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"Swing Sweat, Erasing Firm-Hopping Lawyers' Imputed Knowledge Leaves Clients Hanging in the Balance"

San Francisco Daily Journal
By: Kurt W. Melchior
04/25/01

The booming economy of the late 1990s saw an unprecedented number of attorneys jumping from one law firm to another as they aimed to take advantage of skyrocketing salaries and mounting benefits. But do clients ultimately pay the price in lost confidentiality as a result of this game of musical chairs?

In the aftermath of this job-hopping trend, a California Court of Appeal recently issued a decision that - if not reversed by the California Supreme Court - seriously will devalue the confidential relationship that is established between a client and his or her law firm. Decided this February, Adams v. Aerojet, 86 Cal.App.4th 1324 (2001), threw established law to the wind, with important consequences to the practice of law.

To understand the impact of Adams, accept for a moment the following hypothetical situation: A client engages a law firm to handle a matter, and an attorney at the firm is assigned responsibility for that matter. During the course of that attorney's representation, the client discloses confidential concerns, information and strategies to the attorney.

Under current law, when the client made the disclosures to that attorney, he or she was deemed to have disclosed client strategies in confidence to every attorney at the law firm. This concept of "confidential disclosure to one, confidential disclosure to all" is known as "imputation." The lead attorney's confidential knowledge is thus "imputed" to every attorney at the firm.

The courts have been quite rigorous in imputing confidential knowledge to a firm and all its attorneys. The rationales provided for this imputation are that a client rightfully should expect the loyalty of the entire firm. If, in the future, a situation should arise in which the client must prove improper use of confidential knowledge, it would have to examine who in the firm knew what about its confidential business and who communicated what internally within the firm. Not only would this be impractical and unseemly, it also would force the client to bring its confidences to light.

Imputation is a necessary judicial fiction that disqualifies a law firm and its lawyers from representing another client against the first client in an adverse matter that is substantially related to the work that was done on that initial client's behalf. Without such imputation, the law firm and its lawyers could find themselves using the former client's confidences against it, greatly diminishing that client's rightful expectations of confidentiality.

Under California law, this rule of imputation has been applied even when the record showed that the new matter came up years after the first engagement had ended and no lawyer who worked on the original case remained in the firm. Elan Transdermal Ltd. v. Cygnus Therapeutic Systems, 809 F. Supp. 138 (N.D. Cal. 1992). (The Elan opinion applied California law, but was not cited in the Adams decision.) Thus, the presumption of imputed knowledge has been absolute.

Clearly, the concept of imputed knowledge took a hard blow with the Adams decision. The court reversed a ruling that disqualified a lawyer from being involved in a lawsuit against a former client. The lawyer had been a name partner in a small law firm when it represented the current defendant in matters that were substantially related to the subject matter of the new suit that he had now brought against this former client on behalf of a new client.

According to the Court of Appeal, automatic disqualification was not required, simply because the lawyer had meanwhile left the firm where the work for the former client - now adversary - had been done. The court held that in the interest of lawyer mobility and of the subsequent client's choice of counsel, when the lawyer left his old firm, he also left the presumption of imputed knowledge behind.

The court found that in order for the former client to disqualify the lawyer from suing it in a case that was substantially related to the work his previous firm had done for it, the former client would have to prove that the particular lawyer had actual knowledge of its confidences due to the nature of his specific work at the firm or his relationships with lawyers who worked on the engagement while he was there.

A dissent took issue with elements of proof laid down by the majority but agreed that the lawyer left all imputed knowledge of the client's confidences behind when he left his former firm.

The court did not identify any difference in status between the lawyers still at the firm and the lawyer who had left the firm but who unquestionably had access to the client's privileged information during his tenure there. Once the knowledge of such information had been imputed to him, as it clearly was during the attorney's tenure at the firm, by what rationale did the imputation (as distinguished from actual possession of confidential information) evaporate simply because the lawyer had gone elsewhere?

The holding that a lawyer is cleansed of this imputed knowledge simply by leaving the firm where that knowledge resides entirely vitiates the concept of imputed knowledge.

Unquestionably, the imputed-knowledge rule is both artificial and restrictive of a lawyer's freedom of movement and a potential client's choice of counsel. Until now, the sacrifice of those restrictions has been deemed worth the price for two reasons.

First, the relationship of lawyer and client was so sacrosanct that some sacrifices had to be made for its protection.

Second, and as significant, the alternative - the detailed examination of a particular lawyer's exposure to and retention of actual client information - was considered unnecessarily intrusive and of limited value because discovery into such private intrafirm communications had clear practical limits. Most importantly, to examine the lawyer's knowledge of client confidences would require disclosure of those same confidences - an imposition on the client that many courts have held impossible.

Under Adams, all this is to go by the boards as soon as the lawyer, charged with imputed knowledge, leaves the first firm. Except for references to Dieter v. Regents of the University of California, 963 F. Supp. 908 (E.D. Cal. 1997) (which generally had been considered not in line with the main body of California law), to commentary on the ABA Model Rules (which do not govern the practice of law in California) and to the practical concerns of lawyers who move between firms, the court fails to explain why a lawyer is exonerated from the imputed conflict when he or she subsequently leaves the conflicted firm.

The court's reasoning is based on values antithetical to the concept of imputed disqualification. Adams will require actual proof that the lawyer possesses confidential information. The client inevitably will have to develop the details of what passed between it and the firm to try to make the case for disqualification. This requirement jeopardizes the fundamental client right to confidentiality that the courts have striven to protect since the law in this area was introduced a half century ago in T.C. Theatre Corp. v. Warner Bros. Pictures Inc., 113 F. Supp. 265 (S.D.N.Y. 1953).

While the outcome of Adams may be convenient for lawyers and law firms, the court never even addressed the well-established rationale for preventing such inquiries. Rather, through confusing the possible substantial relationship between the current engagement and the prior representation of the client by the former law firm with an inquiry into the substantial relationship between the lawyer's individual knowledge and the client's prior representation, the court undercuts the rationale of the imputed-relationship rule.

Simply put, the client should come first. California has been assiduous in protecting client communications through such things as the unequivocal demand of confidentiality in Business and Professions Code Section 6068(e) and the Supreme Court's repeated refusal to adopt proposed Rule 3-100, which would have allowed limited disclosure of client communications where imminent danger loomed.

Two California Supreme Court cases, People v. SpeeDee Oil Change Systems, 20 Cal.4th 1135 (1999), and Flatt v. Superior Court, 9 Cal.4th 275 (1994), demonstrate the court's commitment to the broadest client confidentiality.

Adams saps the concept of imputed knowledge and the established law that has found a client should not have to prove elusive facts about a lawyer's actual knowledge of its secrets once that individual has moved to another firm. Adams ignores the logic of the imputed-knowledge concept, the Elan precedent and the client's expectation of confidentiality.

Clearly, it was wrongly decided. The California Supreme Court should reverse this case on review, or clients will never again be able to rely on the confidentiality of attorney-client relations.

Kurt Melchior is a partner at Nossaman, Guthner, Knox & Elliott. He is a former member of the Commission on the Revision of the Rules of Professional Conduct. The firm represents Aerojet.

© 2002 Daily Journal Corporation. All rights reserved.

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