Material Adverse Effect Under Rule 1.16(b)(1)

Q:        I am considering whether to withdraw from representing one client in order to enable representing another client. I have reviewed the three Ethics Corners relating to withdrawal published in 2021. I have determined that I am not required to withdraw, but I would like to do so. Rule 1.16(b)(1) states that I can withdraw if I can do so without material adverse effect on my client, but the Ethics Corners provide no guidance on what that term means. Can you provide some guidance on that issue? Can I withdraw from representing a client to accept the representation of a different client?

A:  We addressed in a prior ethics corner the general framework of withdrawal under Rule 1.16(b)(1) as described in ABA Formal Opinion 516 (Terminating a Client Representation under MRPC 1.16(b)(1): What “Material Adverse Effects” Prevent Permissive Withdrawal?). This article addresses your second question: whether and under what circumstances you can withdraw under Rule 1.16(b)(1) to accept the representation of a different client. This phenomenon is sometimes described as the “hot potato” doctrine – where a lawyer withdraws from representing one client to work with a more lucrative client – and frequently surfaces in the context of motions to disqualify attorneys. The ABA’s Opinion on this issue generated a dissenting opinion and significant commentary among the ethics Bar. This issue thus requires careful analysis.

The Hot Potato Doctrine

The “hot potato” doctrine originated in Picker Int’l, Inc. v. Varian Associates, Inc., 670 F. Supp. 1363 (N.D. Ohio 1987). Jones, Day, Reavis & Pogue represented Picker in over one hundred patent cases. Varian was long represented by McDougall, Hersh & Scott. While Picker and Varian were engaged in litigation, Jones Day merged with McDougall Hersh. The firms contacted their respective clients and the merged firm sought permission to continue representing Picker, which was far larger and more lucrative for the firm than Varian would be. The merged firm promised to establish elaborate screening procedures to protect Varian’s confidences. Varian rejected the proposal. Three weeks later, McDougall Hersh withdrew from representing Varian. Varian filed a motion to disqualify the merged Jones Day/McDougall Hersh law firm

The Court granted the motion. The Court found that the only legitimate choice was for the newly-merged Jones Day to withdraw. The Court found, “[a] firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more lucrative client.” Id. at 1365. Picker expressly cited the public perception of disloyalty. Id. at 1367 (quoting Harte Biltmore, Ltd. v. First Pennsylvania Bank, 655 F. Supp. 419, 421 (S.D. Fla. 1987)).

The ABA Rejects the Hot Potato Doctrine in the Context of Rule 1.16(b)(1)

ABA Formal Opinion 516 rejects the “hot potato” doctrine as articulated by Picker and its progeny. First, Picker was decided under Ohio’s since-superseded Ohio Code of Professional Responsibility (based on the ABA’s since-superseded Code of Professional Responsibility (the “Code”)), the common law duty of loyalty, and the need to preserve public confidence in the bar.  The Code contained no equivalent to Rule 1.16(b)(1). The ABA Opinion notes that under the ABA’s Rules of Professional Conduct, a lawyer may advocate against the interests of a current client with the informed consent of both clients, Rule 1.7(a)(1), and may also advocate against the interests of a former client if the matter is unrelated to the former representation and the lawyer preserves the former client’s confidences. Rule 1.9(a). The ABA Opinion pointed out that courts applying the hot potato rule under the Rules of Professional Conduct essentially disregard the lawyer’s withdrawal and analyze the disqualification issues under Rule 1.7(a). See Markham Concepts, Inc. v. Hasbro, Inc., 196 F. Supp. 3d 345 (D.R.I. 2016) (After eight years of representing Hasbro, the law firm “decided to abruptly drop Hasbro as a client only after Hasbro refused to waive the Markham conflict. If [the law firm] could convert Hasbro to its former client by quickly dropping it in the face of imminent conflict, then a law firm could avoid Rule 1.7 by simply converting a current client into a former one”) (internal quotation omitted)). The Markham Concepts court stated “[t]his is not to say that a lawyer may never drop a client. If, for whatever reason, [the law firm] thought it best not to continue representing Hasbro, it could have sought to wind down its representation and declined to take on new matters. The issue here is that [the law firm] apparently dropped Hasbro solely to assume a conflicting representation. As detailed in this Order, this breached [the law firm’s] duty of loyalty to Hasbro in violation of Rule 1.7.” Id. at 349 n.1.

