Big Law Firms, Clients Battle Over Advance Conflict Waivers

The tug-of-war between Big Law firms and their most profitable corporate clients has shifted in favor of firms as they increasingly use advance conflict-of-interest waivers seeking to govern whether, and when, they can represent competing corporations at the same time.

Courts increasingly are finding that firms devising advance waivers are taking care to be more specific so they can avoid being targeted by their own clients over conflicts—or at least can beat them in court when they get sued.

Federal judges over the last 18 months have refused to disqualify leading law firms like Kirkland & Ellis, Sullivan & Cromwell, and Paul Hastings in lawsuits involving companies like Coca-Cola Co. and IBM Corp. This wasn’t the case as little as six years ago, when judges regularly took a harsh view of such waivers.

“Over time, firms have started drafting better waivers, so that clients feel like their interests are being better protected,” said Doug Richmond, who advises law firms as a senior vice president with Lockton Companies LLC. As a result, “courts are tending to view these waivers with much less hostility than they used to.”

Courts historically have been suspect of “very broad blanket” advance waivers, said Cornell Law School Professor W. Bradley Wendel. But “I do think courts are willing to enforce the well drafted ones, and I suspect that law firm in-house counsel have gotten better at drafting them,” he said.

Informed Consent

Legal ethics rules generally prohibit law firms from representing parties adverse to existing clients unless they receive a waiver that allows them to do so. Advance conflict waivers in retainer agreements say clients will waive those conflicts if the situation arises. They provide firms with a ready-made way to ask clients to agree—ahead of time—to allow the firm to represent others in ethically sticky situations.

Most states have adopted, modified or in whole, the American Bar Association’s Model Rule 1.7, which says lawyers must not represent a client if the representation involves “a concurrent conflict of interest.” Exceptions include when each affected client “gives informed consent, confirmed in writing,” the rule states.

The ABA has since added a comment to the rule that says an advanced waiver’s effectiveness is “generally determined” by the extent the client “reasonably understands” the risks it entails. The more comprehensive the explanation of the types of representations that might arise, and the possible consequences, “the greater the likelihood that the client will have the requisite understanding,” the comment says.

The ABA’s comments effectively “blessed” law firm use of advance waivers, said Bruce Green, director of the Louis Stein Center for Law and Ethics at Fordham University.

‘Bellwether’ Cases

Determining the boundaries of advance conflict waivers have been key parts of SuperCooler Technologies Inc. v. The Coca Cola Co., IBM Corp. v. Micro Focus Inc., and US v. Tournant. In each, a federal judge granted a firm the right to continue despite alleged conflicts of interest.

A federal court rejected Micro Focus’s motion to disqualify Kirkland from representing IBM in a copyright and breach of contract case, concluding that the law firm’s concurrent representations of IBM and Micro Focus were a “consentable conflict to which Micro Focus, a sophisticated user of legal services,” had provided advance and informed consent.

Micro Focus agreed in writing via the prospective waiver that Kirkland “may represent, or may already represent,” parties in litigation directly adverse to Micro Focus, so long as the matters aren’t “substantially related” to Kirkland’s representation of the company, said Judge Vincent L. Briccetti, of the US District Court for the Southern District of New York.

“Here, the language of the Retention Agreement is adequate to inform Micro Focus of the material risks that the waiver entailed,” Briccetti said.

Another federal judge denied Coca-Cola’s bid to bar Paul Hastings from suing Coke for more than $100 million on behalf of SuperCooler.

When the soda giant agreed to the waiver, “Coca-Cola knew what Paul Hastings is, what Paul Hastings does, and the types of clients Paul Hastings represents,” Magistrate Judge Robert M. Norway wrote.

Paul Hastings’ engagement letter is “unambiguous,” Norway said. Coke “understood and consented” to the firm serving as counsel to an opposing party in future litigation.

In another case, Sullivan & Cromwell’s failure to advise hedge fund manager Gregoire Tournant of a potential conflict of interest didn’t negate the confidentiality waiver that was part of the engagement letter, said Judge Laura Taylor Swain.

The agreement “made a thorough disclosure of the risks and benefits that were posed by the joint representation,” Swain wrote, and Tournant was represented by independent counsel when he signed it.

“IBM and SuperCooler are bellwether cases,” said Matthew Henderson, a legal ethics and professional responsibility partner with Hinshaw & Culbertson. “I think this does reflect a trend.”

‘A Breaking Point’

Sheppard Mullin in 2018 was disqualified from representing J-M Manufacturing Co. Inc. in a $1 billion qui tam action because it represented a defendant in an unrelated matter. The same year, a federal judge stripped Winston & Strawn from a bankruptcy dispute that would have pitted it against patent client Netflix.

In July, a federal judge disqualified Quinn Emanuel Urquhart & Sullivan from a case involving X Corp.

Yet the broader trendline has been tilting in favor of firms, said Professor Ashley London with Duquesne University Thomas R. Kline School of Law.

Waivers feed the confirmation bias myth of the large-firm lawyer as the only advocate “who can grasp complex, large corporate transactional matters,” she wrote in an Oct. 24 paper. “That is, until a client reaches a breaking point and files for disqualification.”

Advance waivers have helped Big Law attorneys simply shelve fundamental legal ethics precepts, London said in an interview, like loyalty and fiduciary duty. “It may be old-fashioned to say, but clients hire lawyers to be on their side.”