UK: Lateral Hires: The Challenges Of Protecting Confidentiality

The challenges posed by lateral hiring have once again been brought to the fore by the replacement in February 2016 of litigation boutique Cooke Young & Keidan (CYK) by Bird & Bird in the highly anticipated GBP 30 million Libor dispute Property Alliance Group ('PAG') v The Royal Bank of Scotland ('RBS').

CYK represented the property investment company PAG in its derivatives mis-selling claim against RBS, which is due to be heard this month. PAG alleges that the bank's misconduct went beyond what has been made public by regulators and asserts that RBS made fraudulent misrepresentations about Libor at a time when the bank's senior executives were aware of problems with the integrity of the benchmark.

RBS served an injunction against CYK to have them removed as PAG's lawyers over alleged issues relating to confidential information arising out of CYK's hire of a junior associate who used to work at Clifford Chance. Michael Cumming-Bruce, a two-and-a-half-year-qualified associate, trained and qualified at Clifford Chance before moving to Carey Olsen for a short spell and was then recruited by CYK. According to reports, RBS alleged that Mr Cumming- Bruce had access to confidential documents concerning RBS while working at Clifford Chance, which it is presumably alleged would be material to the litigation. Commissioned by RBS, Clifford Chance had undertaken an independent review into RBS' global restructuring group (GRG) in 2013, in response to allegations that the GRG had been systematically running small businesses into the ground. The activities of the GRG will be one of the issues in the PAG litigation.

Interestingly, PAG took the initiative, faced with the injunction application by RBS, to replace its representation, perhaps taking the view that they would rather concentrate on preparation for trial than satellite issues (of which there have been many in the course of the litigation).

Although the full facts of the issue in PAG are not known, because the injunction application was never heard, the episode underlines the care around conflicts and confidential information which needs to be taken by firms when hiring not only partners but associates from other firms, and some of the potential consequences of getting it wrong. Often, a lateral hire is sought precisely because of the specific work/client base the individual has, yet this clearly poses a risk of disclosure of confidential client information and can have a ripple effect on a firm's ability to represent existing or prospective clients if an issue is not uncovered and the risks properly managed. Two particularly striking features of the PAG case are the junior level of the associate involved and the fact that his alleged access to relevant confidential documents took place not at his prior firm but at the firm by which he was employed even before that.

Destabilisation tactics

The injunction application could be viewed as a tactical manoeuvre by RBS in an attempt to jeopardise the impending trial date, and/or destabilise PAG at a key stage, and the ability to take such points can be a powerful tool in an opposing party's arsenal. Whilst, fortunately for PAG, the counsel team involved in this instance remains the same, it does still mean that Bird & Bird will have had some very significant work to do in a short space of time in order to prepare fully for the trial. In some circumstances, the cost of bringing a replacement firm up to speed, and/ or dissatisfaction with the eventual outcome of the case as conducted by a firm parachuted in at a late stage, may give rise to knock-on claims or complaints against the ousted firm by its former client. Interestingly, in other litigation against RBS relating to the activities of the GRG, it has recently been reported that a group of claimants, whose retainer of Enyo Law was terminated when Enyo switched to representing a different claimant group, had instructed solicitors to bring a claim over the switch, although the details of the proposed claim are not known; Enyo has reportedly now come off the record for the second group on grounds of conflict of interest relating to its previous relationship with another RBS claimant group.

A regulatory issue

Firms will be familiar with their regulatory duties to avoid conflicts of interest and protect client confidentiality. These include Outcome 4.4 of the Solicitors Regulation Authority ('SRA') Code of Conduct, which generally prevents a firm from acting for a party (party A) in a matter where that party has an interest adverse to that of another client of the firm (party B) about which the firm holds confidential information which is material to party A in the matter. There is an exception to this where (subject to the detailed provisions of Outcome 4.4, as well as the common law – see below) the information can be protected by the use of effective safeguards including information barriers. In the case of former clients, the issue is one of preservation of the confidentiality of the former client's information.

Subject to issues of safeguards, the party who seeks to restrain his former solicitor from acting for another client must show (i) that the professional is in possession of information which is confidential to him and to the disclosure of which he has not consented, and (ii) that the information is or may be relevant to the new matter in which the interest of the other client is or may be adverse to his own. The burden on the former client is not a high one and the duty on a solicitor is unqualified.

Assessing potential client conflicts and safeguarding confidential information

The PAG litigation therefore highlights the possibility that, unless suitable safeguards are put in place, a lateral hire's knowledge of confidential information may effectively be imputed to all of the lawyers in the new firm and disqualify it from ongoing representation. This raises issues about how firms can best protect themselves against such difficulties.

