State Bar of Arizona Ethics Opinions

94-06: Insurance; Conflict
3/1994

Previous in-house counsel for insurance company may subsequently undertake representation adverse to company if dispute arose after attorney left company.



FACTS

This opinion concerns a lawyer's obligation to his former client. Lawyer A represented an insurance company ("Former Client") as a member of in-house counsel staff for two and one half years, ending in December, 1988. Part of Lawyer A's tenure with Former Client included an interim position as chief in-house counsel.

Lawyer A later joined a new law firm which had formerly represented Former Client as outside counsel.[1] In 1993, nearly five years after he left the employment of Former Client, Lawyer A undertook representation of New Client with a potential claim against Former Client. Lawyer A had no involvement with or knowledge of New Client's potential claim while working with Former Client (it is unclear whether the claim even existed during the time Lawyer A was employed by Former Client).

Lawyer A withdrew from representation of New Client when Former Client objected. Former Client claimed that the representation involved a "substantially related matter" under ER 1.9 because Former Client "still does business in 'substantially' the same way, selling 'substantially' the same products, and with 'substantially' the same personnel." Former Client asserted that, unless it "significantly and dramatically" changes its business practices, products and personnel, Lawyer A's representation of New Client with a potential claim against Former Client would be unethical and in violation of ER 1.9. Former Client further claimed that Lawyer A's "intimate" knowledge of Former Client would be disadvantageous to it. Former Client did not claim that Lawyer A would use confidential information concerning it which was not generally known.

 

QUESTIONS

1. Is Lawyer A's representation of New Client having a claim against Former Client a "substantially related matter" under ER 1.9(a) when Lawyer A had no involvement with or knowledge of the claim in the course of his employment with Former Client?

2. Is Lawyer A's knowledge of Former Client's business practices, products and personnel confidential information that could be used to the disadvantage of Former Client?

 

ETHICAL RULES INVOLVED

 

ER 1.6.                   Confidentiality of Information

(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation,....

*****

 

ER 1.9.                   Conflict of Interest: Former Client

A lawyer who has formerly represented a client in a matter shall not thereafter:

(a) represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation; or

(b) use information relating to the representation to the disadvantage of the former client except as ER 1.6 would permit with respect to a client or when the information has become generally known.

 

OPINION

It is safe to say that no prior opinions or decisions in Arizona directly address the question presented here, i.e., is it improper for an attorney to represent a client against a former client merely because the matter involves the same type of case that an attorney routinely handled for the former client? The crux of the inquiry is the search for a definition of "substantially related matter" as set forth in ER 1.9(a). Although the Arizona Supreme Court has discussed and adopted the test (both by common law in Alexander v. Superior Court, 141 Ariz. 157, 163-64, 685 P.2d 1309, 1315-16 (1984), and through adoption of ER 1.9), no satisfactory definition of the concept ever has been articulated.[2]  Moreover, there exists considerable confusion in other jurisdictions:

"Gallons of ink have been consumed by those who have tried to determine or explain what the test compares in deciding whether there is a substantial relationship between the representations: Facts? Legal issues? The representations overall?" (ABA/BNA Lawyer's Manual on Professional Conduct p. 51:215)

An examination of the Comment to ER 1.9 gives guidance:

"When a lawyer has been directly involved in a specific transaction, subsequent representation of other clients with materially adverse interests clearly is prohibited. On the other hand, a lawyer who recurrently handled a type of problem for a former client is not precluded from later representing another client in a wholly distinct problem of that type even though the subsequent representation involves a position adverse to the prior client." (Emphasis added). 

Clearly, ER 1.9(a) is not a per se bar to Lawyer A's representation based solely on the fact that he was involved in the same type of cases when representing Former Client. The language of the rule instead suggests that some factual nexus must exist between the two matters; i.e., the matters themselves must be substantially interrelated. See, e.g., our Opinion No. 91-05 (February 20, 1991) at 6 ("Substantially related matter" requires a "close factual bond" and acknowledging, without endorsement, that some courts have adopted a broader definition).

