Quandaries & Quagmires: Advance waivers: Lessons from Paul Hastings vs. Coca Cola

This summer, ethics took center stage in a conflict-of-interest row between Big Law and corporate behemoth Coca-Cola. As ethics counsel, I followed the developments with curiosity as the drama played out in unusually public fashion and was widely covered in legal news. The dispute highlighted the enforceability of advance waivers.

For those unfamiliar, Paul Hastings LLP is considered “Big Law” and is a premier global law firm with a large presence spanning both the East and West Coast. Back in 2021, Coca-Cola hired Paul Hastings to advise on international human rights issues related to its supply agreements in Africa. As is standard practice for most large law firms, Paul Hastings employed an advance waiver in its engagement letter with Coca-Cola. An advance waiver is a mechanism that allows law firms to manage conflicts of interest while continuing to represent multiple clients. It is written consent given by a client to a law firm permitting a law firm to represent clients with potentially conflicting interests in the future. In other words, it allows the law firm to act against the interest of the client who gave the waiver in specific, predefined situations. Coca-Cola signed the engagement letter with the advance waiver fully intact.

How did the dispute arise? In the winter of 2023, Paul Hastings started job negotiations with several litigation lawyers from the law firm of Cahill Gordon & Reindel, LLP (“lateral hires”). Members of the Cahill Gordon litigation team had just filed a complaint on behalf of their client SuperCooler, a startup company offering precision refrigeration solutions, against Coca-Cola. The lawsuit accused Coca-Cola of misappropriation of trade secrets and intellectual property and sought over $100 million in damages. SuperCooler transferred the litigation to Paul Hastings when the lateral hires joined the firm at the end of March 2023. The lateral hires emailed counsel for Coca-Cola that they had moved to a new law firm and filed a notice with the court. In response, Coca-Cola’s in-house counsel asserted a conflict of interest. Paul Hastings responded that it was relying on its advance waiver in the firm’s engagement letter. Eventually, Coca-Cola filed a motion seeking to disqualify Paul Hastings based upon a conflict-of-interest. Harsh words played out in the media as Coca-Cola accused Paul Hastings of “abandoning its ethical obligations” and Paul Hastings issued statements characterizing Coca-Cola’s motion as “technique harassment.”

How did this play out with the court? The court held the advance waiver was enforceable and issued a no-nonsense order that is a useful reminder about best practices for law firms utilizing advance waivers.¹ First, the court concluded that Paul Hastings had a conflict of interest under Rule 1.7(a)(1) which prohibits a lawyer from representing a client if the representation is directly adverse to another client, even if the matters are unrelated. See Cmt. 6 to Rule 1.7 (Conflict of Interest: Current Clients). Despite a direct adversity conflict of interest under Rule 1.7(a)(1), it is possible for lawyers to proceed with representation if they satisfy Rule 1.7(b)’s four requirements. Subsection (b) of Rule 1.7 permits a lawyer to represent a client even where there is an actual conflict of interest so long as (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing.

How does an advance waiver meet the “informed consent” standard? Rule 1.0(e) defines informed consent as “the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.” This means the lawyer must make a full and effective disclosure of all of the relevant facts, including material advantages and disadvantages of the proposed representation, and provide reasonable alternatives, which is usually hiring or consulting with other counsel. Model Rules R. 1.0 Cmt. 6; RESTATEMENT § 122 Cmt.c(i).

In concluding that Coca-Cola gave informed consent by signing the waiver, the court held that the advance waiver was clearly enforceable; it ticked all of the boxes for informing Coca-Cola about the material risks of signing the waiver and that it should seek advice of independent counsel before agreeing to the waiver. Coca-Cola’s counterargument — that the advance waiver was “open-ended boilerplate” and “unenforceable” —did not move the needle with the court.

Frankly, Coca-Cola was not wrong and, as noted by its counsel, the waiver did not explain to Coca-Cola that one of Paul Hasting’s other clients might sue Coca-Cola for fraud and seek millions in damages. The waiver was boilerplate, but, as was the case in this matter, whether consent is sufficiently informed will often hinge upon the sophistication of the consumer of the legal services.

