By Joshua R. Furman.

Furman is a sole practitioner focused on attorney-client disputes and a Certified Specialist in Legal Malpractice Law. Mr. Furman serves on the LACBA Professional Responsibility and Ethics Committee. The opinions in this article are the author’s alone and should not be attributed to LACBA or any other organization.

Conflicts are a fact of life for litigators and other attorneys in private practice. The clear lines of which clients are in disputes with which parties are hard to mistake. However, transactional lawyers must also be on the lookout for conflicts of interest between clients—and between clients and former clients—that can crop up unexpectedly.

For a lot of entertainment transactional practices, the formal sense of conflicts may be counterintuitive. Entertainment lawyers are often valuable not just for their legal acumen, but for the relationships they can bring to a project. Multiple contacts within a production can be a boon for the lawyer and the lawyer’s client, but they also carry a lurking ethical morass of differing benefits and divided interests between the parties. Consider the position of a lawyer hired as production counsel. The party retaining the lawyer is usually the producer, and the lawyer is expected to prepare producer agreements, director agreements, and negotiate with talent’s representatives. But what happens when the director, who is also a client of the lawyer, has a dispute with the producer? The production lawyer’s instinct may be to work to resolve the dispute on behalf of the producer. In practice, that means negotiating in the interest of the producer and against the interest of the director raising the dispute—a conflict of interest. This is true even if the director is disengaged from the firm at the time the dispute arises.

This Ethics Update takes a look at some of the fundamentals of conflicts of interest and how they can arise in the entertainment setting.

Conflicts Between Clients

The most basic conflict is when a lawyer is representing two clients with differing interests. California Rules of Professional Conduct, rule (“RPC”) 1.7(a) provides: “A lawyer shall not, without informed written consent … represent a client if the representation is directly adverse to another client in the same or a separate matter.” The rule requires that the lawyer also try to anticipate whether a conflict is likely, and may not engage in that representation either. (RPC 1.7(b).) Client consent to a conflict representation is not a panacea. Consent is only valid if the lawyer (1) reasonably believes the conflict will not affect their ability to represent both clients; (2) the representation is not prohibited by law; and (3) the representation does not relate to an actual dispute before a tribunal. (RPC 1.7(d).)

These fiduciary restrictions apply equally to disputes and transactions under RPC 1.7(b), requiring the lawyer to anticipate conflicts. While consent obtained from both clients can be valid where the criteria in subsection (d) are met (e.g., Lessing v. Gibbons (1935) 6 Cal.App.2d 598 [representing actor and director in negotiations with United Artists with due consent]), conflicts are unwaivable where the parties’ interests are materially adverse (Anderson v. Eaton (1930) 211 Cal. 113, 116 [“The rule is designed not alone to prevent the dishonest practitioner from fraudulent conduct, but as well to preclude the honest practitioner from putting himself in a position where he may be required to choose between conflicting duties, or be led to an attempt to reconcile conflicting interests, rather than to enforce to their full extent the rights of the interest which he should alone represent.”]).

A lawyer that is asked to represent both sides in a negotiation may do so, as long as the clients provide informed consent. To ensure “informed” consent, the lawyer must provide all reasonably available facts to both parties that would impact the representation. (RPC 1.0.1(e) [informed consent requires disclosure of “(i) the relevant circumstances and (ii) the material risks, including any actual and reasonably foreseeable adverse consequences”].) Blanket consent to future conflicts in a fee agreement is not “informed” and is inadequate. (Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 6 Cal.5th 59, 84.)

Even if proper informed consent is obtained, once an actual conflict arises between the parties, the lawyer may not represent either party—and may not give so much as informal advice about the conflict whether litigated or otherwise. The duty of loyalty that a lawyer owes to every client prevents the lawyer from representing any client that is adverse to any other client. (Flatt v. Superior Court (1994) 9 Cal.4th 275, 285 [“A client who learns that his or her lawyer is also representing a litigation adversary, even with respect to a matter wholly unrelated to the one for which counsel was retained, cannot long be expected to sustain the level of confidence and trust in counsel that is one of the foundations of the professional relationship.”] [emphasis in original].)

