Duty of Loyalty and Conflict of Interest Issues
Duty of Loyalty and Conflict of Interest Issues07.02.2018
I returned from London last week where I met with both underwriters and claim professionals. I was asked several times about US claim trends in the legal malpractice space and, in particular, what was the biggest source of claims against attorneys. I responded from what I have read from recent articles and studies that legal malpractice claims have stabilized in quantity since the economic crisis that started a decade ago but not in severity (in terms of reserves, settlement, and judgments not to mention the costs to defend such claims.)
The somewhat flattening in the number of claims is not surprising given the increase in real estate values and an overall better US economy since the Great Recession since real estate transactions and family law are two of areas of practice with the greater likelihood of claims. (Historically, divorce rates and child custody fights increase in bad economic conditions.) That being said, the drop in claims arising out of real estate transactions has been replaced somewhat with an increase in cyber-related legal malpractice claims. (Other areas of practice that provide the highest number of claims is personal injury, estates and trusts, and corporate/business organization.)
With respect to specific claims, I mentioned that conflicts of interest remains the leading cause of claims against attorneys. Plaintiff’s lawyers “love” such claims as they are easily explainable to a judge or jury that an attorney puts his or her own interest above the needs of his or her client. This also provides a plaintiff’s lawyer with the justification to present a larger damage claim, including punitive damages in certain jurisdictions, by focusing on the actual or alleged violation a basic tenant of attorney ethics – loyalty. Finally, while the American Bar Association and state bar associations have model rules for attorney conduct, there is no statute that defines conflict of interest providing plaintiff’s lawyers with creative license.
The landscape is complicated with law firms like other businesses in the US seeing an uptick in mergers and acquisitions resulting in a more regional if not national footprint (and requiring multi-office risk management systems). Moreover, law firms continue to laterally hire attorneys as a vehicle to grow and/or diversify its practice. All too often, conflicts that are discovered are addressed late in the M&A or lateral hire process, and after the parties have invested time, money, ego and reputation to complete the transaction.
These economic trends are magnified by the reality of law firm culture where partners are measured on finding new and maintaining existing business relationships. While not intentionally violating the duty of loyalty, business pressures could cause an attorney to turn a blind eye to what can perceived to be a conflict of interest to keep an existing or new client happy. (If you advise a client of a conflict, it will undoubtedly lead to the client incurring extra or what is perceived to be duplicative legal fees, not to mention learning about another lawyer/law form, all of which could have adverse business consequences.)
I experienced my own business reality of advising a client of a conflict of interest. While in private practice, I was asked by an E&O insurer to represent a fast food entity as well as individuals in connection with an alleged assault based on the sexual orientation of a customer. I advised the client that it would be a conflict for us to represent both the corporate entity and the 3-4 employees alleged to be involved in the incident. (In fact, I advised that each defendant should have separate counsel. I was told that each defendant “waived” the potential conflict, but was concerned about the economic pressure to agree to waive any conflict.) The long and short of it is that this conflict dialogue led to a weakening of the relationship with the E&O insurer.
As you can imagine, a claim of the breach of loyalty to a client can be troublesome on several levels for an attorney and her/his law firm. Moreover, such a contention as a basis for an attorney malpractice claim can be a cause celebre. That being said, it is useful to remember that conflict of interest in and of itself does not support a legal malpractice cause of action, and there must be actual damages for a claimant to prevail. Two recent Court decision discussing this can be found at Fitts v. Richards-Smith, 2016 WL 626220 (Tex. App. 2016) and Fletcher v. Boies, Schiller & Flexner, LLP, 140 A.D.3d 587 (NY 1st Dep’t 2016).