The ABA Opinion distinguished between disqualification decisions and the Rules of Professional Conduct. Disqualification decisions rely upon common law factors not necessarily tied directly to the Rules of Professional Conduct. The ABA Opinion noted that not every violation of a Rule of Professional Conduct necessarily results in disqualification. E.g., Hempstead Video, Inc. v. Village of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005). Courts are well positioned to determine whether the conflict of interest rules may require disqualification under a given set of circumstances. While a lawyer’s motive in seeking to withdraw remains potentially relevant to a court’s analysis of a motion to disqualify, the ABA Opinion deems motive irrelevant to analysis of ethical conduct under Rule 1.16(b)(1).

Dissenting Opinion

Two members of the ABA Standing Committee on Ethics and Professional Responsibility dissented. They argued (1) that the opinion makes it more difficult to convince lawyers to close files and transform current clients into former clients when the representation is complete, (2) the opinion fails to consider whether terminating one client to file suit against it on behalf of another client is itself a “material adverse effect” under Rule 1.16(b)(1), (3) the opinion offers no guidance on mandatory withdrawal under Rule 1.16(a), which is necessary to place the “hot potato” doctrine in a more complete context, and (4) the opinion offers no guidance to transactional lawyers.

New Hampshire Disqualification Cases

As ABA Formal Opinion 516 touches upon the relationship between disqualification and the Rules of Professional Conduct, a brief overview of New Hampshire disqualification cases may be helpful.

The ABA Opinion suggests that disqualification relies upon common law factors not necessarily tied to specific Rules of Professional Conduct, but that does not appear to be the case in the New Hampshire decisions to date. The Supreme Court’s core analysis in disqualification motions has adhered closely to the applicable Rules of Professional Conduct without reference to common law factors. Considerable caution is warranted, however, since the New Hampshire Supreme Court has not yet published an opinion addressing circumstances similar to those in the “hot potato” cases.

When the Court has referenced factors outside the scope of the Rules of Professional Conduct, they appear as dicta. For example, in McElroy v. Gaffney, 129 N.H. 382 (1987), while the Court observed that disqualification motions are frequently filed for purely strategic purposes, such motives were not a factor in its analysis. Id. at 391. McElroy arose from the third lawsuit between the parties based upon their corporation. McElroy had been represented in all disputes related to the corporation by Attorney Jim Schulte. Gaffney sought to disqualify Schulte from representing McElroy on the basis that Schulte was a necessary witness under Rule 3.7. The trial court denied the motion on the basis that disqualifying Schulte would create an unreasonable hardship on McElroy. The Supreme Court held that due consideration must be given to the effect disqualification would have on the lawyer’s client, including whether the lawyer’s knowledge was extensive and unique. The Court held that Schulte had extensive and detailed knowledge of the complex business and personal transactions between the parties and that his disqualification would work an unreasonable hardship on McElroy. The Court noted that it was important to consider the potential for abuse inherent in the disqualification provision and that disqualification motions are often used for purely strategic purposes. Id. at 391.

In Sullivan County Reg’l Refuse Disposal Dist. v. Town of Acworth, 141 N.H. 479 (1996), the Supreme Court held that the trial court erroneously failed to disqualify the Town’s attorneys for violation of Rule 1.9. The Town of Acworth was a member of the Sullivan County Regional Refuse Disposal District pursuant to an agreement among several towns. The Town accused the District of violating the agreement and notified the District of its intent to withdraw. The District filed a petition for declaratory and injunctive relief in superior court. The Town was represented by Laurence Gardner. Attorney Gardner represented the District and its predecessor in drafting the agreement, provided the district with legal opinions regarding the agreement and acted as its principal draftsman. The District filed a motion under Rule 1.9 to disqualify Gardner from representing the Town. The trial court found that Gardner’s representation was materially adverse to the District and that the current and former representations were substantially related, but declined to disqualify Gardner because he did not receive any confidential information of the District in the prior representation and the District therefore could not demonstrate prejudice. The Supreme Court reversed. The Court held that the trial court’s approach would require the District to disclose the confidences that Rule 1.9 was designed to protect. The Court held that if the elements of Rule 1.9 have been satisfied, the court must irrebuttably presume that the attorney acquired confidential information in the former representation. Id. at 483. Finally, the Court rejected the Town’s argument that the District had no confidentiality interest in the agreement because it was a public document. The Court held that “an attorney’s duty to protect confidential information gleaned from a client does not disappear simply because portions of that information have been included in public documents or discussed in public forums.” Id. at 484.

