Ethics

John kindly invited me to share a panel with him at the APRL meeting last Friday.  The topic was terms sophisticated clients now demand of sophisticated firms.  I played my role of economic provocateur, and the APRL members were as John promised -- wonderfully engaged and uninhibited.  I wish every audience was even half so good. It was great fun.

I thought the topic might be of some general interest, particularly since my freedom of contract argument was not universally welcomed.  A summary of my argument, and responses to some objections, is below.

Sophisticated clients now commonly use form agreements (often requests for proposals or invitations to bid) to buy services from firms.  Some terms of the agreements -- such as strict accounting provisions -- are unobjectionable. 

Other terms drew more interest.  I'll address four here: Demands that firms either (i) agree to represent or (ii) at least not be adverse to affiliates or subsidiaries of the client; and (iii) not advance positions contrary to the client's economic interests; and (iv) rely on the client or third-party vendors for some portion of the services needed, such as document collection and imaging.

The first term is ethically unproblematic.  If a firm wants to represent all 100+ affiliates of some large client, that is the firm's choice, and no rule prohibits it (assuming no conflicts, etc.).  Apparently some clients will not bother even to list all their affiliates and subs -- telling lawyers to go read the 10K.  But that is a reason to say "no" to the term, not an ethical problem. 

The second term struck some people as problematic.  The basic idea seemed to be that if a firm is not conflicted out of a representation then the rules should not allow the firm to form an agreement that would force it to decline the representation. 

I don't think the current model rules support this argument.  MR 5.6 refers to restrictions on practice in connection with settlement.  (California's 1-500 does not contain the settlement language in the text of the rule, but its purpose is the same.)  A retainer does not satisfy that rule, and  MR 1.7 and 1.9 say nothing against such terms. 

My view is that a firm does not have to agree to such a term but may if it wants to.  (For a more extensive discussion, which also defends contracting to clarify rules doctrine leaves uncertain, see John Steele, Corporate Affiliate Conflicts: a Reasonable Expectation Test, 29 W. State U. L. Rev. 283 (2002).)

Two normative arguments were raised against this view, and they implicate the third term, which prohibits "positional" conflicts.  The arguments boiled down to two claims: The terms deny clients the ability to hire counsel of their choice and, more narrowly, might deny some clients counsel altogether. That might be the case if only a few firms could do some type of work and they were all locked up by these terms.

I don't find these arguments very persuasive.  Clients do not have a right to counsel of the their choice.  If they did, lawyers would have a corresponding duty to represent clients who choose them; no such duty exists.  Both .MR 1.7 and 1.9 deny clients counsel of choice all the time.  (Note in this regard that representing the affiliates has exactly the same effect on the lawyer's ability to take on new clients as an agreement not to oppose the affiliates, and representation is ethically unproblematic.)

The client choice argument might be watered down a bit to avoid these points, but the watered down version seems unpersuasive, too.  Here it is:  Clients don't have a right to counsel of choice, but they do have a right not to have counsel taken away by some other client's paranoid contract term. 

To see why I find this version unpersuasive, consider four cases:

(1) Suppose a lawyer who genuinely believes in a client's legal position and disagrees with the theories its opponents wield.  (For example, I think most of the antitrust claims against Microsoft were no good; I could pitch myself to MS as a Chicago-School type, whose beliefs dovetail with Microsoft's positions.)  The lawyer uses these views as a selling point in a pitch for business.  With or without a client agreement, the lawyer would not be adverse to the client (or its affiliates) and would not pursue adverse theories. 

(2) Now suppose a lawyer who has no such views but wants the client's business.  This lawyer touts her loyalty by saying (though the client does not demand it) that as a matter of principle she would turn away prospective clients who sought rulings hostile to the client she was pitching. 

(3) Now suppose the same lawyer does not choose to pitch based on manufactured loyalty but does sign the "no adversity to affiliates/no positional conflicts" term because the client insists. 

(4) Finally, suppose a lawyer who would like to be adverse to the affiliates and would like to pursue theories hostile to the client but who signs anyway to get the business.

