduct 901 at 907. Note: The discussion in opinion 96-400 should not be read to endorse such tactics in the law firm merger context. First, the opinion explicitly states that it does not apply to law firm mergers. Second, the opinion states that Rule 1.10 may not be directly applicable for the job negotiating lawyer, since he/she would not necessarily have the same interests as the lawyers who remain with the firm.

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IV. State Bar Opinions

State bar ethics opinions have addressed some of the ethical issues implicated in law firm mergers in a variety of contexts. See, e.g., Connecticut Bar Association Opinion 05-09 (2005). This opinion addressed a situation where a law firm that represented developers before a town’s zoning board was going to merge with a firm that served as town attorney. The Committee stated that the firm could continue to represent both clients but only if it stopped representing the town in any land-use matters and obtained the informed consent of both clients for each new representation of a developer. The opinion also suggested that the firm screen any lawyers who had information that could be used to the detriment of either client. In Connecticut Bar Opinion 94-9 (1994), the Committee stated that a law firm that was representing a husband in a divorce could merge with a firm that had represented the wife in a personal injury matter so long as they took steps to ensure that no information gleaned from the former representation was used to the wife’s detriment.

Rhode Island opinion 94-77 [PDF] (1994) discussed circumstances surrounding the merger of two legal services agencies. The opinion stated that the merged agency could not represent clients with adverse interests, and further that it could not represent a client that had interests adverse to any of its former clients. The opinion also urged the merging agencies to develop a system whereby they could identify conflicts of interest. Pennsylvania Opinion 98-55 (1998) stated that a lawyer may not represent the executor of a deceased client’s estate if a law firm with which the lawyer’s firm has since merged drafted the client’s surviving spouse’s will, even though that was 12 years ago and the lawyer who drafted the will has had no contact with the surviving spouse since then.

Missouri Opinion 990050 (1999) discussed the conflicts issue where two firms were undergoing merger negotiations while they had clients in litigation with one another. The opinion, using a rationale similar to ABA Formal Opinion 96-400, stated that the firms could continue with the negotiations only if both clients consented. The opinion states further that clients would need to be informed that a merger was being contemplated. South Carolina Opinion 00-13 (2000) stated that a law firm can continue to represent the executor of an estate when it merges with the law firm that represents the beneficiaries so long as they seek identical relief and the representation will not be adversely affected. South Carolina Opinion 92-23 (1992) stated that a law firm may continue to represent a client in a litigation matter where the lawyer for the opposing party joins the firm so long as the formerly adverse lawyer does not reveal any information about the adverse party.

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ETHICSearch is intended to stimulate awareness of ethical problems and illustrate the varying approaches of different jurisdictions. It is not intended as legal advice. The ABA Model Rules of Professional Conduct and the opinions discussed are advisory only; the ethics rules, laws and court decisions of your jurisdiction may dictate a different result.

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