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For attorneys caught up in the excitement of a pending law firm merger, expectations of more offices, more lawyers and more money can be heady. But practitioners who have gone through the courtship warn that some very tough work — more than most firms expect — lies ahead in uprooting potential client conflicts created by the firms’ marriage. They can bust up a pending merger deal, send partners packing or require lawyers to implore clients for waivers. And whatever the severity of the possible conflicts, firms are spending huge resources to determine if their clients will butt heads should the merger deal close. Checking for these conflicts likely is the most underestimated cost of completing a merger, experts say, and it’s a continuing job demanding much of a merged firm’s attention as new business comes in. “It’s an enormous task,” said DLA Piper Rudnick Gray Cary attorney William Campbell. He has worked on ferreting out potential conflicts of interest related to Piper Rudnick’s series of mergers, the latest of which was with London’s DLA. With the merger completed last month, the firm now has 2,700 lawyers in 49 locations. Conflicts fall into two types: those related to former clients and conflicts pertaining to current clients. Besides a lawyer’s duty of loyalty to eliminate conflicts, which is a requirement of each state’s ethic rules, there are compelling business reasons for doing so. Attorneys who represent conflicted clients run the risk of malpractice liability and disgorgement of fees. But preventing them, especially when big firms get bigger, can be daunting. “You have to collect the relevant data, you have to mechanically run computer searches, you have to analyze the results — and then you have to take action,” Campbell said. THE CRITICAL JUNCTURE Uncovering potential conflicts, which is part of the due diligence that firms conduct before any merger, usually starts during the second or third meeting between firms, when the lawyers sit down and exchange the names of their biggest clients. Those lists typically include clients with a long history at the firms and those that bring in more than $100,000 annually, said one attorney who worked on a major law firm merger and who asked not to be identified. It is at this point that many potential mergers die, when firms discover that they have current clients in adverse positions. “I’ve seen mergers come to a screeching halt there,” said Ward Bower, principal at legal consultancy Altman Weil. In the early stages, firms are focused on making a “business case” for a merger, Bower said, and look at client lists that do not include “the little ones.” During these initial meetings, the attorneys may discover that their firms do not have ethical conflicts, but they nevertheless may have business conflicts. For example, even if Coke and Pepsi are not suing each other, they do not want the same firm handling their legal business. SIX DEGREES OF SEPARATION But the possible conflicts may be more pronounced, especially for litigation firms, where clients can be in direct opposition. Howrey Simon Arnold & White Chairman Robert Ruyak described the conflicts process at his firm, one that handles much intellectual property litigation, as a “rugged piece” of the merger effort. Howrey & Simon merged with Arnold, White & Durkee in 2000, which at that time formed the nation’s largest intellectual property practice. Last month, Washington-based Howrey Simon, with 534 lawyers, acquired the litigation firm Clements, O’Neill, Pierce, Wilson & Fulkerson, adding 17 attorneys to its Houston office. “It’s like six degrees of separation,” Ruyak said, referring to the difficulty of merging litigation firms. “By the time you get done, everybody’s related to everyone else.” He explained that in two previous merger attempts, Howrey Simon and the other firms abandoned the idea after potential conflicts arose. “In a couple of cases, you realize by the time we get through this minefield, it’ll be two years down the road and three clients will never agree,” he said. Three partners and two executive assistants at Howrey Simon Arnold & White work on conflicts of interest and other risk-management issues. At DLA Piper Rudnick Gray Cary, a team of 12 attorneys and assistants handles conflicts work. According to Altman Weil, law firms increasingly are dedicating resources to handle risk-management matters. A survey conducted last year by Altman Weil found that 62.5 percent of big firms have their own general counsel, whose job, in part, involves conflicts work. Those departments get the busiest when firms begin merger talks. And that’s the point when some of the partners at the firms start to get nervous that their business may create conflicts. The conflicts attorney who declined to be identified said fellow attorneys dread seeing him coming down the hall because the news he brings is rarely good. “I see them ducking back into their offices,” he said. CONFLICT DISCOVERED Once a conflict is uncovered, firms begin to weigh their options, which include considering whether to cut the client loose and possibly, in the process, lose the partner who represents that client, said Lisa Smith, a director at Hildebrandt International. Firms may also hold off the merger until the legal matter with one of the conflicted clients is closed. Ethics rules dealing with conflicts pertaining to a former client generally are easier to handle than those involving concurrent representation. Firms need to tread carefully in making these decisions, Smith said, by considering the value of the client with the overall benefit the partner brings to the firm. “While in the grand scheme of things in a billon-dollar firm a client may bring in a million of revenue, but an individual partner may bring in $2 million. That’s a big deal,” she said. TOUGHER ON CLIENTS? Whether the firm will continue to represent clients in future business may be a tough call for the lawyers involved in a merger, but some are concerned that firm consolidations are even tougher for clients, whose interests may take a back seat to a firm’s bottom line. “It’s become an issue regarding a client’s right to counsel of their choice,” said Diane Karpman, a legal ethics lawyer with Karpman & Associates in Los Angeles. “Are you going to let a client make their own decisions — and choose who they want — or are you going to let one client deny another of their chosen partisan?” Recognizing that concern, Ruyak said Howrey Simon takes a “more modern” approach by helping transition clients into new firms. “Why burn bridges and make enemies?” he said. If firms proceed through the initial exchange of client lists without discovering any deal-breaking conflicts, they usually begin to delve further into each other’s client bases, looking at perhaps the top 300 clients, depending on the size of the two firms. Then comes a look at each firm’s conflicts system, when the two parties will determine the reliability of the other’s databases, client family trees and tracking mechanisms. In some cases, the two systems are not compatible, resulting in the lengthy process of each firm running a search through its own system using the other firm’s data. At this point, firms begin to realize the size of the task involved. “The time it takes cannot be underestimated,” said Campbell, with DLA Piper Rudnick. Indeed, Howrey Simon currently is working with SAP Technology to develop a new conflicts-checking system for the firm that will make it easier to catch potential problems, Ruyak said. Difficulties arise, he explained, when parties are added to cases, when companies change their names, when they acquire subsidiaries and with the passage of time. The new system will monitor those factors more easily, he said. THE WAIVER STAGE Once the firms have uncovered potential conflicts and are convinced that a merger is viable, they will ask current or former clients to sign waivers, a process that can take up to a third of the total time required to complete the conflicts work, according to a source familiar with the process. Executing waivers with current clients is trickier — and in some cases, strictly prohibited — and drafting waivers for former clients, and allowing them time to consider them, can eat up weeks in the merger process, the source said. But premerger steps are just the beginning. The hard work for these lawyers continues long after the closing date. In essence, their jobs have doubled, at least, as the opportunity for more conflicts explodes due to more attorneys and clients. And even if the conflicts team grows with the merger, the attorneys are using a database on an ongoing basis that is much bigger than before and most likely more complicated. “There’s a lot of digging,” Ruyak said. To pre-empt possible future conflicts of interest troubles, more firms are asking clients to sign advance waivers, a trend that has followed several ethics opinions across the country favoring the agreements. Advance waivers allow firms to represent big clients on a limited basis and later represent a competitor or adverse party in other matters, with the clients’ approval. Proponents say that the agreements give corporate clients access to representation they might not have had by firms worried about losing future business. Karpman, the ethics lawyer, said she favors such agreements, but warns that they must be drafted carefully to encompass the “foreseeable consequences” of the firm’s representation of the client. “The question is ‘How much do you include?’” she said.

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