The clients whose choice is at issue in the watered-down argument lose nothing if lawyer (1) signs up.  She would not have represented them anyway.  They lose nothing with lawyer (2), either, because lawyer (2) is not obliged to take any clients and can develop her reputation by picking the causes she chooses. 

The only difference between lawyers (2) and (3) is that (3) signs an agreement she might not sign if the rules prohibited it.  The only difference between (2) and (3), in other words, is that lawyer (2) takes the initiative while with lawyer (3) the client insists.  If the client choice argument starts working only with lawyer (3), that is a signal that the argument is more about saving lawyers from competitive pressures than it is about helping clients.

(Note that a rule voiding contract terms such as these would not prevent lawyer (2) from making a pledge identical to the client's form contract terms, a pledge secured by her reputation rather than the law.  Reputation is probably a better guantor of performance than a breach of contract action, and this example shows that a rule against such terms will likely be ineffective if it does not regulate pitches in addition to contracts, in which case the rule begins to bump into Lawyer (1).  Are we to regulate pitches by having disciplinary rule that demand findings into the lawyer's sincerity?)

Still, lawyers (3) and (4) might be taken out of the market by such terms.  What does my freedom of contract theory say about them?  Two things: First, I think most markets in which clients propound such terms are highly competitive, so the loss of these two will not matter in any meaningful way to competition, though the terms will pinch individual firms.  (As the antitrust slogan goes, antitrust is about competition--a state of affairs--not about competitors.)

Second, and more importantly, if there are only a few sellers in a market--only a few lawyers who can provide service -- those lawyers have the leverage scarcity always creates.  They can simply say "no" to such terms.  And why on Earth wouldn't they?  The clients who propound such terms by definition have few alternatives in such a market (for why would they be in any different position than any other client?), and they likely would have to give up their terms.  The client choice concerns is weakest precisely where it seems most relevant, because clients who propound such terms have no greater choice than clients who might suffer from them. 

(Note also that this sort of scarcity of talent is different than the scarcity MR 5.6 worries about in connection with settlement.  That rule makes sense because a defendant might buy off a lawyer who represents a large fraction of a set of plaintiffs but does not represent every injured party.  Some persons with good claims would be left out. If the case was costly to work up, there might be too few non-settling plaintiffs to interest another firm, and those plaintiffs might never see a dime.  That would not be a problem for the original firm, which would have sunk all the fixed costs or working up the case and face only low marginal costs on the additional client.  That sort of cost-based stranding is a legitimate worry, but a different one from an ordinary shortage of talent.)

I've addressed term four in my Qualcomm posts, so I'll simply note here that outsourcing is economically rational and is not going away.  Lawyers should be careful who they rely on; they cannot fight economies of scale.

Lastly, a couple of doctrinal points.  What happens if the client sends its form and the firm sends its form and the two don't match up?  One of two things, I think.  The parties might catch the conflict and reconcile offer and acceptance.  If they don't catch the conflict but do go ahead with the representation their contract will consist of the terms on which their forms agree, if any, and terms that can be inferred from performance.  If even that fails (though why would it), quantum meruit remains.

Also, there is an important difference between representing all affiliates and agreeing not to sue them.  Representation implies disqualification in the event of a conflict.  A covenant not to sue implies the default contract remedy, which is expectation damages, not specific performance.  It would be interesting to see how a client would argue the remedy portion of such a breach action.  My guess is they would argue for specific performance--a disqualification order, and thus equivalent to actual representation--on the ground that damages were too hard to calculate.  It will be interesting to see if such a case arises.

Finally, even if one rejects my arguments for freedom of contract, it need not follow that terms such as (ii) and (iii) should be prohibited.  They might be analogized to covenants not to compete, and upheld to the extent reasonable (though not in California, where such covenants are void unless ancillary to the sale of a business).  Judicial blue-penciling, however, seems to me less desirable than letting big firms and big clients work things out for themselves.

Thanks to my new friends at APRL for a terrific discussion.

DM