In Franklin v. Callum, 146 N.H. 779 (2001), the New Hampshire Supreme Court was presented with motions by each party to disqualify the other party’s counsel. The plaintiff was a municipal representative to the NH/VT Solid Waste Project. Plaintiff filed a Right-to-Know request to examine the Project’s legal bills, which were provided to him in redacted form. The plaintiff sought access to the unredacted bills. The New Hampshire District of the Project supported the plaintiff’s access to the unredacted bills. The plaintiff retained attorney Adele Fulton. The Project filed a motion to disqualify Attorney Fulton on the basis that her law partner previously represented the Project. The plaintiff filed a motion to disqualify the Project’s attorney, Brown, Olson & Wilson because it represented both the Project and the New Hampshire District as separate entities. The trial court ordered Attorney Fulton disqualified and denied Plaintiff’s motion to disqualify the Project’s attorneys. The Supreme Court reversed the trial court’s denial of the motion to disqualify the Project’s attorneys. The Court relied upon Rule 1.7(a) and concluded that the interests of the Project and the New Hampshire District were directly adverse. The Court held Attorney Fulton disqualified under Rules 1.9 and 1.10 because her representation of the Plaintiff required her to interpret the work of her law partner.

In State v. Van Dyck, 149 N.H. 604 (2003), the Defendant was charged with simple assault, criminal mischief, and resisting arrest based upon events that occurred in December 2001. The victim obtained a restraining order against the Defendant and alleged that he violated it on three occasions in February 2002. In March 2002, before the Defendant was served with arrest warrants for the alleged February violations, the Defendant’s attorney and the prosecutor negotiated a disposition of the December charges. The Defendant pled guilty to resisting arrest and the other charges were nol prossed. As he was leaving the courtroom, he was arrested on the February charges. The Defendant moved to dismiss the February charges for prosecutorial misconduct for failing to disclose the arrest warrants on those charges. The Defendant argued that the prosecutor violated his due process rights because he pled guilty to put all issues relating to the victim behind him. The State moved to disqualify defense counsel because he would be a necessary witness. The trial court granted the motion because his dual roles as witness and attorney were so incompatible as to create an appearance of impropriety. Id. at 606. The Supreme Court reversed on the basis that the defense attorney’s testimony was merely cumulative of the prosecutor’s testimony and he was not the best witness to testify to the Defendant’s state awareness of the February charges at the time he entered his plea. The Court wrote, “[w]e admonish trial court to review motion to disqualify defense counsel in criminal cases cautiously to minimize the potential for abuse of the advocate-witness rule and the risk that a criminal defendant will be deprived unnecessarily of chosen counsel.” Id. at 607-08.

The case of St. Anselm College Corp. v. Board of Trustees of St. Anselm College, 2021 N.H. LEXIS 75 (2021), arose from the disqualification of law firm from representing a litigant against its former client, the St. Anselm College Corporation. The Supreme Court dismissed the law firm’s appeal based upon lack of standing. However, the Court held that law firm was disqualified notwithstanding it did not violate any Rule of Professional Conduct or engage in any misconduct. The Court held that the law firm was disqualified because the litigation was substantially similar to the firm’s prior work for the College Corporation, because the interests of its current and former client could be materially adverse and because the firm had access to confidential information of the College Corporation. The Supreme Court order unfortunately fails to describe the underlying circumstances in detail, but the Court clearly held that disqualification may arise regardless of whether the attorney violates a Rule of Professional Conduct.

These cases taken in sum suggest that the New Hampshire Supreme Court closely analyzes the applicable Rules of Professional Conduct in disqualification matters and does not rely upon common law factors. As the Supreme Court has not yet published an opinion analyzing Rule 1.16(b)(1) in the “hot potato” (or any other) context, it remains to be seen whether it will follow ABA Opinion 516. However, the available precedent suggest that the Court will closely analyze the relevant facts and circumstances under the express language of Rule 1.16(b)(1) without extensive reference to common law factors.