Chinese Walls Are No Longer High Enough

The New Mexico Supreme Court recently entered a decision with ramifications regarding conflicts of interest in law firms.  The issue: may a firm cure a clear conflict of interest by erecting a “Chinese wall.”  The lesson: Chinese walls are not as strong as they used to be and some conflicts may only be cured through the disqualification of counsel, and maybe the entire law firm.

The underlying dispute in Mercer v. Reynolds, concerned the interpretation of an easement.  The plaintiff alleged that it was entitled to construct large berms on the defendant’s property due to a 1936 easement granted by the defendant’s predecessor in favor of the plaintiff’s predecessor.  The defendant objected and litigation ensued.  During the litigation, the defendant filed a counterclaim and the parties joined additional defendants.

Part of the original defense team consisted of an associate in a two-attorney firm.  Two years into the litigation, however, the associate who previously represented the defendant, was hired to join another firm that now represented one of the additional defendants.  A heated dispute arose concerning the potential conflict of interest.

In an effort to cure the defect, the newly hired associate’s firm erected a Chinese wall which it felt would allow it to continue the representation.  Generally, a Chinese wall is an information barrier implemented to isolate persons who are privy to certain information.  The New Mexico Supreme Court held that the wall was not enough.  According to the court, the “screening [of] the new attorney from any involvement in the lawsuit is not an adequate response to the conflict.”  As a result, the firm was disqualified from the entire case.

Certainly all attorneys are aware of the importance of completing a conflict of interest evaluation when opening a matter.  However, the principles of conflict avoidance survive throughout the life of an engagement.  Attorneys must consider conflicts when a new party is joined to litigation or a transaction, when new claims are raised, and as a result of this decision, when new hires are made.  A firm must carefully analyze the benefits and consequences of hiring a new attorney including the possibility that the new hire may impact active cases and jeopardize client relationships.  Maintaining an updated conflict database is one way in which a firm can proactively anticipate and prepare for the potential impact of hiring a new attorney.  Firms must also understand that “Chinese walls” may not be as high as attorneys may have once believed.

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