An Economic Analysis of Conflict of Interest Regulation

Iowa Law Review

Volumn 82, Issue 4, 1997, Pages 965-1004

  Macey, Jonathan R ^a   Miller, Geoffrey P ^b  

^a Department of Obstetrics Gynecology   (United States)

^b NEW YORK UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0031330798     PISSN: 00210552     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (102)

1. See David Luban, Calming the Hearse Horse: A Philosophical Research Program for Legal Ethics, 40 Md. L. Rev. 451, 455-59 (1981); Thomas L. Shaffer, The Practice of Law as Moral Discourse, 55 Notre Dame Law. 231, 231 (1979).
2. See David Luban, Calming the Hearse Horse: A Philosophical Research Program for Legal Ethics, 40 Md. L. Rev. 451, 455-59 (1981); Thomas L. Shaffer, The Practice of Law as Moral Discourse, 55 Notre Dame Law. 231, 231 (1979).
3. See generally Stephen Gillers, Regulation of Lawyers: Problems of Law and Ethics (4th ed. 1995).
4. A charge frequently found, in one form or another, in the commentaries. See, e.g., Richard L. Abel, Why Does the ABA Promulgate Ethical Rules?, 59 Tex. L. Rev. 639, 655-56 (1981) (arguing that the model rules reflect the interest of the elite bar); Stephen Gillers, Can a Good Lawyer Be a Bad Person?, 84 Mich. L. Rev. 1011, 1017 (1986) (referring to ethics regulations as "narrow and self-interested resolutions"); Thomas D. Morgan, The Evolving Concepts of Professional Responsibility, 90 Harv. L. Rev. 702, 738-39 (1977) (discussing lawyers' self-interest in ethical duties); Deborah L. Rhode, Ethical Perspectives on Legal Practice, 37 Stan. L. Rev. 589, 611 (1985) (arguing that the bar rules serve guild purposes).
5. A charge frequently found, in one form or another, in the commentaries. See, e.g., Richard L. Abel, Why Does the ABA Promulgate Ethical Rules?, 59 Tex. L. Rev. 639, 655-56 (1981) (arguing that the model rules reflect the interest of the elite bar); Stephen Gillers, Can a Good Lawyer Be a Bad Person?, 84 Mich. L. Rev. 1011, 1017 (1986) (referring to ethics regulations as "narrow and self-interested resolutions"); Thomas D. Morgan, The Evolving Concepts of Professional Responsibility, 90 Harv. L. Rev. 702, 738-39 (1977) (discussing lawyers' self-interest in ethical duties); Deborah L. Rhode, Ethical Perspectives on Legal Practice, 37 Stan. L. Rev. 589, 611 (1985) (arguing that the bar rules serve guild purposes).
6. A charge frequently found, in one form or another, in the commentaries. See, e.g., Richard L. Abel, Why Does the ABA Promulgate Ethical Rules?, 59 Tex. L. Rev. 639, 655-56 (1981) (arguing that the model rules reflect the interest of the elite bar); Stephen Gillers, Can a Good Lawyer Be a Bad Person?, 84 Mich. L. Rev. 1011, 1017 (1986) (referring to ethics regulations as "narrow and self-interested resolutions"); Thomas D. Morgan, The Evolving Concepts of Professional Responsibility, 90 Harv. L. Rev. 702, 738-39 (1977) (discussing lawyers' self-interest in ethical duties); Deborah L. Rhode, Ethical Perspectives on Legal Practice, 37 Stan. L. Rev. 589, 611 (1985) (arguing that the bar rules serve guild purposes).
7. A charge frequently found, in one form or another, in the commentaries. See, e.g., Richard L. Abel, Why Does the ABA Promulgate Ethical Rules?, 59 Tex. L. Rev. 639, 655-56 (1981) (arguing that the model rules reflect the interest of the elite bar); Stephen Gillers, Can a Good Lawyer Be a Bad Person?, 84 Mich. L. Rev. 1011, 1017 (1986) (referring to ethics regulations as "narrow and self-interested resolutions"); Thomas D. Morgan, The Evolving Concepts of Professional Responsibility, 90 Harv. L. Rev. 702, 738-39 (1977) (discussing lawyers' self-interest in ethical duties); Deborah L. Rhode, Ethical Perspectives on Legal Practice, 37 Stan. L. Rev. 589, 611 (1985) (arguing that the bar rules serve guild purposes).
8. Note, however, that the increased profits the bar can obtain through lowering contracting costs will eventually dissipate as a result of competition unless they are coupled with supply restrictions.
9. For another commentator who found that the conflicts of interest rules seem to work quite well when viewed from the lens of economic analysis, see Richard A. Epstein, The Legal Regulation of Lawyers' Conflicts of Interest, 60 Fordham L. Rev. 579, 582 (1992).
10. As one of us has argued, this point was well known (and regulated by legal norms) even in preliterate societies. See Geoffrey P. Miller, Contracts of Genesis, 22 J. Legal Stud. 15, 34 (1993) (arguing that many biblical narratives should be understood, in part, as legal texts).
11. See Lisa Lerman, Lying to Clients, 138 U. Pa. L. Rev. 659, 705-20 (1990) (noting a study in which nearly all lawyers interviewed reported engaging in some deceptive billing practices).
12. See Geoffrey P. Miller, Some Agency Problems in Settlement, 16 J. Legal Stud. 189, 200-02 (1987) (explaining different theories of attorney settlement methods).
