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Journal of the Institute for the Study of Legal Ethics

Publication Date

1-1-1999

Introduction

Lawyer represents Parent Corporation. May Lawyer (or another lawyer in her firm), acting on behalf of another client, file suit against Subsidiary Corporation if Subsidiary is wholly-owned by Parent? In any attempt to answer such a conflict of interest question, one must first identify whom or what is being represented as client of the challenged lawyer. In the example, the question is whether Lawyer, when she undertook to represent Parent, also undertook conflict of interest obligations that extend as well to Subsidiary. For corporate and similar entity clients, that task has proved notoriously difficult. One difficulty that once muddied analysis has now been resolved because of the wide consensus supporting acceptance of the so-called "entity" concept of corporate representation. Under it, a lawyer representing a corporation is deemed to represent only the corporate entity, and not-by force of the originating representation-any constituent of the corporate client, such as a majority shareholder, a high-ranking officer, or the like.

Acceptance of the entity theory has been beneficial on the whole, despite perhaps inevitable difficulties in applying it even when dealing with what is indisputably only one entity. However, it has proved of limited value when the client must be identified among multiple but affiliated corporate entities such as parent and subsidiary corporations and sister corporations. Those problems may exist for purposes of both concurrent-representation conflicts and those involving former clients. Think of this set of client-identification problems as if the task were that of gathering together for a family portrait all corporate affiliates who are significantly related at any one moment in time. Although the familyportrait metaphor fits only loosely, I will refer to such questions as the "lateral" dimension of corporate family conflicts of interest. Beyond lateral-dimension conflicts, courts have also sometimes differed in attempting to identify the entity client when the entity has transmogrified over time. That can occur, for example, when a corporate client's shares are sold to an acquirer, or when the corporate family picture arguably has been enlarged because of a merger or acquisition and when the transmogrifying event is claimed to have significance for conflict purposes. Think of this as if the problem were to gather together in one album all antecedent and successor corporations that are significantly related for conflicts purposes. Again using the family-album metaphor only loosely, I refer to this second set of corporate-family conflicts as "lineal-dimension" conflicts.

Various theories have been advanced to support one "test" or another for client identification in the case of multiple corporate affiliates, but none has gained common acceptance. Those various theories jostling each other for acceptance are remarkable for their radically different approaches. At the extremes in the lateral-dimension realm are categorical, per se theories. At the one-large-picture extreme, one rule posits that a lawyer who represents one member of a multi-member corporate family is always deemed to represent all others as well-what I hereafter term the all-affiliates approach. At the small-picture extreme, a competing theory would impose the inflexible rule that a lawyer representing one such member never (by that fact alone), or hardly ever, represents any other affiliated entity-the no-affiliates approach. (The foregoing characterizes to some extent. In fact, both the all-affiliates and no-affiliates positions come in multiple variations, many of which admit more or less expansive exceptions, causing them to converge at least somewhat.) Similarly, although comparatively few decisions have yet analyzed issues of lineal-dimension conflicts, courts have held both that a lawyer who represents a corporate client in its sale to acquirers either may or may not appear adversely to the corporation in subsequent litigation by the sellers against the buyers. Courts and commentators have more uniformly approached the somewhat related lineal-dimension question of the effect of post-representation client mergers and acquisitions on corporate-family conflicts. On the other hand, courts and commentators have not commonly recognized that there are indeed the two different lines of decisions for what I here call the lateral and lineal dimensions of the client-identify problem, and that they ought to be governed by quite different considerations. Rather clearly, theory and the decisions are themselves in conflict and, to some extent, in a state of disarray.

The disarray is partly a function of lack of authoritative guidance. Neither of the ABA lawyer codes written in the latter half of this century addresses the issue. The lawyer codes of Florida and the District of Columbia were recently amended to do so, with varying results. Florida's rule merely states that lawyers are not subject to the no-affiliates rule, but-other than alluding to an alter ego exception and one dealing with confidentiality--provides no further guidance as to the otherwise unspecified "exceptions to the general proposition" that it also recognizes. The more recent rule of the District of Columbia is much more admirably fine-tuned and is examined below, with very general approval. Indeed, the committee now studying the ABA's Model Rules would do well to follow it, with some alterations, as a model for other jurisdictions.

