Sws Financial Fund a v. Salomon Bros. Inc.
1992 WL 87912, 790 F. Supp. 1392 (1992)
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Rule of Law:
A law firm's violation of the ethical rule against representing a client with interests directly adverse to another current client does not automatically require the firm's disqualification. Disqualification is a drastic remedy that should not be imposed when the matters are not substantially related and other factors weigh against it, such as the sophistication of the client and the potential for tactical abuse of disqualification motions.
Facts:
- Beginning in May 1990, the law firm Schiff, Hardin & Waite ('Schiff'), through partner Kenneth Rosenzweig, provided legal services to Salomon Brothers ('Salomon') on commodity futures law compliance.
- Over a 13-month period from May 1990 to June 1991, Schiff worked on several discrete projects for Salomon, including contributing to a compliance manual and answering regulatory questions, totaling 214 hours of service.
- Schiff's last billable work for Salomon occurred on June 25, 1991, but the firm never formally gave notice that it was terminating the attorney-client relationship.
- On August 9, 1991, Salomon issued a press release admitting to irregularities in its bidding at U.S. Treasury auctions.
- Shortly thereafter, Hickey, a group of investment partnerships, retained Schiff to pursue a claim against Salomon based on the alleged market manipulation.
- On August 13, 1991, while beginning work for Hickey against Salomon, Schiff's partner Rosenzweig contacted Salomon's General Counsel to obtain consent to represent a different client in an unrelated negotiation with Salomon.
- In September 1991, Schiff attorneys, representing Hickey, met with Salomon's legal personnel to discuss a potential settlement, but did not disclose that Schiff had previously represented Salomon.
- Schiff and Salomon personnel maintained professional contact after June 1991, including Rosenzweig sending letters to Salomon in October and December 1991 to solicit support on a regulatory matter.
Procedural Posture:
- Hickey filed an eight-count complaint against Salomon Brothers in the U.S. District Court for the Northern District of Illinois, the court of first instance.
- Salomon Brothers subsequently filed a motion in the district court to disqualify Hickey's counsel, the law firm of Schiff, Hardin and Waite, on the grounds of a conflict of interest.
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Issue:
Does a law firm's violation of the ethical rule prohibiting representation of a client directly adverse to a current client automatically require the firm's disqualification from the case?
Opinions:
Majority - Judge Brian Barnett Duff
No, a violation of Rule 1.7 does not automatically require disqualification. Although Schiff violated its ethical duty of loyalty by suing a current client, disqualification is a drastic and inappropriate remedy in this case. The court first determined that Salomon was a current client of Schiff when the firm undertook the adverse representation of Hickey. Based on the continuous, 13-month relationship on a variety of matters, Salomon was entitled to assume the relationship would continue, and the burden was on Schiff to clarify any termination. However, disqualification is not an automatic sanction. The court must consider the purposes behind the rule: protecting client confidences and ensuring loyalty. Here, there is no risk to confidences because Schiff's prior work on commodities futures compliance is not substantially related to the current litigation concerning Treasury auction manipulation. While the duty of loyalty was breached, disqualification would impose substantial costs on the innocent client, Hickey, and would be an overly harsh sanction given the circumstances. The court noted that in an era of 'mega-firms' and 'mega-parties,' automatic disqualification could encourage large corporations to parcel out minor legal work to many firms as a tactic to create conflicts and 'buy insurance' against future lawsuits. Therefore, while Schiff's conduct was improper and may warrant other sanctions, disqualification is denied.
Analysis:
This case is significant for rejecting a per se rule of disqualification for a breach of the duty of loyalty to a current client. It establishes that courts should engage in a more nuanced, equitable analysis of the remedy, distinguishing the ethical violation itself from the appropriate sanction. The decision reflects a pragmatic adaptation of professional responsibility rules to the modern legal market of large, institutional clients and multi-specialty law firms. It signals that courts will consider factors like the lack of a substantial relationship between the matters, the nature of the attorney-client relationship, and the potential for strategic abuse of disqualification motions, thereby making it more difficult for large corporations to strategically 'conflict out' major law firms with minimal legal work.
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