Law Firm Conflict of Interest Issues
Conflicts of interest cause lawyers professional liability (LPL) claims. Hidden conflicts can cause law firm problems. Not finding conflicts leads to loss of clients, fees, disciplinary issues and LPL claims. Lawyers need to consider not only actual impropriety, but the appearance of impropriety when determining when to engage a client.
Here are the main types of conflicts of interest that law firms must manage:
- Direct Conflicts (Between Current Clients)
- Same-Party Conflicts: Representing both sides in a legal matter (e.g., buyer and seller in a transaction, plaintiff and defendant in litigation).
- Adverse Interests: Acting for one client in a way that harms another current client (e.g., suing one client on behalf of another).
- Former Client Conflicts
- Substantial Relationship Test: A firm cannot represent a new client in a matter that is substantially related to work done for a former client if the new client’s interests are adverse to the former client.
- Use of Confidential Information: Even if matters are unrelated, firms must avoid using a former client’s confidential information against them.
- Imputed Conflicts (Firm-Wide Disqualification)
- Attorney Movement (Lateral Hires): If a lawyer joins a firm, they may bring conflicts from their prior firm, potentially disqualifying the new firm from opposing former clients.
- Screening Mechanisms: Certain jurisdictions allow “ethical walls” to isolate conflicted attorneys, but not all courts accept this.
- Business vs. Legal Interests
- Investing in Client Companies: Lawyers or firms holding financial stakes in a client’s business may prioritize their own interests over the client’s.
- Board Memberships: Serving on a client’s board while providing legal advice can create divided loyalties.
- Personal Conflicts
- Family or Close Relationships: Representing a client against a family member, close friend, or business associate may impair objectivity.
- Personal Bias or Grudges: Strong personal feelings about a case or party can compromise professional judgment.
- Third-Party Influence Conflicts
- Outside Pressures: Accepting cases where a non-client (e.g., an insurer, investor, or another law firm) exerts undue influence on legal strategy.
- Referral Fee Arrangements: Compensation from third parties for client referrals may create loyalty conflicts.
- Class Action & Aggregate Settlements
- Multiple Plaintiffs with Diverging Interests: Representing a group where certain clients may benefit at the expense of others (e.g., class actions with differing damages).
- Government & Public Sector Conflicts
- Former Government Lawyers: Restrictions on representing private clients in matters they oversaw while in public service (“revolving door” rules).
- Current Government Work: Performing government contract work while also pursuing cases against government agencies.
Best Practices
- Run Checks at Intake and Engagement Change-Always re-check when adding new parties, claims, or lawyers to a matter.
- Include All Relevant Parties-Clients, subsidiaries, affiliates, adverse parties, co-counsel, insurers, etc.
- Use Standard Naming Conventions-Normalize entries to avoid false negatives.
- Centralize the Process-Ensure all checks go through one system or designated conflict review team.
- Document Every Step-Keep audit logs of searches, results, waivers, and responsible attorneys.
- Enforce Pre-Clearance Before Matter Opening-Do not allow time entry or matter work until conflict finalizing clearance.
- Lateral Hire Conflicts-Use screening protocols and deal with “imputed disqualification” under Model Rule 1.10.
Conflicts of interest are among the most common and complex malpractice errors, producing a substantial number of claims each year. Conflicts can come in all shapes and sizes, so despite the best efforts of lawyers, they can be hard to identify. Attorneys that do not perform adequate conflicts of interest checks can expect malpractice claims, disciplinary issues, and higher attorney malpractice premiums.
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Lee Norcross, MBA, CPCU
California License # 0D87292
L Squared Insurance Agency, LLC ® DBA in California as L2 L Squared Insurance Agency, License # 0L93416
Managing Director, CEO
Lee@L2Ins.com
616-726-7080