In this article, I reconsider this double set of corporate-family conflict problems and propound theories and considerations on the basis of which most such issues might be addressed. I examine the issues both in terms of conventional conflict-of-interest analysis, and, perhaps of equal importance, in terms of the practicalities confronted by businesses in setting up and operating affiliated corporations and of law firms in dealing with conflicts problems created by corporate affiliations. Too often, analysis of corporate-family conflicts has proceeded by caricaturing affiliated entities as if they were all mega-corporations with hundreds of affiliates or by ad hominem suspiciousness about the motivations of corporations that might object to a law firm's suing an affiliate. While any conflict theory should recognize the potential for confounding complexity in applying conflict rules or outright abuse of them, here as elsewhere, theory can hardly be justified on the overriding notion that either grotesque caricature is systematically sound or that claims of abuse provide all we need to know about motivation. Reality may be, on occasion, both messier and less chaotic than caricature might suggest

As will be seen, no single theory can adequately deal with both lateral and lineal dimensions of corporate-identity conflicts. In the first place, it must be recognized that lateral and lineal conflicts present uniquely different problems. Moreover, both kinds of corporate-family conflicts are best approached in highly individuated ways-ways that, unfortunately perhaps for large law firms in the present state of conflictchecking technology, seem to require a correspondingly fact-intensive, and thus somewhat lawyer-intensive examination of corporate clients and their affiliates. Such an inquiry, although in part well-adapted to computer-driven conflicts checking for "hits" among prospective present and former firm clients, will admittedly be more time-intensive and produce more disabling conflicts than would, for example, the no-affiliates rule with its refusal to recognize any, or many, such conflicts. But conflicts analysis is not intended, above all else, to relieve lawyers of the tedious shopkeeper's work of checking conflicts or, certainly, of the economic burdens of having to turn away business because the new business will introduce an impermissible conflict. Nor, more substantially, can conflicts law ultimately quail at the thought that an occasional innocent client will be forced by conflicts rules to find new counsel and will thus be denied their first choice of counsel. That is the heavy but accepted price for conflicts rules in general and should also be recognized as the accepted price for conflicts within corporate families.

In the remainder of this Article, I begin with illustrations of the various types of entity families that corporations may create and some of the reasons they do so. I then briefly examine the entity-representation rule itself, for it is the starting point from which much corporation-representation conflicts analysis proceeds. We see the various ways in which the entity-representation rule has been applied, both in the law and in the law of lawyering and specifically for purposes of assessing conflicts of interest in a lawyer's representation of various kinds of entities. It should be no surprise to find that, even at this preliminary point, the law by no means favors mindlessly automatic application of the entity-representation concept. I then turn to examine specifically the problem of lateraldimension corporate family conflicts-those of parent-subsidiary corporations and the like-in the process examining the several theories that courts and commentators have advanced to resolve corporate-family conflict questions. I reject the absolutism of both the all-affiliates and the no-affiliates positions. In their place, I propose a functional analysis of such problems-one focusing on protecting the corporate client's reasonable expectations in the confidentiality of its information and its reasonable expectations in a smooth working relationship with its counsel based on the extent of operational proximity between the lawyer's work and the assertedly affiliated entity and its agents who are important in the representation. I then turn in a much more perfunctory way to lineal-dimension corporate-family conflicts problems. In this quite different realm, I argue for a test that is again functional but importantly different-one that focuses upon whether the "before" and "after" family of corporations represents the same or a different community of interests as compared with those that the lawyer undertook to represent. I also applaud the nearly universal answer that courts and commentators have given to another lineal-dimension issue-that concerning conflicts produced by client and opposing-party mergers and similar transactions. I then conclude.

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