Determining Whether a Representation Against a Client's Subsidiary Constitutes a Conflicted Representation

• Citation: Vol. 2024 No. 2
• Publication year: 2024
• Author: Written by Elizabeth L. Bradley

DETERMINING WHETHER A REPRESENTATION AGAINST A CLIENT'S SUBSIDIARY CONSTITUTES A CONFLICTED REPRESENTATION

Written by Elizabeth L. Bradley^*

Does the representation of a client against a subsidiary of a current client constitute a conflicted representation? Not surprisingly, the answer to this question is ... it depends. As with so many ethics questions, there is no bright line rule.

DUTY OF LOYALTY IS PARAMOUNT IN CONCURRENT REPRESENTATIONS

"A lawyer shall not, without informed written consent from each client ... represent a client if the representation is directly adverse to another client in the same or a separate matter," even where the two matters are entirely unrelated.⁰¹ "The primary value at stake in cases of simultaneous or dual representation is the attorney's duty—and the client's legitimate expectation—of loyalty, rather than confidentiality."⁰² The test for disqualification due to simultaneous representation is stringent.⁰³ A client who learns that their lawyer is also representing a litigation adversary, even in a wholly unrelated matter, cannot be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship.⁰⁴

Where a lawyer represents an organization, the client is the organization itself, acting through its duly authorized directors, officers, employees, members, shareholders, etc.⁰⁵ The prevailing view is that the mere fact of corporate affiliation does not create a conflict. Under certain circumstances, however, an adverse representation against an affiliate or subsidiary of a current client may constitute a conflicted representation. Both the State Bar of California and the American Bar Association have issued formal ethics opinions concluding that a lawyer who represents a corporate client is not by that fact alone barred from a representation that is adverse to a corporate affiliate of that client in an unrelated matter; both opinions recognize that a disqualifying conflict could arise in particular circumstances.⁰⁶ Whether a client's subsidiary should be treated as a client for conflict purposes is therefore a highly factual analysis, to be decided on a case-by-case basis.

"[A] parent corporation and its subsidiary, even if wholly owned, are generally regarded as separate entities for conflicts purposes, unless an exception applies—where the relationship between the entities are such they have a 'unity of interests' so as to deserve being treated as one."⁰⁷ The State Bar opinion identifies two exceptions. "When a corporation is the alter ego of another entity or has a sufficient unity of interests, they should be treated as the same entity for conflict purposes."⁰⁸ Also:

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if the attorney has obtained confidential information directly from the nonclient subsidiary under circumstances where the subsidiary could reasonably expect that the attorney had a duty to keep such information confidential, the attorney might be precluded from acting adversely to the subsidiary in matters related to the subject on which the attorney had obtained such confidential information.⁰⁹

SUCCESSIVE V. CONCURRENT REPRESENTATIONS

In Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft,¹⁰ the conflict question involved a successive representation in the context of monitoring counsel.¹¹ The court applied four factors to ascertain whether a parent corporation and its subsidiary should be regarded as separate entities for conflict purposes: (1) Whether the firm received confidential information from the parent substantially related to the claim against the subsidiary; (2) Whether the parent controlled the legal affairs of the subsidiary;¹² (3) Whether the parent and subsidiary shared operations and management, such as overlapping functions and personnel; and (4) Whether the parent and subsidiary shared a unity of interest.¹³

The Morrison court equated this analysis as the "unity of interests" analysis referred to in the State Bar opinion, and recognized it as distinct from and something less than an alter ego analysis. The court's approach has been referred to as a "pragmatic, totality of the circumstances approach."¹⁴ It concluded that the principal focus should be the practical consequences of the attorney's relationship with the corporate family. If that relationship may give the attorney a practical advantage in a case against an affiliate, then the attorney can be disqualified from taking the case. While an alter ego test is one possible basis for equating affiliates in conflicts cases, an alter ego finding is not required.¹⁵ Because confidentiality was the primary...