By Karen Sutherland and Ross Farr

Consider this scenario: as a member or partner of a law firm, you have a question about a potential malpractice claim against the firm by one of your clients. You go to another member and ask her advice. One of you drafts a memorandum of the conversation. Later, the client sues your firm for malpractice and propounds discovery asking for that memorandum. Can your firm withhold the memorandum as an attorney-client privileged communication?

This question was raised, but only partially answered, in a recent Court of Appeals decision, VersusLaw, Inc. v. Stoel Rives, LLP.1 In that case, Stoel Rives represented VersusLaw in an arbitration with Matthew Bender. At some point before arbitration, a Stoel Rives attorney realized that one of VersusLaw’s claims “may have been compromised by Stoel Rives’ failure to advise VersusLaw to timely file [the] claim . . . .”2

VersusLaw eventually filed suit against Stoel Rives for malpractice. During the course of discovery, VersusLaw learned of communications between its former attorney and her colleagues at Stoel Rives and moved to compel production of any related documents.

Both VersusLaw and Stoel Rives agreed that the attorney-client privilege could attach to communications between two lawyers in the same firm. The question for the court was “whether a law firm can maintain an adverse attorney-client privilege against an existing client.”3 In other words, can a member of a firm represent another member of the firm against an existing client without running afoul of RPC 1.7? Under the facts of this case, if the answer is no, then the attorney-client privilege does not attach to those communications between lawyers in the firm.

Analysis under RPC 1.7
Currently (and at the time of the events in VersusLaw), RPC 1.7 states, in relevant part: 4

A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless: (1) The lawyer reasonably believes the representation will not adversely affect the relationship with the other client . . . .

RPC 1.7(a). Furthermore:

A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless: (1) [t]he lawyer reasonably believes the representation will not be adversely affected . . . .

RPC 1.7(b).
In the facts of VersusLaw and the hypothetical above, the prospect of a malpractice claim means that the firm has become a potential adversary with its own client. Yet the firm has a fiduciary responsibility to this pre-existing client. With RPC 1.7 in mind, the lawyer who was consulted by her partner must resolve these questions:

• Can I represent my firm without adversely affecting my fiduciary duty to another client?
• Does my own financial interest in the firm materially limit my ability to represent my firm against my pre-existing client?
• By extension, can the firm represent itself against a current client?
• Is this the kind of conflict that both clients (my firm and the existing client) can waive?

The answer to these questions is almost certainly that a lawyer cannot represent her own firm against the firm’s pre-existing client without adversely affecting the pre-existing relationship. At the very least, her own professional concern and financial interest in the firm as they relate to any malpractice claim against the firm will affect the relationship with the pre-existing client. Because the firm’s and the client’s claims are adverse, neither one could waive the conflict, even if it wanted to do so.

Under the facts of VersusLaw, the lawyer cannot establish an attorney-client relationship with her own firm when consulting on potential malpractice claims against the firm. Without an attorney-client relationship, any communication between the lawyer and members of her firm are not privileged and must be disclosed in a future malpractice suit.

We recommend caution in applying the VersusLaw decision to other conflict of interest situations where the attorney’s own firm is not the client. For example, the court in VersusLaw was not presented with a situation where an attorney discovers a conflict of interest between a pre-existing client and a new client where the new client has no reason to be aware of the conflict.

Under such facts, we believe that the court may not extend VersusLaw to find that there is no attorney-client relationship with the new client. This is because the conflict would arise through no fault of the new client and the new client would have a reasonable expectation that its communications with the attorney were confidential and privileged. In that situation, we believe that the court may not require the disclosure of the new client’s communications with the attorney to the pre-existing client because of the new client’s innocence in the whole situation and the harm that it would do to the new client to have its confidences and secrets shared with its adversary.

In VersusLaw, the Court of Appeals determined that a question of fact remained regarding when Stoel Rives’ attorney-client relationship with VersusLaw ended and when Stoel Rives knew that VersusLaw had a potential malpractice claim. The implication is that if VersusLaw fired Stoel Rives before the internal conversations occurred, then the consulted attorney did not have a conflicting duty to VersusLaw (or, at least, the implication is that the conflict would be analyzed under the rules relating to former clients as opposed to current clients).

In order to avoid a discovery dispute of this nature, we recommend consulting with outside counsel instead of another attorney in the firm for advice as soon as an attorney in the firm has knowledge of facts that could give rise to a conflict of interest between the firm and a client.

Analysis Under Proposed Rule Change
The ethics rules for lawyers in Washington likely will change soon. These include changes to RPC 1.7, which, if adopted by the state Supreme Court, as proposed, would read as follows:5

RULE 1.7 CONFLICT OF INTEREST: CURRENT CLIENTS

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:

(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

(2) the representation is not prohibited by law;

(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

(4) each affected client gives informed consent, confirmed in writing (following authorization from the other client to make any required disclosures).

This proposed change to RPC 1.7 is considered a clarification, not a substantive change, and brings the rule into line with the model ABA rules.

The analysis of the hypothetical does not change under this proposed amendment. A concurrent conflict would exist because the firm and the firm’s pre-existing client would have interests directly adverse to one another. Also, the lawyer’s interest in the firm would probably materially limit her representation of the pre-existing client. Because the hypothetical involves “the assertion of a claim by one client against another client,” this conflict is not waivable.6

Therefore, under either version of RPC 1.7, any communication between members of your firm, even if one of you is the designated risk-management partner or member, will not be privileged by attorney-client confidentiality. The solution is for you or your firm to seek advice from outside counsel when you believe a client may bring a malpractice suit against you, your firm or an attorney in your firm.

1 127 Wn. App. 309, 11 P.3d 866 (2005).

2 VersusLaw, 127 Wn. App. at 317.

3 Id. at 333.

4 Client consent requirements in RPC 1.7 were not raised as an issue in the VersusLaw v. Stoel Rives decision.

5 A link to all of the Suggested Amendments to the Rules of Professional Conduct can be found at http://wsba.org/lawyers/groups/ethics2003/.