A recent dust-up between The Coca-Cola Co. and law firm Paul Hastings should put in-house lawyers on notice: Be wary of signing anything, even if your own counsel puts it in front of you.
Paul Hastings “fired” Coke as a client so the firm’s lawyers could represent another company suing the beverage giant for more than $100 million, according to a recent court filing. Coke wants the federal judge hearing the case to bar Paul Hastings lawyers—a group that recently joined from Cahill Gordon & Reindel—from representing SuperCooler Technologies Inc. in the suit.
The firm says Coke signed a 2021 engagement letter with an “advance waiver,” which allows Paul Hastings to represent SuperCooler. It accused Coke of “harassment” in its own court filing, and has pledged to dump Coke as a client in an unrelated human rights case if the company doesn’t back down.
No matter how the dispute shakes out, advance conflict-of-interest waivers are bad business. According to some courts, they’re also unenforceable.
I would always hold my breath when the annual letter from outside counsel arrived, announcing the seemingly inevitable hourly rate increase.
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That sense of dread hasn’t changed, but the letters have gotten longer. Now many are filled with legalese that resembles a click-through terms of service agreement.
It’s tempting to just scroll through these letters and sign. After all, they’re from the outside lawyers you’re paying to help protect you. Those lawyers are duty bound to zealously represent your interests, right?
The Paul Hastings-Coke saga isn’t terribly surprising.
It highlights an inherent conflict between law firms and their clients. Firms want to cast their nets as widely as possible to bring in work. Clients, of course, want lawyers that are loyal to them above all.
Law firms, which have grown exponentially over the last three decades, face continued pressure to bring in new clients. Lawyers have jumped from one firm to the next more frequently over the same time, raising complicated questions about potential conflicts.
Where’s the Trust?
Corporate legal leaders and their outside law firms can better navigate these thorny issue if they start from a place of mutual trust.
During my time leading legal departments at companies like Airbnb and eBay, my relationships with outside counsel boiled down to a few questions: Do we approach legal problems the same way? Is the lawyer smart, well-versed in the relevant area of the law, practical, solutions-oriented, highly responsive and invested in the success of my company?
If the answer to those questions is “yes,” we were likely to have long relationship. Even if the lawyer’s firm ticks up billing rates over the years.
A total of seven outside lawyers—four men and three women—met this criteria for me. I trusted them completely to deliver what I wanted. If they moved law firms, I moved law firms. If I changed jobs, I retained them to advise my new company.
I wanted those lawyers to succeed. I would never enter into a billing relationship that didn’t compensate my outside counsel fairly. An arrangement that saved me a lot of money but short-changed the firm would be bad for our long-term relationship.
By the same token, my outside counsel wouldn’t want to do anything to hurt my company. They would never, for example, send me an annual letter with an advance conflict-of-interest waiver buried in small print.
Instead, I’d expect us to have a mature conversation about the issue up front. It usually would go something like this:
Outside counsel: “Hey Rob, if we ever get approached for representation in a situation that might present a conflict of interest with your company, I’ll call you and we’ll discuss it. I know that you’ll be fair, and if there’s not a real conflict, you’ll waive it so that you can support my firm’s success. If the conflict is real, there won’t be much of a conversation…I’ll ensure that our firm turns down the work.”
Law firms are going to push the envelope. That’s understandable. But Paul Hastings let Coke down.
My advice to firms is to rip these waivers out of your terms of service, now. Don’t show up on the other side of a lawsuit, suing my company, without so much as an advance phone call and a discussion.
Paul Hastings might manage to get a court to enforce the waiver in this case. But, by allegedly failing to have the conversation with Coke—and later threatening to walk away from the company if it doesn’t agree to waive the conflict—the firm hurt its own brand.
It appears to have lost at least one major corporation, and who knows how many others, as a potential future client.
Rob Chesnut is the former general counsel and chief ethics officer at Airbnb. He spent more than a decade as a Justice Department prosecutor and later oversaw US legal operations at eBay. The author of “Intentional Integrity: How Smart Companies Can Lead an Ethical Revolution,” Rob consults on legal and ethical issues.
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