The New Jersey Advisory Committee on Professional Ethics faced this exact question in its Opinion 654 (10/17/91) (ABA/BNA Lawyers' Manual, supra, p. 1001:5802), 1991 WL 415510. An attorney, formerly in-house counsel with an insurance company, sought employment at a personal injury law firm and inquired about the ethical limitations should he handle cases against the insurance company. The committee responded that "a substantially related matter" under ER 1.9 (a) is not the same as a "substantially related subject matter" and that the language of the rule "contemplates a factual nexus between the cases." Id. at *3. The committee concluded that no conflict would exist under ER 1.9(a) should the attorney handle matters that arose after his departure from the insurance company and that had no factual relationship to any of the cases he previously handled there. Id.[3]

We agree with that reasoning. Lawyer A properly may represent clients against Former Client -- even if the matter is precisely the type he previously defended for Former Client -- provided that the matter has no substantial factual relationship to any matters he handled with Former Client. That Former Client still has substantially the same business methods, products and personnel as when Lawyer A represented Former Client is insufficient to create a conflict of interest.

Former Client's other concern is that Lawyer A's "intimate" knowledge of Former Client (presumably its business methods, products and· personnel) could be used to its disadvantage under ER 1.9(b). That concern is not significant given that Former Client does not claim that Lawyer A would use confidential information not generally known. And, insofar as Lawyer A has non-confidential information about Former Client's operations, such information would be available in discovery. Thus, Lawyer A obtains no unfair advantage in a routine insurance matter through his prior employment.

Nothing we say here is inconsistent with Maritrans v. Pepper, Hamilton & Scheetz, 602 A.2d 1277 (Pa. 1992). There, Pepper, Hamilton had intimate knowledge of Maritrans' financial goals, projections, competitive strategies, debt coverage, rates and labor strategies. Id. at 1280-81. When Pepper, Hamilton began representing Maritrans' competitors, Maritrans complained loudly because of the business confidences it had invested in the law firm, and Pepper, Hamilton agreed not to represent any more competitors. Id. at 1281. Then, Pepper, Hamilton abruptly ceased representing Maritrans and three weeks later undertook representation of competitors that the attorneys had expressly agreed not to represent. Id. Moreover, the attorneys' representation of the competitors involved the very issues which gave Maritrans a competitive edge in business. Id. Here, however, Lawyer A left Former Client five years ago. Lawyer A is not representing another insurance company in direct competition with Former Client in which his knowledge of Former Client (however stale) will be of any use. Lawyer A is representing an insured in a dispute over coverage.

Of course, there could be situations where Lawyer A's prior employment might raise the specter of abuse of confidential information. For example, should Former Client's methods of doing business be in dispute (unlike a routine insurance coverage dispute), Lawyer A's knowledge of the company likely would encompass confidential information which would preclude representing a client against Former Client. This, of course, is a matter for Lawyer A's professional judgment, who, if he concludes that the type of case would involve confidential information, should refrain from representing a client against Former Client.

In conclusion, we agree with the New Jersey Committee in its Opinion 654, supra, that former insurance company in-house counsel "should not be subject to a blanket ethical prohibition disqualifying them from representing new clients who have claims adverse to the insurance carrier by whom the attorney was previously employed." 1991 WL 415510, *4; see also Pepper, Hamilton, 602 A. 2d at 1286 ("We do not wish to establish a blanket rule that a law firm may not later represent the economic competitor of a former client in matters in which the former client is not also a party to the law suit.") (emphasis in original). Disqualification should only occur when the claims are the same or interrelated, or when the very knowledge the attorney obtained by virtue of his employment is at issue in the matter.

 

Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.

©State Bar of Arizona 1994

 


[1] Former Client has waived any potential conflict due to the new law· firm's former representation.

[2] Each of the opinions and decisions involves conflicts of interest considerably more obvious than the facts presented here. E.g., In re Ockrassa, 165 Ariz. 576, 799 P.2d 1350 (1990) (attorney who, while a public defender, represented a defendant in two DUI cases, both of which resulted in conviction, may not later prosecute third DUI charge against the same defendant where the defendant intended to challenge the validity of the prior convictions); Foulke v. Knuck, 162 Ariz. 517, 784 P.2d 723 (App. 1989) (stepfather met with attorney for "initial consultation" regarding his legal rights to child custody in an impending divorce; attorney may not later represent wife in divorce proceeding because it involved a matter substantially related to the custody issues); but see Alexander v. Superior Court, 141 Ariz. 157, 685 P.2d 1309 (1984) (attorney who represented investors in Tax Court to obtain reversal of IRS rulings could later represent the sellers of the securities to the investors because, although matters were substantially related, the case did not involve any confidential information and court held that "substantial relationship" test did not apply).

[3] New Jersey retains the original version of ER 1.9, as does Arizona.

 




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