Conflict of interest


A conflict of interest is a situation in which a person or organization is involved in multiple interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates to situations in which the personal interest of an individual or organization might adversely affect a duty owed to make decisions for the benefit of a third party.
An "interest" is a commitment, obligation, duty or goal associated with a specific social role or practice. By definition, a "conflict of interest" occurs if, within a particular decision-making context, an individual is subject to two coexisting interests that are in direct conflict with each other. This is important because under these circumstances, the decision-making process can be disrupted or compromised, affecting the integrity or reliability of the outcomes.
Typically, a conflict of interest arises when an individual occupies two social roles simultaneously, generating opposing benefits or loyalties. The interests involved can be pecuniary or non-pecuniary. The existence of such conflicts is an objective fact, not a state of mind, and does not in itself indicate any lapse or moral error. However, especially where a decision is being taken in a fiduciary context, it is important that the contending interests are clearly identified and the process for separating them is rigorously established. Typically, this will involve the conflicted individual either giving up one of the conflicting roles or recusing themselves from the particular decision-making process.
The presence of a conflict of interest is independent of the occurrence of inappropriateness. Therefore, a conflict of interest can be discovered and voluntarily defused before any corruption occurs. A conflict of interest exists if the circumstances are reasonably believed to create a risk that a decision may be unduly influenced by other, secondary interests, and not on whether a particular individual is actually influenced by a secondary interest.
A widely used definition is: "A conflict of interest is a set of circumstances that creates a risk that professional judgement or actions regarding a primary interest will be unduly influenced by a secondary interest." Primary interest refers to the principal goals of the profession or activity, such as the protection of clients, the health of patients, the integrity of research, and the duties of public officers. Secondary interest includes personal benefit and is not limited to only financial gain but also such motives as the desire for professional advancement, or the wish to do favors for family and friends. These secondary interests are not treated as wrong in and of themselves, but become objectionable when they are believed to have greater weight than the primary interests. Conflict of interest rules in the public sphere mainly focus on financial relationships since they are relatively more objective, fungible, and quantifiable, and usually involve the political, legal, and medical fields.

In the practice of law

Conflicts of interest have been described as the most pervasive issue facing modern lawyers. Legal conflicts rules are at their core corollaries to a lawyer's two basic fiduciary duties: the duty of loyalty and the duty to preserve client confidences. The lawyer's duty of loyalty is fundamental to the attorney-client relationship and has developed from the biblical maxim that no person can serve more than one master. Just as fundamental is the lawyer's duty to maintain client confidences, which protects clients' legitimate expectations that they can make full disclosure of all facts to their attorneys without fear of exposure.
The basic formulation of the conflicts of interest rule is that a conflict exists "if there is a substantial risk that the lawyer's representation of the client would be materially and adversely affected by the lawyer's own interests or by the lawyer's duties to another current client, a former client, or a third person." The duty of loyalty requires an attorney not to act directly adverse to an existing client, even on an unrelated matter where the lawyer has no client confidences. Such a loyalty conflict has been labeled a concurrent conflict of interest. The duty of confidentiality is protected in rules prohibiting so-called successive conflicts of interest, when a lawyer proposes to act adversely to the interests of a former client. A lawyer who has formerly represented a client in a matter is precluded from representing another person in the same or a substantially related matter that is materially adverse to the former client. These two basic formulations – that a lawyer may not act directly adverse to a current client or adverse to a former client on a substantially related matter – form the cornerstone of modern legal conflicts of interest rules.

Concurrent conflicts of interest

Direct adversity to current client

An attorney owes the client undivided loyalty. The courts have described this principle as "integral to the nature of an attorney's duty." Without undivided loyalty, irreparable damage may be done "to the existing client's sense of trust and security – features essential to the effective functioning of the fiduciary relationship..." A key feature of the duty of loyalty is that an attorney may not act directly adverse to a current client or represent a litigation adversary of the client in an unrelated matter. The damage done is to the client's confidence that the lawyer is serving their interests faithfully. An example of a lawyer acting directly adverse to a client is when the lawyer sues the client. At the other end of the spectrum is when a lawyer represents business competitors of the client who are not adverse to it in a lawsuit or negotiation. Representing a client's business competitors in unrelated matters does not constitute direct adversity nor give rise to a loyalty conflict. As one state bar ethics committee has noted:
Direct adversity may arise in litigation when an attorney sues a client or defends an adversary in an action their client has brought. It may also arise in business negotiations, when a lawyer negotiates on behalf of an adversary against a current client, even if the matter is unrelated to any matter the lawyer is handling for the client. However, merely advocating opposite sides of the same legal issue does not give rise to direct adversity. Even if a lawyer's advocacy in an unrelated matter may make unfavorable law for another client, such effects are only indirect and not subject to the conflicts rules. There is no conflict in advocating positions that may be unfavorable to another client so long as the lawyer is not directly litigating or negotiating against that client.
Identity of the client – corporations
One of the most frequently arising questions in corporate practice is whether parent corporations and their subsidiaries should be treated as the same or different entities for conflicts purposes. The first authority to rule on this question was the California State Bar Ethics Committee, which issued a formal opinion ruling that parent corporations and their subsidiaries are to be considered distinct entities for conflicts purposes. The California committee considered a situation where an attorney undertook a representation directly adverse to the wholly owned subsidiary of a client, when the lawyer did not represent the subsidiary. Relying on the entity as client framework in Model Rule 1.13, the California committee opined that there was no conflict as long as the parent and subsidiary did not have a "sufficient unity of interests." The committee announced the following standard for evaluating the separateness of parent and subsidiary:
As one commentator has noted, "For a state ethics opinion, California Opinion 1989-113 has been unusually influential, both with courts there, with ethics committees elsewhere, and through the latter set of ethics committee opinions, with... recent decisions in other jurisdictions." The California opinion has been followed by ethics committees in such jurisdictions as New York, Illinois and the District of Columbia, and served as the basis of ABA Formal Ethics Opinion 95-390. The law in most jurisdictions is that parent corporations and their subsidiaries are treated as distinct entities, except in limited circumstances noted by the California ethics committee where they have a unity of interests.
The Second Circuit has adopted a variation of the California standard. In GSI Commerce Solutions, Inc. v. BabyCenter LLC, the court ruled that parent corporations and their subsidiaries should be treated as the same entity for conflicts purposes when both companies rely "on the same in-house legal department to handle their legal affairs." However, the court ruled that the lawyer and client can contract around this default standard. The court quoted with approval the opinion of the City of New York Committee on Professional and Judicial Ethics, which stated, "corporate family conflicts may be averted by... an engagement letter... that delineates which affiliates, if any, of a corporate client the law firm represents..."
Material limitation conflicts
A concurrent conflict will also exist when "there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer." Comment 8 to Model Rule 1.7 states, by way of example, that an attorney representing multiple persons forming a joint venture may be materially limited in recommending the courses of action that any jointly represented client may take because of the lawyer's duty to the other participants in the joint venture.
The Supreme Court of Minnesota found a material limitation conflict in In re Petition for Disciplinary Action Against Christopher Thomas Kalla. In Kalla, an attorney was disciplined for representing a borrower bringing suit against her lender for charging a usurious interest rate while simultaneously representing the mortgage broker who arranged the loan as a third-party defendant in the same lawsuit. Although neither client had brought an action against the other, the court found a material limitation conflict: "Advocating for Client A would potentially harm Client B, who was potentially liable for contribution. Kalla's ability to fully advocate for both was materially limited by Kalla's dual representation."