Entertainment lawyers should bear in mind that adversity between clients is not solely a condition of actual disputes. When two parties are negotiating a contract, the duties and benefits flowing to and from each party also present a conflict. Informed consent must be obtained prior to any dual representation in a negotiation. A thorough informed consent should include specifics about the nature of the conflicting interests of the two parties including bargaining power imbalances, potential pitfalls for attorney-client privilege in dual representation (Rest. 3d of the Law Governing Lawyers, § 75 [“communication … is not privileged as between the co-clients in a subsequent adverse proceeding between them”]), that the costs of representation will be multiplied if an actual conflict arises, and advice to seek independent counsel prior to consenting.

Conflicts Between Clients and Former Clients

The duty of loyalty precludes simultaneous representation of adverse clients discussed above. The duty of confidentiality also precludes representation of a client adverse to a former client. (RPC 1.9; Forrest v. Baeza (1997) 58 Cal.App.4th 65.) “[A] lawyer who has represented a client in a matter may not thereafter represent another client in the same or a substantially related matter in which the interests of the former client are materially adverse.” (Rest. 3d of the Law Governing Lawyers, § 132.) This duty is somewhat more limited than the duty to avoid concurrent representation of adverse clients. Unlike concurrently represented clients, the lawyer is only barred from representing the interests adverse to a former client where the subject matter of the dispute relates to the lawyer’s former representation. Nonetheless, if a lawyer represented both parties in negotiating a deal, the lawyer may not represent one of those parties in a subsequent dispute over the deal, even if the adverse party is no longer represented by the lawyer.

In the introductory example, if the lawyer represented both sides to a directing deal—representing the director only for the purposes of the deal—and the director later raises a dispute with the producer on that project, the lawyer may not advise the producer on the subject matter of the dispute without informed consent of the director. As above, informed consent requires that the lawyer fully inform the director in writing of all reasonably available facts that may affect the director’s decision to consent. Of course, the cleanest ethics solution is to never have engaged in the dual representation in the first place.

Imputed Conflicts: Ethical Screening is Ineffective

The concept of an ethical wall was still recently taught as a way to insulate a conflicted lawyer from other lawyers at the same firm. The idea of an ethical wall is that by isolating the conflicted lawyer from giving any advice to the adverse client, and simultaneously preventing the conflicted lawyer from sharing confidential information of the conflicted former client, the firm could still engage in the conflict representation. Firms cannot rely on this practice to avoid conflicts. The adversary’s confidences known by the conflicted lawyer are imputed on the entire firm. (RPC 1.8.11 & 1.10; Rest. 3d of the Law Governing Lawyers, § 123 [imputed conflicts apply to members of the same firm, organization, or co-located office].)

Before RPC 1.8.11 & 1.10 were implemented, ethical screening was regarded as fact-dependent, available in limited circumstances, and challenging to properly implement. (Kirk v. First American Title Ins. Co. (2010) 183 Cal.App.4th 776, 810–814 [describing “The Elements of an Effective Screen”]. Also see, Adams v. Aerojet-General Corp. (2001) 86 Cal.App.4th 1324, 1333 [calling ethical screening a “practical impossibility”].) It is unclear whether Kirk survives the promulgation of RPC 1.8.11 & 1.10, which brought the doctrine of imputed conflicts into the Rules for the first time in 2018.

The proper practice is to presume that one lawyer’s conflict applies to all lawyers in the firm and to prevent conflicts and seek informed consent accordingly. A lawyer whose prior representation of an adverse party has a “substantial relationship” to the firm’s representation disqualifies the firm. (Rosenfeld Constr. Co. v. Superior Court (1991) 235 Cal.App.3d 566, 576.) Even outside of a litigated matter where disqualification is a risk in addition to liability, conflicted representation can raise liability issues in a legal malpractice or breach of fiduciary duty claim alleging damage to a former client. (Yanez v. Plummer (2013) 221 Cal.App.4th 180, 188.)

