From the desk of Gordon C. Klug: It should come as no surprise that a lawyer is prohibited from representing a new client where that new client’s interests are adverse to the interests of a former client and the matters are closely related. From a business standpoint, lawyers are also well-served to avoid these scenarios; especially in the case of repeat customers like insurers or other large institutions. Washington’s Rules of Professional Conduct (RPC), which all lawyers must follow, tend to disfavor the disqualification of an attorney. A cornerstone of the legal system is a client’s freedom to select their representative without restriction. However, where the representation of one client is “substantially related” to the representation of a former client on a different matter, disqualification may be in order if the attorney took the case. What does “substantially related” mean? The Washington Supreme Court had not addressed that question until now. Read on to see when a lawyer might be prohibited from taking on a new case that may conflict with their representation of a different client in a previous lawsuit.
Case Pointer: In this case, the Washington Supreme Court seized the opportunity to decide what it means for matters to be “substantially related” in the context of potential conflicts with previous clients. RPC 1.9(a) does not allow an attorney who has formerly represented one client to thereafter represent another client in “the same or a substantially related matter” in which that client’s interests are “materially adverse” to the interests of the former client. As you are about to see, this case provided the perfect opportunity for the Supreme Court to define and clarify one of Washington’s Rules of Professional Conduct that guide attorney behavior.
Plein v. USAA Cas. Ins. Co., 195 Wn.2d 677, 463 P.3d 728 (May 21, 2020).
In the Plein case, a law firm (“Keller”) which had previously defended USAA in bad faith litigation for over ten years accepted a case against USAA alleging bad faith. The clients? The Pleins. The case? A fire loss. The Pleins’ home had been damaged in a fire. USAA accepted coverage under the Pleins’ homeowners’ policy and recommended a contractor to repair the damage. Unfortunately, the contractor did not repair the home and instead merely “concealed unrepaired fire damage.” There were also numerous other deficiencies in the work performed. USAA declined to pay the Pleins’ expenses incurred for additional home repairs as well as temporary living arrangements while the home remained uninhabitable.
The Pleins hired an attorney, Joel Hanson, to represent them in a suit against USAA alleging, among other claims, insurance bad faith and a violation of the Consumer Protection Act (CPA). After filing the suit, Hanson consulted with two Keller attorneys, who the Pleins chose to hire as additional counsel. USAA took great issue with Keller’s decision, as Keller was its sole defense counsel against bad faith claims in Washington for over a decade. While representing USAA in those cases, Keller had access to a variety of information including USAA’s business customs and practices, litigation philosophies and strategies, as well as a general understanding of how USAA adjusters handled and processed claims. Declaring a conflict of interest, USAA gave Keller 24 hours to withdraw. The Pleins moved for a ruling on the asserted conflict of interest and the trial court allowed Keller to continue representing them. Specifically, the trial court found that the Plein matter was “factually distinct from and not substantially related to the firm’s prior representation of USAA.” The Court of Appeals disagreed. In their view, Keller “learned significant confidential information about USAA’s strategies for bad faith litigation.” The Court of Appeals reasoned that the (confidential) information Keller possessed could be used to materially advance the Pleins’ case and therefore, RPC 1.9(a) barred Keller’s representation.
On further appeal, the Washington Supreme Court’s opportunity to define “substantially related” had finally arrived. Specifically, the Court addressed whether the Plein matter was “substantially related” to any matter on which Keller had previously represented USAA. The RPC at issue, 1.9(a), states:
A lawyer who has formerly represented a client in a matter shall not thereafter 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 gives informed consent, confirmed in writing.
At the outset, the Supreme Court noted that the burden of showing that matters are substantially related falls on the former client asserting a conflict issue. In an attempt to satisfy that burden, USAA relied heavily on comment 3 to RPC 1.9. That comment states that matters may be “substantially related” if there is “a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.” Under this comment, a lawyer would be prohibited from representing a past client’s spouse in a divorce proceeding if they had obtained private financial information about the past client in the previous representation. Unfortunately for USAA’s argument, comment 3 lists “general knowledge [of an organizational] client’s policies and practices” and knowledge of specific facts gained in a prior representation as relevant to the issue of whether the current challenged representation is precluded.
In response, the Pleins urged the Court to focus on comment 2. That comment allows a lawyer to represent a client in a case where their position is adverse to one of the lawyer’s former clients as long as the subsequent case is “factually distinct” from the previous representation. As long as the representation is on a factually different problem, evidence that the representation is of the same type (e.g. CPA, bad faith, etc.) is not disqualifying.
Because this case was the first of its kind, the High Court looked to other jurisdictions which recently addressed similar issues for guidance. In one case, Duncan v. Merrill Lynch, 646 F.2d 1020 (5th Cir. 1981),a federal court addressed an issue almost precisely on point with the Plein issue. There, a firm represented Merrill Lynch in a variety of securities cases but then later represented a client who sued Merrill Lynch for securities fraud. The district court disqualified the firm, but the Fifth Circuit reversed, stating that Merrill Lynch had shown that the firm represented it in similar types of cases, but provided no evidence as to the specific nature of those cases beyond general, superficial connections between the cases’ subject matter. As to the Plein representation, the Washington Supreme Court felt that Keller had obtained the same sort of “general” knowledge that the firm held in Duncan. That is, Keller had information relating to USAA’s business customs and practices, business and litigation strategies, etc. Comment 3 to RPC 1.9 specifically identifies that type of knowledge as not precluding a subsequent representation.
USAA attempted to argue that Keller previously handled fire loss and bad faith cases for them in the past, and therefore had insider information that could be used against the insurance company in the Plein lawsuit. The Court was not convinced that USAA’s handling and response to similar facts meant that Keller had obtained “confidential information that would materially advance the Pleins’ case.” USAA would have to show more. For example, the Court referred to another federal case in which an attorney who defended a client against allegations it had shorted a buyer on soybean deliveries was unable to later pursue a claim against the previous client where the claim was also for shorting on soybean deliveries. Government of India v. Cook Industries, Inc., 569 F.2d 737 (2d Cir. 1978). In that case, the attorney was disqualified because he had conducted confidential inquiries into the previous client’s loading procedures and that information “was the cornerstone of the allegations in the new case.” It was clear that the issues were inextricably intertwined.
The same could not be said on USAA’s claims. The Court could find nothing in the record, and USAA did not point to any such evidence, to show that the Plein matter was factually related to any of Keller’s previous representation of USAA. Certainly, the type of representation was the same (CPA, bad faith), but these kinds of similarities do not result in matters being “substantially related.”
Ultimately, the Court of Appeals was reversed. The Washington Supreme Court found that the trial court ruled correctly – Keller was not precluded from representing the Pleins in their CPA/bad faith suit against USAA. Although Keller did obtain information relating to USAA’s procedures and strategies, it had never represented USAA on a matter that was “substantially related.” This case illustrates the difference of whether an attorney’s actions comply with the Washington Code of Professional Responsibility versus whether that attorney’s conduct damages a relationship with a former, longstanding, client. Although the Supreme Court found that Plein’s law firm had faithfully defended USAA for over a decade and obtained insider information that could be used against them, their lawyer was not in violation of one of Washington’s Rules governing the ethical behavior of attorneys. In the end that lawyer may have gained the trust of one client, but may have lost the trust of another.