13. See John C. Coffee, Jr., Understanding the Plaintiffs' Attorney: The Implications of Economic Theory for Private Enforcement of the Law Through Class and Derivative Actions, 86 Colum. L. Rev. 669, 670 (1986) (arguing that certain legal rules create an incentive for attorneys to maximize their own wealth); Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 3 (1991) (explaining the class action attorney as an entrepreneur conducting business in the American legal system).
14. See John C. Coffee, Jr., Understanding the Plaintiffs' Attorney: The Implications of Economic Theory for Private Enforcement of the Law Through Class and Derivative Actions, 86 Colum. L. Rev. 669, 670 (1986) (arguing that certain legal rules create an incentive for attorneys to maximize their own wealth); Jonathan R. Macey & Geoffrey P. Miller, The Plaintiffs' Attorney's Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform, 58 U. Chi. L. Rev. 1, 3 (1991) (explaining the class action attorney as an entrepreneur conducting business in the American legal system).
15. See Donald Langevoort & Robert K. Rasmussen, Skewing the Results:The Role of Lawyers in Transmitting Legal Rules, 5 S. Cal. Interdisc. L.J. 375 (1997) (noting that attorneys may overstate legal risks to clients in order to protect their own interests).
16. See, e.g., Anthony T. Kronman, The Lost Lawyer: Failing Ideals of the Legal Profession (1993) (emphasizing need for "practical wisdom" in lawyering and decrying increased commercialization of the profession); Charles Fried, The Lawyer as Friend: The Moral Foundations of the Lawyer-Client Relation, 85 Yale L.J. 1060 (1976) (stating that lawyers can serve as special-purpose "friends" who can enhance and protect client autonomy in stressful situations); Robert W. Gordon, The Independence of Lawyers, 68 B.U. L. Rev. 1 (1990) (exploring and justifying instances when lawyer independence should be encouraged); William H. Simon, Ethical Discretion in Lawyering, 101 Harv. L. Rev. 1083 (1988) (asserting that attorneys should have discretion to make ethical decisions for clients).
17. See, e.g., Anthony T. Kronman, The Lost Lawyer: Failing Ideals of the Legal Profession (1993) (emphasizing need for "practical wisdom" in lawyering and decrying increased commercialization of the profession); Charles Fried, The Lawyer as Friend: The Moral Foundations of the Lawyer-Client Relation, 85 Yale L.J. 1060 (1976) (stating that lawyers can serve as special-purpose "friends" who can enhance and protect client autonomy in stressful situations); Robert W. Gordon, The Independence of Lawyers, 68 B.U. L. Rev. 1 (1990) (exploring and justifying instances when lawyer independence should be encouraged); William H. Simon, Ethical Discretion in Lawyering, 101 Harv. L. Rev. 1083 (1988) (asserting that attorneys should have discretion to make ethical decisions for clients).
18. See, e.g., Anthony T. Kronman, The Lost Lawyer: Failing Ideals of the Legal Profession (1993) (emphasizing need for "practical wisdom" in lawyering and decrying increased commercialization of the profession); Charles Fried, The Lawyer as Friend: The Moral Foundations of the Lawyer-Client Relation, 85 Yale L.J. 1060 (1976) (stating that lawyers can serve as special-purpose "friends" who can enhance and protect client autonomy in stressful situations); Robert W. Gordon, The Independence of Lawyers, 68 B.U. L. Rev. 1 (1990) (exploring and justifying instances when lawyer independence should be encouraged); William H. Simon, Ethical Discretion in Lawyering, 101 Harv. L. Rev. 1083 (1988) (asserting that attorneys should have discretion to make ethical decisions for clients).
19. See, e.g., Anthony T. Kronman, The Lost Lawyer: Failing Ideals of the Legal Profession (1993) (emphasizing need for "practical wisdom" in lawyering and decrying increased commercialization of the profession); Charles Fried, The Lawyer as Friend: The Moral Foundations of the Lawyer-Client Relation, 85 Yale L.J. 1060 (1976) (stating that lawyers can serve as special-purpose "friends" who can enhance and protect client autonomy in stressful situations); Robert W. Gordon, The Independence of Lawyers, 68 B.U. L. Rev. 1 (1990) (exploring and justifying instances when lawyer independence should be encouraged); William H. Simon, Ethical Discretion in Lawyering, 101 Harv. L. Rev. 1083 (1988) (asserting that attorneys should have discretion to make ethical decisions for clients).
20. Leading articles in the area of agency theory in economics include Sanford Grossman & Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7 (1983) (describing a simple approach for analyzing the principal-agency cost minimization problem using computational methods); Milton Harris & Arthur Raviv, Optimal Incentive Contracts with Imperfect Information, 20 J. Econ. Theory 231 (1979) (describing a theory of optimal contracts in the employment, or agency, context); Bengt Homstrom & Paul Milgrom, Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, J.L. Econ. & Org., Fall 1991, at 24 (analyzing a number of variants of a linear principal-agent model); Stephen A. Ross, The Economic Theory of Agency: The Principal's Problem, Am. Econ. Rev., May 1973, at 134 (examining the canonical agency problem