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California Law Business

Publication Date: August 30, 1999

The California Supreme Court has issued a ruling that may result in disqualifying a firm from representing clients based on conflicts arising from client relationships of the firm's 'of counsel' attorneys.

Practitioners use the "of counsel" moniker to describe a variety of employment arrangements between attorneys and law firms. IN some contexts, of counsel is a euphemism for "emeritus"; in others, it can mean a full-time, experienced attorney not on the partnership track, a lateral partner "on probation" or a part-time affiliate with other personal or professional commitments. IN some situations, of counsel simply may mean "a food lawyer down the hall with whom we sometimes associate and who bought us drinks last week."

Before adopting or maintaining the of-counsel title to describe a firm's relationship with another attorney or firm, law firms should consider the recent California Supreme Court ruling that may result in disqualifying the firm from representing desired clients based on conflicts arising from client relationships of the firm's of-counsel attorneys.

In People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems Inc., 99 Daily Journal D.A.R. 7567 (July 28, 1999), the California Supreme Court concluded that under ethical standards, an of-counsel relationship necessarily is one that is "close, personal, continuous, and regular" and that the well-established "vicarious-disqualification" rule usually applied to partners and associates of the same firm would also apply to attorneys identified as of counsel. In other words, an of-counsel attorney representing a client adverse to one of the firm's clients may result in the firm's being disqualified from representing its client.

Franchisees of SpeeDee Oil Change retained Shapiro, Rosenfeld & Close to associate with their existing counsel in a lawsuit brought against them by the California attorney general. In that same action, SpeeDee filed a complaint in intervention against Mobil Oil Corp. The Shapiro Rosenfeld letterhead listed 14 attorneys' names, with four more attorneys listed as of counsel, all at the same address. One of the counsel attorneys was Eliot Disner.

In an unfortunate coincidence, at the same time that SpeeDee was retaining the Shapiro firm, Mobil was consulting with Disner regarding the same case. Disner spoke on the phone with Mobil's existing counsel in the action and later met with them over lunch. According to declarations from Mobil's counsel, these discussions included the background of the matter, Mobil's theories, discovery strategy and an analysis of current and future procedural and substantive issues. The day following the lunch meeting, counsel for Mobil learned through court papers that the Shapiro firm was now representing SpeeDee.

Mobil immediately moved to disqualify the Shapiro firm, citing the vicarious-disqualification rule. This rule provides that when an attorney is disqualified, the attorney's entire law firm is disqualified as well because attorneys practicing together in a firm presumptively share access to privileged and confidential matters. According to the SpeeDee court: "The rule is designed not only to prevent the dishonest practitioner from fraudulent conduct, but also to keep honest attorneys from having to choose between conflicting duties, or being tempted to reconcile conflicting interests, rather than fully pursuing their clients' rights."

The trial court denied Mobil's motion, and the appellate court affirmed the denial. The Court of Appeal relied on the declarations of Shapiro attorneys and Disner maintaining that Disner had not discussed the merits of the matter with nay attorney or employee of the Shapiro firm. The undisputed declarations established that Disner had a separate law practice from the Shapiro firm; had his own clients, whom he billed separately from the Shapiro firm; paid rent to the Shapiro firm; had his own staff, whom he paid himself; did not share in the profits or liabilities of the Shapiro firm; associated in on three or four cases a year with the Shapiro firm; charged the Shapiro firm for any time he worked on a Shapiro matter; and paid for any Shapiro attorney who worked on a Disner matter.

The declarations established Disner and the Shapiro form did not discuss the case, or the potential for conflict of interest, because neither intended to associate the other.

Based on these declarations, the Court of Appeal ruled that the evidence supported the conclusion that "in reality" there was no "close, personal, continuous, and regular" relationship between the Shapiro firm and Disner. Therefore, the vicarious-liability presumption did not apply in the absence of evidence that Disner had imparted confidential information to the Shapiro firm.

The Supreme Court reversed. The court concluded that an attorney-client relationship existed between Disner and Mobil because Mobil's attorneys imparted material confidential information to Disner during their telephone calls and lunch meeting. Because Disner was found to represent defendant Mobil, and the Shapiro form obviously represented plaintiff SpeeDee, the question then became whether the of-counsel relationship between Disner and the Shapiro firm justified applying the vicarious-disqualification rule to the Shapiro firm.

In resolving this question, the court found that, at minimum, an of-counsel relationship must be one that is "close, personal, continuous, and regular," based on ethical rules and standards. See California Rule of Professional Conduct 1-400(E)(8). The court agreed with the view of the State Bar of California, as amicus curiae, that the public is encouraged to consult those sharing an of-counsel relationship based on the expectation that the resources of both are fully available to clients.

In other words, a firm listing an attorney as of counsel on its letterhead is affirmatively representing to its clients and the public at large that the services of that attorney are available to the of-counsel attorney. Thus, advertising an of-counsel relationship on firm letterhead creates a presumption of a "close, personal, continuous, and regular" relationship.

The rule of vicarious disqualification recognizes the reality that attorneys working together in a professional association share each other's and their clients' confidential information. In light of the court's view that a close, personal, continuous and regular relationship is presumed between a law firm and its of-counsel attorneys, this relationship carries with it many of the same elements that justify applying the rule of vicarious disqualification to partners and associates.

"This close, fluid, and continuing relationship, with its attendant exchanges of information, advice, and opinions, properly makes the of-counsel attorney subject to the conflict imputation rule, regardless of whether that attorney has any financial stake in a particular matter," the court reasoned.

The court thus held that attorneys in an of-counsel relationship are no different from partners and associates in the same law firm for conflict-of-interest purposes: "The fundamental nature of the relationship makes a presumption of shared confidences as appropriate for the of-counsel attorney as it is for partners, associates, and members of law firms. From the clients' and the public's perspective, the of-counsel attorney can hardly be distinguished from other attorneys who may be more close tied to a firm financially. As a result, the need to preserve confidentiality and public confidence in the integrity of the legal profession and judicial process require that of-counsel attorneys be regarded as the same as partners, associates, and members of law firms for conflict of interest issues."

So what does this mean for the many lawyers associated as of counsel with other lawyers or law firms, particularly those who maintain a separate practice while sharing some aspect of their overhead? Many lawyers who share these costs also occasionally share clients or work on each other's matters. This Supreme Court ruling should make of-counsel attorneys and their associated law firms – or at least those that do not maintain a "close, personal, continuous, and regular" relationship – rethink the use of the of-counsel label if they believe their client relationships may engender conflicts.

Practitioners should hesitate before signing on as of counsel to a firm because going forward, their universe of clients will be limited by those represented by the associated firm. A thorough disclosure of each other's client bases should give attorneys a sense of whether potential conflicts are a real possibility. And if the firm and of-counsel attorney think they have enough mutual interest to proceed, they should integrate their conflicts-check databases to prevent conflicts form remaining undetected until it is too late.

On the other hand, if the of-counsel relationship is something less than "close, personal, continuous and regular," then advertising such a relationship on firm letterhead could constitute an ethical violation and lead to a potential claim for breach of fiduciary duty or false advertising by a disgruntled client.

The benefits of announcing an of-counsel relationship are obvious. For the of-counsel attorney, the relationship fosters a perception of being part of a larger operation, perhaps one able to accommodate a wider range of client needs. For the law firm, it might provide the firm with an area of legal specialty not practiced by firm attorneys. While these benefits obviously are substantial, they should be balanced with the need to comply with ethical standards and to avoid the potential for future conflicts.