Firms considering hiring laterals (of, as PAG highlights, any level of seniority) should ensure that full due diligence has been undertaken on each individual whom it proposes to hire. Detailed and precise questions should ideally be asked at interview stage or in a questionnaire. In principle, firms should seek, as far as possible, to ascertain:

  1. The clients for whom the candidate worked while at prior firms (not just their current firm);
  2. The nature of the work the candidate performed for each client; and
  3. The identity of clients about whom the candidate learned information.

However, given the confidentiality obligations owed by candidates both to clients and to their former firm(s), in many (if not most) cases this information will be difficult to ascertain, and any questions asked should recognise this. Firms need to think about how to undertake checks which will uncover the risk of issues of the type experienced in PAG without asking candidates to reveal confidential information; for example, firms should consider what information is in the public domain. Consideration should also be given to specific matters which may be impacted: for example, is the hiring firm currently dealing with a matter in which a previous firm of the candidate has at a relevant stage been involved for another known party?

Firms may reach a stage in their due diligence where they cannot ascertain any further information without encouraging breaches of confidentiality. They will then need to stand back and assess whether such issues or potential issues as they have been able to identify can properly be addressed by the putting in place of safeguards including information barriers, and if so how these should operate.

This is no small matter. Whilst in some cases there may be scope for the use of information barriers, caution should be exercised and these should be used only in exceptional circumstances, where sophisticated clients are involved and with stringent procedures put in place. Firms and members of firms may be expected to give undertakings to the affected party, whereby failure to comply may lead to Court and/or regulatory sanctions.

The leading authority in this area is still Prince Jefri Bolkiah v KPMG (1998), in which the House of Lords considered that an effective information barrier needs to be an established part of the organisational structure of the firm, with no risk of disclosure or misuse of confidential information. Ideally, information barriers should involve the complete physical separation of the individuals holding the protected confidential information and may stretch so far as to include restrictions on the ability of those individuals to attend work-related social or business development events and internal meetings, and their ability to discuss matters with unrelated third parties. In some circumstances this may not be a logistical possibility. Examples given in the SRA Handbook of circumstances where it may be difficult to implement effective safeguards are where: the firm is a small one; the physical structure or layout of the firm restricts its ability physically to separate people and documents and thus preserve confidentiality; or clients are not sophisticated users of legal services (an issue potentially most relevant to boutique/mid-sized firms).

Bearing in mind the issues involved both in ascertaining the relevant information about a proposed lateral hire's former work and in implementing effective safeguards and information barriers, there may come a point in some proposed hires where firms may have to take a view as to whether the hire is one with which they can properly proceed, or indeed one which they wish to pursue from a commercial standpoint given the potential issues.

Firms beware

It is unclear whether the junior CYK associate had been involved in the Clifford Chance report, whether this was known about by CYK, whether once at CYK he was assisting with the PAG litigation, or (if so) whether there were any information barriers in place. It is therefore difficult to draw any "lessons learned" from the story. However, the episode undoubtedly shines a light on the importance for firms of checking a lateral hire's background as thoroughly as possible, and ensuring that any knowledge they do have about a potentially adverse client is able to be ring-fenced from the rest of the firm. Unfortunately, both tasks are easier said than done given duties of confidentiality and the rigours of the law on information barriers.

A further difficult question is where firms should draw the line. Should firms apply the same level of rigour to, for example, the hire of newly qualified associates who have trained at other firms, or even work experience students who may have had access to confidential information?

There are no simple solutions to these issues. However, what is clear is that it is becoming ever more important for firms to be aware of the problems that recruiting associates and partners at every level can cause. These should be kept in mind throughout the recruitment process so that all the issues can be considered as fully as possible, decisions both as to hiring and steps to be taken following a hire can be made on a fully informed basis, and potential repercussions (whether loss of a client, reputational issues, claims or regulatory action) can hopefully be avoided.

More broadly, it is possible that CYK's removal from the PAG litigation may have an impact on the appetite of firms for making lateral hires. Views on how welcome or unwelcome this would be are likely to vary. On one hand, some have commented that CYK's removal could have an effect on access to justice in cases against banks by restricting the movement of magic circle associates to litigation boutiques. More generally, associates might be concerned about the restrictive effect on their ability to climb the career ladder by moving laterally across firms. A counter-argument, however, might be that an increased focus on nurturing and training up "home grown" talent could be a positive development in terms of quality within both firms and the profession as a whole.

Lateral Hires: The Challenges Of Protecting Confidentiality

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