In the most recent Professional Responsibility Column, "A Fresh Look at Advance Waivers," July 1, 2013, we reviewed prior articles in this column dealing with that topic in the context of an important new case from Texas, Galderma Laboratories v. Actavis Mid Atlantic, 2013 WL 655053 (N.D.Tex.), which significantly advanced the circumstances in which law firms might expect to be able to enforce advance waivers included in their engagement letters. Now there is a New York case, Macy's v. J.C. Penney, 2013 N.Y. App. Div. LEXIS 4798; 2013 NY Slip Op 4891 (June 27, 2013), which takes an even more robust view of the effectiveness of advance waivers, even against a client's subsequently expressed change of mind.
In addition to considering Macy's v. J.C. Penney, this column notes the changes recently adopted by the four Appellate Divisions to the text of the Statement of Clients' Rights which must be posted in all law offices pursuant to Rule 1210 of the Court Rules.
'Macy's v. J.C. Penney'
The Macy's v. J.C. Penney case addressed the twin issues of when advance conflict waivers are valid and binding on clients, and what requirements lawyers must meet in order for them to be enforceable. By agreement dated March 7, 2008, Jones Day undertook to represent defendant, J.C. Penney Corporation Inc., regarding certain "intellectual property litigation and trade mark registration" in Asia. That agreement expressly informed the client that Jones Day's present or future clients "may be direct competitors of [defendant] or otherwise may have business interests that are contrary to [defendant]'s interests," and "may seek to engage [Jones Day] in connection with an actual or potential transaction or pending or potential litigation or other dispute resolution proceeding in which such client's interests are or potentially may become adverse to [defendant]'s interests."
The agreement unambiguously explained that Jones Day could not represent defendant unless defendant confirmed that this arrangement was amenable to defendant, thereby "waiv[ing] any conflict of interest that exists or might be asserted to exist and any other basis that might be asserted to preclude, challenge or otherwise disqualify Jones Day in any representation of any other client with respect to any such matter." The agreement also provided, "However, please note that your instructing us or continuing to instruct us on this matter will constitute your full acceptance of the terms set out above and attached."
Notwithstanding the agreement, the defendant sought to disqualify Jones Day from representing Macy's in this case, which involved a dispute between Macy's and J.C. Penney entirely unrelated to the Asian intellectual property work that Jones Day was performing for J.C. Penney under the agreement. The trial court denied the motion to disqualify, and the Appellate Division, First Department, unanimously—and almost summarily—upheld the trial court's decision, holding that it had "providently decided" that disqualification was not warranted.
The Appellate Division found that it was "undisputed that Jones Day continued to represent defendant with respect to defendant's Asian trademark portfolio" after defendant accepted the terms set out in the engagement letter, "and, thus, defendant accepted the terms of the agreement, including waiver of the alleged conflict at issue." Further, the court noted that "the interests of defendant that Jones Day represents, namely intellectual property litigation and trademark registration exclusively in Asia, do not conflict with defendant's interests at issue here…" In other words, the court implicitly concluded that the matters were unrelated, and that Jones Day held no confidential information from its work on the Asian trademark portfolio that were of any relevance to this matter.
Unlike the Galderma case, the New York Appellate Division almost summarily disposed of the motion to disqualify, based upon the straightforward language of the advance waiver in the engagement letter, and without extensive discussion of the applicable principles. Because of its very brief treatment of the case, what does not appear from the appellate decision is the very interesting basis on which the trial court, upheld here, reached its decision. It appears from the transcript of the lower court decision (retrievable from the following link: https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=qH2wwWld83oAXvlEtmT4BA==&system=prod) that the letter containing the waiver was reviewed by a lawyer in J.C. Penney's in-house law department, and although it was not countersigned, J.C. Penney proceeded to engage the firm, and the firm undertook the engagement on the basis of the letter.