Ultimately, the court found Coca-Cola to be a sophisticated, frequent consumer of legal services and that disclosure was reasonably adequate in this specific instance. There was testimony that Coca-Cola employed between 150 and 200 in-house lawyers, spent millions of dollars each year on in-house legal services, and hired 50, perhaps more than 100, outside firms in the last five years to the tune of additional millions of dollars. “Think of it this way,” the court wrote, “A magician performing magic tricks is perceived differently by different people. A toddler in the audience might be surprised and delighted to see the magician pull a rabbit out of his hat. Teenagers and adults in the audience may respond differently based on the number and types of magic shows they have experienced. But the seasoned vaudeville actor lurking just off the stage will not be surprised. Here, Coca-Cola is most like the jaundiced-eyed vaudeville actor. Coca-Cola knew what Paul Hastings is, what Paul Hastings does, and the types of clients Paul Hastings represents. Based on Coca-Cola’s familiarity of the risks involved, its representation by independent counsel, and the disclosure provided, Coca-Cola knowingly waived the specific conflict here — that is, it understood and consented to Paul Hastings serving as counsel to an opposing party in future litigation matters.” Shakespeare could not have written it better.

What is to be learned from the fallout with Paul Hastings and Coca-Cola?

Advance waivers are not a silver bullet, and law firms should not be overconfident in their reliance upon them. Advance waivers are subject to ethical and legal standards that vary by jurisdiction, and their enforceability may depend on a range of factors, including the clarity of the waiver and the specific circumstances of the case. Importantly, there are limits to the enforceability of advance waivers and some jurisdictions have held them to be unenforceable. Law firms should be more wary of employing advance waivers with individuals or small companies who are not sophisticated actors. Reliance on an advance waiver in direct adversity situations like litigation always brings higher risk.

After understanding the limits and risks involved with advance waivers, there are common sense things a law firm can do to make an advance waiver more likely to stand up to judicial scrutiny:

• Spend time constructing an advance waiver specific to the client to avoid accusations of using unenforceable, boilerplate terms.
• Describe any existing or presenting foreseen conflicts that are known at the time of retention and define what will and will not be considered unrelated matters. Make sure that you have other clients’ consent to make such disclosures if it involves identifying the representation of a specific client such as a competitor. A good work-around is to use categories of clients that may be adverse to the specific client.
• Expressly address potential risks to confidentiality, even if circumstances are such that the material risk of adverse disclosure or use of confidential client information is low.
• Discuss client specific risks to loyalty such as representation of clients that may have adverse business interests to the client, such as competitors.
• Do not ask for more than what is required of the client. If you are engaged primarily in transactional matters, including litigation within the scope of the advance waiver makes it more unlikely to be accepted by a client. Some business clients have outside counsel guidelines (“OCGs”) prohibiting acceptance of advance waivers. Including litigation makes it more likely to be rejected by in-house counsel. Interestingly, Coca-Cola had OCGs that prohibited advance waivers and argued its OCGs superseded the advance waiver. The court covered it in a passing footnote and gave it no credence. Despite the court’s lax treatment of this issue, OCGs can present a total bar to a law firm’s use of an advance waiver. Limiting the scope to transactional matters in the future makes it more likely to be signed in these circumstances.
• Recommend that the client seek the advice of independent counsel and give adequate time for the client’s consideration of the advance waiver prior to signing. “[G]enerally a client or other person who is independently represented by other counsel in giving the consent should be assumed to have given informed consent.” Cmt. 6 to Rule 1.0. Where possible, draft an advance waiver for signature by the client’s in-house counsel as they have an independent obligation to inform the organization of all of the relevant information and risks associated with the waiver.

Elephant in the room? After dissecting all of the media coverage and the court’s order denying disqualification, I am left with a nagging question. Did a premier law firm like Paul Hastings really miss the ball on its lateral screening or did it believe that reliance on its advance waiver would survive a disqualification motion? The latter seems more plausible and presents an off-putting possibility for prospective clients of Paul Hastings. Clients may think twice about hiring a law firm that sets aside its clients with such calculation. The media attention garnered by this spat resulted in unwarranted attention for Paul Hastings and the fallout serves as a due diligence cautionary tale for other law firms to spend adequate time screening for potential conflicts-of-interest, especially active litigation conflicts.

Cassie Hanson is a legal ethics lawyer with substantial experience in the field of ethics and professional responsibility. As conflicts and ethics counsel at Fredrikson & Byron, P.A., Cassie is focused on legal ethics, conflict prevention and resolution, legal malpractice/loss prevention and trust account compliance. Additionally, Cassie worked for 20 years as a senior litigator and adviser at the Office of Lawyers Professional Responsibility. Cassie investigated and prosecuted high-level attorney discipline cases. She is an experienced trial attorney and appellate advocate who regularly argued complex attorney discipline cases in front of the Minnesota Supreme Court. She has advised various government agencies, law firms and other stakeholders on legal ethics and professional responsibility. Cassie is a frequent public speaker on ethics and lawyer well-being.

Endnote

¹ SuperCooler Technologies, Inc. v. The Coca Cola Company, et al., 6:23-v-00187-CEM-RMN (U.S. District Court Middle District of Florida, Orlando Division, July 17, 2023).