Conflict Check: Why Silicon Valley Needs to Consolidate Legal Work

Thursday, January 26th, 2017 at 6:33 pm, by Brandon Wallace

In the legal profession, conflicts of interest are common. Most large law firms have a practice in place for standardizing the disclosure of conflicts of interest and for ‘walling off’ attorneys when such conflicts arise. However, in Silicon Valley—the United States’ home to a substantial majority of technology companies—these conflicts can quickly become problematic. When a limited number of major tech giants (such as Apple, Alphabet, Hewlett-Packard, and Intel) routinely seek legal representation from the limited pool of large law firms with prominent Bay Area practices, overlap becomes nearly inevitable. While increased conflicts disclosure may help alleviate—or at least illuminate—the problem, true solutions lie elsewhere: in the interests of both due process and preserving attorneys’ freedom to move between firms, reduced conflicts standards, consolidation of legal work, and more routine conflicts waivers will soon become a necessity.

To illuminate the problem, the California State Bar Rules reasonably state that “[a] member shall not, without the informed written consent of the client or former client, accept [adverse] employment… where… the member has obtained confidential information material to the employment.” This, on its surface, should be sufficient to prevent a firm from suing its own client using, to the firm’s own advantage, the confidential information it gleaned while representing the client in the past. In practice, however, even innocuous amounts of overlap can be enough to disqualify attorneys—or, at least, preclude a firm from accepting a given matter. This overlap can be as minor as one attorney who, according to the ABA’s model rules, can impute his or her conflicts history onto an entire firm. Thus, it is essential for firms to do whatever they can to avoid potential conflicts of interest, from screening new hires to declining to represent a client that would put the firm or some of its attorneys in a difficult position. Anything that firms do to mitigate conflicts, however, will necessarily increase transaction costs and slow either the process of hiring or the course of ongoing litigation, or both.

In the likely event that a small conflict is discovered, law firms may occasionally find sympathy with judges. As one example, Shearman and Sterling was recently permitted to concurrently represent a company on one matter and bring a lawsuit against it in another matter, given that the attorneys representing the company were based out of one office and that the attorneys suing the company were based in another. However, attorneys’ need to defend themselves just to acquire legal work will increase the cost of litigation and further prolong the litigation process. In a proactive step, attorneys can seek advance conflicts waivers from clients—but even these are fraught with potential legal problems. And screening lateral attorneys before hiring them further adds to firms’ expenses while significantly narrowing the hiring pool. Finally, particularly in a world in which tech companies are utilizing multiple law firms for their work, it won’t be long until several of the major tech companies are, under current rules and practices, immune from a lawsuit brought by any large law firm. For example, just among the five biggest Bay Area firms, Wilson Sonsini and Cooley both represent Google, while Orrick and Latham & Watkins are both representing PG&E. Oracle, meanwhile, has also hired Morrison & Forerster, Boise Schiller, Latham & Watkins, and Keker & van Nest. Worse, when many large companies are in the practice of refusing to sign advance conflicts waivers, law firms have limited options for controlling future conflicts of interest and preserving the right to sue major corporations.

Although conflicts seem pervasive and even a legitimate threat to potential plaintiffs’ due process—insofar as they may have difficulty utilizing the services of large law firms whose lawyers have previously represented potential defendants—there are steps that the judiciary and that corporations can take to begin alleviating the problem. First, judges can begin raising the threshold necessary to constitute a conflict of interest. Rather than finding a single lawyer to be sufficient to disqualify an entire firm from representing a company, judges can look for substantial overlap in both content and personnel before finding a conflict. Doing so would allow lawyers to move laterally between law firms more freely. For example, it would enable firms who have already hired a lawyer who represented Google to eventually sue Google on a related matter provided that the firm sufficiently ‘walls off’ that lawyer.

Additionally, corporations—particularly technology companies in Silicon Valley—can begin to more routinely waive conflicts. When a firm seeks to hire an attorney that previously represented a technology company, that technology company should expend the resources to verify how much information the attorney was privy to and waive all other potential conflicts. At the same time, lawyers should be particularly careful to identify all potential conflicts before accepting business, as to do otherwise may be perceived as hiding information to which the client is entitled, and is almost certainly a breach of loyalty.

Finally, and perhaps most challenging to implement, corporations can consolidate their legal work. In the densely packed Silicon Valley, both large law firms and large corporations are limited. By constraining the firms whose services a company utilizes to merely one or two, potential plaintiffs will have greater freedom to decide what law firm to hire. The difficulty, of course, is that consolidating legal work to fewer firms probably works against a company’s best interests, simply because more firms will be able to sue that company in the future.

Nevertheless, making a less congested, less conflicted legal market can help companies by reducing the cost of legal services, and can help law firms by both reducing the need for excessive caution around conflicts and expanding the hiring pool to a greater number of qualified attorneys with experience representing large companies. As a result, cooperation between lawyers, judges, and executives at large corporations can create a more open and less costly legal market for all parties involved.