Conflicts Between Lawyers and Clients

The rules for transactions between a lawyer and the lawyer’s client are more stringent. If a lawyer is entering into an agreement with the lawyer’s client—such as where production counsel seeks executive producer credit or backend fees—the lawyer must approach cautiously. The baseline requirements are (1) the transaction must be fair and reasonable, the lawyer may not leverage superior legal knowledge or the client’s trust in obtaining better terms; (2) the lawyer must tell the client in writing to obtain independent legal advice before entering into the transaction; and (3) the client must give informed written consent to the transaction and specifically the nature of the lawyer’s involvement and the conflict created thereby. (RPC 1.8.1.) These requirements can also apply to transactions with former clients. (Hunniecutt v. State Bar (1988) 44 Cal.3d 362.)

The fairness of the transaction is fact-dependent, but lawyers should bear in mind that the law presumes the transaction is unfair to the client and the lawyer bears the burden to overcome that presumption. (Prob. Code, § 16004; BGJ Associates v. Wilson (2003) 113 Cal.App.4th 1217, 1227 [“[Statute] applies to the fiduciary relationship between attorney and client.”].)

The requirements for independent legal advice and written consent are more universal. Before the transaction, the lawyer must provide a writing to the client telling explaining the nature of the conflict created by the transaction and that they should seek independent legal advice. The client must be given a reasonable opportunity to do so before entering into the transaction. At least one decision has condoned a transaction without full informed consent, but only under certain circumstances where the client has actually hired another lawyer for advice on the transaction. (Ferguson v. Yaspan (2014) 233 Cal.App.4th 676, 688.) The better practice would be to ensure that the lawyer entering into the transaction actually makes a complete disclosure, even if—or especially if—it is not in the lawyer’s interest to do so.

Conflict Complications Presented by Business Entities and Loan-Outs

When the client signing the fee agreement is a business entity there are additional conflicts considerations for the lawyer. The entity, not any individual associated with the entity, is the lawyer’s client. (RPC 1.13(a).) A conflict may arise between a principal of a client entity and the entity. If the principal has had communications with the lawyer in the course of representing the entity, those communications can be privileged and the entity is the holder of the privilege. (Meehan v. Hopps (1956) 144 Cal.App.2d 284.) It follows that the lawyer cannot represent a principal of the entity in a subsequent or ongoing dispute with the entity. (Rest. 3d of the Law Governing Lawyers, § 131.) The lawyer must act in the best interests of the entity, and report to the entity if the lawyer discovers that a principal of the entity is undertaking or planning conduct against the interests of the entity (while not revealing client confidences). (RPC 1.13(b)–(c).)

Many entertainment professionals use loan-out entities or create serial entities for individual projects. So long as the loan-out is exclusively owned by an individual, the same principles for advising an individual client would apply. When a project entity is owned by a client, or multiple clients, the lawyer must be careful to ensure that in advising the project entity neither the duties of loyalty nor confidentiality to the entity’s constituent clients are violated. If the lawyer represents both the entity and the entity’s constituents, the lawyer may have a conflict of interest between those two clients, particularly if any issues or negotiating points arise between the entity and its constituents—or between its constituents. For entertainment practices, this can often arise in negotiating or renegotiating the backend waterfall and priorities of interests. One executive producer who is a constituent of the project entity may claim first money out for their capital contribution, while another may have a competing claim. The lawyer cannot represent both parties claiming first priority while adhering to a duty of loyalty to each, or to the entity itself.

The entertainment bar operates in a different business world than many other practitioners, but the ethical rules do not stop at the red carpet. Conflicts for entertainment lawyers and their many intertwined relationships can be complex, but failure to observe generally applicable conflicts rules can result in diminished client service and potential liability. While the world of conflicts is much larger than the basic rules examined here, entertainment lawyers should consider conflicts of interest when taking new engagements and continue to evaluate them as engagements proceed to ensure that conflicts with current and former clients are handled appropriately.