Later, in the context of the disqualification motion, the in-house lawyer submitted an affidavit in which she conceded that she had received and reviewed the letter but by not countersigning it had not agreed to the waiver that it contained. As the defendant's counsel described her argument, she had "subliminally rejected" the waiver. The trial court concluded, to the contrary, that it was reasonable and appropriate for the firm to rely on the fact that they had delivered the letter and that the client had subsequently engaged them for the matter without expressly rejecting any of the terms of the engagement letter. In that respect, therefore, this case goes significantly further than Galderma in allowing a firm to rely on a waiver that it has supplied to the client and that has been reviewed by independent counsel and not rejected, even if it was not explicitly countersigned and agreed to.
The case therefore represents another step along the way of recognition that sophisticated clients should be—and will be—held to understand, and be bound by explicit advance waivers, provided that the client and its independent counsel (including in-house counsel) have had notice of the waiver and an opportunity to object to it and that the law firm reasonably relies on the client's failure to object when it undertakes the representation.
In terms of the underlying principles at play in these cases, on the one hand, the rules governing conflicts of interest are premised on the fiduciary duties of loyalty and the protection of client confidences. On the other hand, the law governing lawyers recognizes that clients should normally be free to select counsel of their choice, free from outside interference, and that client consent can, in appropriate circumstances, form a proper basis for overcoming prohibitions on conduct that would otherwise be impermissible.
Crafting an Effective Waiver
As we indicated in the context of our discussion of Galderma, some useful lessons can be drawn from these cases:
• First, as to existing or presently identifiable potential conflicts, a waiver will most likely be sustained when disclosure of both the specific facts and the potential adverse consequences is made.
• Second, as to advance or blanket waivers of potential future conflicts, disclosure should be as comprehensive and detailed as is possible, laying out foreseeable types of adversity and the nature of any potential negative consequences for the client.
• Third, as to waivers of both existing and future conflicts, these should be obtained in circumstances that—as far as possible—preclude the client from later averring that the client did not understand the meaning or implications of the waiver. Waivers standing the greatest chance of success are those where the client actually receives independent legal advice with respect to the waiver—and a very significant element of this case and the Galderma decision is that in-house counsel for a corporation can serve that function.
• Fourth, Macy's v. J.C. Penney suggests that law firms should consider adding language along the following lines to proposed advance waivers: "While we request that you countersign and return this engagement letter, your instructing us in this engagement, even in the absence of a countersigned copy of this letter, will constitute your full acceptance of this waiver."
In sum, the ideal signatory of a conflict waiver letter is a client's independent counsel—whether in-house, or outside. At a minimum, lawyers should advise clients to obtain the advice of independent counsel before signing waivers of conflicts, and, preferably, clients should be required to do so before lawyers proceed based on the waiver. Generally, this is easier where an in-house counsel is available, but, if not, then whenever the law firm believes that there is any likelihood it will later need to rely on the waiver, the case is even stronger for requiring the affected client to have another lawyer review the waiver letter before signing it.
Effective April 15, 2013, Part 1210 of the Official Compilation of Codes Rules, and Regulations of the State of New York was revised, effecting changes in both the Statement of Client's Rights and the separate Statement of Client Responsibilities. Since the rule requires the posting of the Statement of Client's Rights, it is worth summarizing the principal changes to that document. The new version includes:
• Additional language providing that clients have a right to be respected by both attorneys and non-attorneys in an attorney's office;
• Additional language that fees and expenses must be reasonable and that clients are entitled to be informed about the fees and expenses before, or within a reasonable time after representation begins;
• Changes in language regarding communications with attorneys, to reflect the use of digital communications;
• New language reflecting New York Rule of Professional Conduct (RPC) 1.4, adopted in 2009, regarding the rights of clients to be reasonably informed regarding their matters;
• Additional language to reinforce the principle that clients have the right to decide whether and on what terms to settle matters;
• Replacement of the phrase "secrets and confidences" with "confidential information" to reflect the changes to RPC 1.6 also adopted in 2009.
The latest version of Rule 1210 may be found at: http://www.nycourts.gov/attorneys/clientsrights.shtml.
Anthony E. Davis is a partner at Hinshaw & Culbertson and a past president of the Association of Professional Responsibility Lawyers.