Like their business clients, law firms are striving to stay ahead of the business curve and position themselves for future expansion and growth.  For many law firms this will require moving out of their comfort zones and broadening their legal service offerings beyond their traditional market niches and geographical areas.  Instead of expanding practices using internal resources, firms are accelerating growth initiatives by merging with or acquiring other firms and recruiting experienced lateral attorneys who can bring a book of business to the firm.  Once a firm or a lateral candidate is identified and preliminary conversations have begun, the recruiting firm must begin the conflicts checking process.  The efficiency with which a firm can identify and assess conflicts arising out of prior work history, the sooner a decision can be made as to whether the candidate - be it another firm or an individual attorney - is a good fit.

Many firms do not have a defined process or adequate systems to thoroughly assess the severity of potential conflicts of interests.  Consequently, they often take shortcuts and make formal offers of employment to lateral candidates or move further ahead in the merger process before the conflicts checking process is completed.  The chance for missing conflicts increases when firms need to vet large volumes of client matter representations in contemplating a merger partner.

In the early stages of recruiting a lateral or evaluating a merger, the primary goal of checking conflicts is to determine if the lateral attorney's or potential merger firm's representations are in opposition to the interests of the recruiting firm's clients.  If there are significant conflicts at this stage, firm management will decide whether these conflicts warrant discontinuing discussions.  If conflicts are not identified and dealt with before a lateral is hired and before a merger is finalized, there can be negative financial, image and legal consequences to the firm and affected clients.  The source of many motions to disqualify opposing counsel can often be attributed to unidentified and unresolved client conflicts as a result of a lateral attorney changing firms during matter representation.

In the early stages of merger discussions, conversations are limited to managing partners of firms and maybe a small group from the management team.  While the managing partner will often have a strategic vision of how the firm is operating, this level of management typically does not always understand the details of the administrative systems and applications in place for operating the firm.

It is imperative that a firm evaluate and leverage existing technology platforms to identify and manage conflicts before initiating a campaign to recruit laterals or identify a merger partner.  IT staff need a basic understanding of the professional and ethical standards that must be adhered to in order to understand capabilities of existing systems.  Conversely, firm management should have a working knowledge of existing systems to appreciate the limitations of the current process.  The optimum process includes the following steps firms should take to manage the risk associated with conflicts due diligence as they plan for growth through mergers and lateral hires.

Reviewing Data in Conflicts System
As law firms have grown, the amount of data elements to be searched has increased; subsequently, the potential conflicts hits that must be reviewed has also increased.  IT professionals and the intake/conflicts department should work together to regularly review where data elements are stored in the conflicts database.  Inaccurate and duplicative data in conflicts systems will create bottlenecks in the entire conflicts reporting and resolution process.  There must be a commitment to regularly clean up the system and eliminate data elements that are no longer relevant.  For example, let's assume that attorney Joe Jones left Firm A to join Firm B.  After a year, Joe decides to leave Firm B and takes a lateral position with Firm C.  There is related party information in Firm B's conflicts database from Joe's prior work history at Firm A even though those matters were never opened at Firm B.  When Joe leaves Firm B, much of  the prior work history data retained in the conflicts database from Joe's work at Firm A may be eligible to be purged from the conflicts system when Joe moves to Firm C.  Before deleting information from a conflicts system, however, it is important that IT obtain authorization from the firm's general counsel and/or risk management partner.

In an attempt to simplify conflicts reports that will be reviewed by attorneys, firms sometimes eliminate critical information, such as a lateral attorney's prior work history, for matters that will not be transitioned to the firm.  This shortsighted approach may be problematic when the firm later opens a new matter that conflicts with a lateral's prior work history.  In an attempt to halt this practice, New York and other jurisdictions require firms to store and search all of a lateral's work history as part of the conflicts check process.

The conflicts check process is still more complicated for today's large firms with locations in multiple states.  Often a firm's system and procedures surrounding conflicts due diligence are based upon the ethics rules in the state where the conflicts department resides.  Firms that span multiple states need to have an infrastructure to update their conflicts processes to reflect differences in all the jurisdictions in which they practice. 

Clients affected by a conflict as a result of a merger will sometimes agree to waive the conflict if the firm can guarantee that their confidential information will not be disclosed.  Each state bar association has differing opinions as to whether the establishment of an ethical screen alone is sufficient protection to avoid imputed disqualification of the firm as a result of conflicts arising from a lateral's prior work history.  If we assume that the establishment of a screen is sufficient remedy to alleviate client concerns, it is presumed that the firm can identify and secure all information subject to the screen.  In the past, when confidential matter information existed in physical file folders, many firms labeled the file to notify anyone accessing the file of the existing screen.  It is a bit more complicated today because information subject to a screen could exist in numerous repositories inside and outside of the firm's control.

It is impossible to protect confidential information unless you know where it exists.  IT staff should have an updated map of all of the applications and systems used by the firm.  Firms that have established policies that define designated repositories for storing and identifying information are better able to comply with requests for protective screens.  At a minimum, information related to a specific client matter representation should be identifiable by the unique client matter number assigned by the firm.

Improving the Conflicts Due Diligence Process
All firms - and especially those considering growth through mergers and lateral hires - should have in place technology and processes that can:

• Integrate systems that contain information that should be searched for conflicts.
  
• Close inactive and settled legal representations on a regular basis.  The firm's policy to close matters should not be in response to potential conflict hits.
  
• Evaluate data elements in the conflicts database to ensure there is sufficient detail about current and former matter representations. This will allow the firm to make informed decisions as to whether there is a conflict based upon jurisdictional ethics rules and the firm's position on business conflicts. 
  
• Continuously evaluate data in the conflicts database.  There should be an ongoing commitment to clean up duplicative data elements and streamline conflicts reports.
  
• Protect client-confidential information prior to a lateral joining the firm.  It is not sufficient to establish a policy in response to a conflict or audit from a client.  There must be a way to secure confidential information across repositories and applications that contain client confidential information.
  
• Identify business conflicts and a process to communicate to conflicts staff and attorneys the types of matters that are considered business conflicts.  Firms should integrate systems that contain marketing information to enable early identification of matters that are business conflicts.  There must be oversight to ensure that taking on one matter will not preclude the firm from taking on other, more desirable matters in the future.

Improving the conflicts infrastructure will protect the firm when an attorney decides to leave the firm and mitigate myriad risks when firms decide to merge.

By evaluating the systems and processes being used today and addressing any ethical and tactical issues that arise, law firm management, IT and conflicts professionals can smooth the way to alleviating client concerns and mitigating risk regarding conflicts and confidentiality during periods of growth.  With solid processes and technology, law firms can handle their due diligence conflicts check with efficiency and effectiveness.  In turn, the process of growth through mergers and lateral moves becomes easier and faster, which is desirable for all parties involved.

About our author :: :: ::

Nancy Beauchemin is president of InOutsource.  She has spent more than 20 years working with law firms advising on records management best practices, new technologies and risk management issues.  She has earned a Certified Records Manager designation from the Institute of Certified Records Managers, and is a member of ARMA International.  Nancy can be reached at nbeauchemin@inoutsource.com.