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Your corporate attorney may be a great deal lawyer, but even the most carefully crafted deal can end up in litigation. One 2018 study found that 85 percent of merger deals struck in 2017 resulted in litigation. Matthew D. Cain, et al., The Shifting Tides of Merger Litigation, 71 U. PA. Rev. 603 (2018). If the deal ends up in litigation, should the client hire the deal firm to represent it or is the client better served with a separate firm as litigation counsel? The initial reaction may be that the firm is already on the scene will have a shorter learning curve, coordinate better between deal lawyers and litigation counsel, and have a greater investment in defending the client’s position. There are, however, multiple pitfalls inherent in this “one firm” approach. Using the same firm for deal litigation might constrain the strategies adopted for the litigation and for any possible settlement. Also, litigation counsel may be tainted or disqualified.

The Benefits of Independent Litigation Counsel

When a dispute erupts over a transaction, the person who ultimately will determine which side prevails, and on what terms and conditions, will be a neutral decision-maker, such as an arbitrator, a panel of arbitrators, a judge, or a jury. A client may be better served by a lawyer who has some distance from the deal and can make an experienced objective judgment about the best strategy, witnesses, and approaches to meet the client’s business goals and position the case. In all cases, choosing litigation counsel, like choosing a surgeon, should be an intentional choice designed to ensure that the client is employing the best one for the job.

Deal Lawyers May Be Affected by Unconscious Bias

All of us use mental shortcuts or “heuristics” to make critical decisions. Nobel prize-winning psychologists Daniel Kahneman and Amos Tversky developed the term “framing effect” to describe how seemingly rational choices may be distorted or “framed” through subjective presentation. The Framing of Decisions and the Psychology of Choice, 211 Science 453 (1981). Another heuristic they identify is “anchoring bias,” that is, a cognitive bias towards an initial estimate or starting point, which ultimately weighs heavily on the outcome of a decision. Judgment and Uncertainty: Heuristic and Biases, 185 Science 1124 (1974). These types of heuristics affect everyday decisions, including decisions made in business and law.

Deal lawyers tend to have “confirmation bias:” strong views, which are not objective, about what documents mean and why they did a good job. Oxbow Carbon LLC Unitholder Litigation, 2017 WL 3207155, at *6 (Del. Ch. July 28 2017) (“Motivated reasoning, motivated remembering, and confirmation bias are part of the human condition”). Confirmation bias can mean favoring a position early on and giving undue weight to evidence that supports that early conclusion. Raymond S. Nickerson, Confirmation Bias: A Ubiquitous Phenomenon in Many Guises, 2 Rev. of Gen. Psychol. 175 (1998). That is why judges admonish the trier of fact to “keep an open mind” Id. The same concept applies to the attorneys preparing the strategies and approaches for courtroom disputes.

Deal Lawyers May Be Motivated by Self-Protection

When engaging litigation attorneys from the same firm as the deal lawyers, there is an almost inevitable tendency and unconscious bias to offer litigation theories and strategies that protect the firm as much as the client. Of course the lawyers who did the deal know what the language means! Litigation counsel in the same firm can face internal pressure to justify the language, negotiations, documents, and advice given by their deal partners. Particularly when the deal lawyer is the firm’s main client contact, it may be difficult for the litigator to tell the deal partner, or the client who sends the firm’s rainmaker repeat business, that the contract has flaws, that the strategy must be modified, or that a term is ambiguous and the team should rethink what the parties meant.

The Deal Firm May Be “Materially Limited” in Representing the Client

ABA Model Rule 1.7 prevents lawyers from taking a representation that “involves a concurrent conflict of interest.” A concurrent conflict of interest exists if there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. A competing “personal interest of the lawyer” includes risks to the lawyer’s partners or his or her firm. Such conflicts may extend to the firm as a whole. ABA Model Rule 1.10. When litigation and deal counsel are from one firm, there are multiple ways in which the representation of a client may be “materially limited.”

Concerns about the reputation of a firm’s corporate lawyers can limit representation options, especially in deals involving private equity, potentially hindering unbiased advice regarding deal failures and the actions of the deal firm itself Veras Inv. Partners, LLC v. Akin Gump Strauss Hauer & Feld LLP (2008). The possibility of deal lawyers serving as witnesses poses another challenge, risking conflicts of interest and complicating attorney-client privilege Hertzog, Calamari & Gleason v. Prudential Ins. Co. (1994). The credibility of trial counsel can be undermined if they are perceived by the factfinder as biased towards their firm’s interests, with an obvious impact on the effectiveness of their advocacy Eurocom, S. A. v. Mahoney, Cohen & Co. (1981). Such considerations underscore the importance of ensuring independent, unbiased representation in litigation matters to uphold the integrity of legal proceedings and protect client interests.

Final Thoughts

Choosing independent litigation counsel over the deal firm may offer a more impartial and effective approach to handle complex disputes arising from transactions. While the familiarity of the deal firm may seem advantageous, the risks of bias, conflicts of interest, and compromised representation often outweigh the benefits. Opting for an independent law firm ensures a robust defense, efficient litigation, and prudent settlement negotiations that prioritize the client’s interests.

Written by:

John B. Quinn