using von-Neumann Morgenstern utility functions); Steven Shavell, Risk Sharing and Incentives in the Principal and Agent Relationship, Bell J. Econ., Spring 1979, at 55 (studying arrangements concerning the payment of a fee by a principal to his agents). For an interesting paper modeling some forms of representation as means by which the attorney as agent can enhance cooperation between disputing parties, see Ronald J. Gilson & Robert H. Mnookin, Disputing Through Agents: Cooperation and Conflict Between Lawyers in Litigation, 94 Colum. L. Rev. 509 (1994). For papers applying economic agency theory to the attorney-client relationship, see, for example, Coffee, supra note 9; Epstein, supra note 5; Langevoort & Rasmussen, supra note 10; Macey & Miller, supra note 9.
21. Leading articles in the area of agency theory in economics include Sanford Grossman & Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7 (1983) (describing a simple approach for analyzing the principal-agency cost minimization problem using computational methods); Milton Harris & Arthur Raviv, Optimal Incentive Contracts with Imperfect Information, 20 J. Econ. Theory 231 (1979) (describing a theory of optimal contracts in the employment, or agency, context); Bengt Homstrom & Paul Milgrom, Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, J.L. Econ. & Org., Fall 1991, at 24 (analyzing a number of variants of a linear principal-agent model); Stephen A. Ross, The Economic Theory of Agency: The Principal's Problem, Am. Econ. Rev., May 1973, at 134 (examining the canonical agency problem using von-Neumann Morgenstern utility functions); Steven Shavell, Risk Sharing and Incentives in the Principal and Agent Relationship, Bell J. Econ., Spring 1979, at 55 (studying arrangements concerning the payment of a fee by a principal to his agents). For an interesting paper modeling some forms of representation as means by which the attorney as agent can enhance cooperation between disputing parties, see Ronald J. Gilson & Robert H. Mnookin, Disputing Through Agents: Cooperation and Conflict Between Lawyers in Litigation, 94 Colum. L. Rev. 509 (1994). For papers applying economic agency theory to the attorney-client relationship, see, for example, Coffee, supra note 9; Epstein, supra note 5; Langevoort & Rasmussen, supra note 10; Macey & Miller, supra note 9.
22. Leading articles in the area of agency theory in economics include Sanford Grossman & Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7 (1983) (describing a simple approach for analyzing the principal-agency cost minimization problem using computational methods); Milton Harris & Arthur Raviv, Optimal Incentive Contracts with Imperfect Information, 20 J. Econ. Theory 231 (1979) (describing a theory of optimal contracts in the employment, or agency, context); Bengt Homstrom & Paul Milgrom, Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, J.L. Econ. & Org., Fall 1991, at 24 (analyzing a number of variants of a linear principal-agent model); Stephen A. Ross, The Economic Theory of Agency: The Principal's Problem, Am. Econ. Rev., May 1973, at 134 (examining the canonical agency problem using von-Neumann Morgenstern utility functions); Steven Shavell, Risk Sharing and Incentives in the Principal and Agent Relationship, Bell J. Econ., Spring 1979, at 55 (studying arrangements concerning the payment of a fee by a principal to his agents). For an interesting paper modeling some forms of representation as means by which the attorney as agent can enhance cooperation between disputing parties, see Ronald J. Gilson & Robert H. Mnookin, Disputing Through Agents: Cooperation and Conflict Between Lawyers in Litigation, 94 Colum. L. Rev. 509 (1994). For papers applying economic agency theory to the attorney-client relationship, see, for example, Coffee, supra note 9; Epstein, supra note 5; Langevoort & Rasmussen, supra note 10; Macey & Miller, supra note 9.
23. Leading articles in the area of agency theory in economics include Sanford Grossman & Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7 (1983) (describing a simple approach for analyzing the principal-agency cost minimization problem using computational methods); Milton Harris & Arthur Raviv, Optimal Incentive Contracts with Imperfect Information, 20 J. Econ. Theory 231 (1979) (describing a theory of optimal contracts in the employment, or agency, context); Bengt Homstrom & Paul Milgrom, Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, J.L. Econ. & Org., Fall 1991, at 24 (analyzing a number of variants of a linear principal-agent model); Stephen A. Ross, The Economic Theory of Agency: The Principal's Problem, Am. Econ. Rev., May 1973, at 134 (examining the canonical agency problem using von-Neumann Morgenstern utility functions); Steven Shavell, Risk Sharing and Incentives in the Principal and Agent Relationship, Bell J. Econ., Spring 1979, at 55 (studying arrangements concerning the payment of a fee by a principal to his agents). For an interesting paper modeling some forms of representation as means by which the attorney as agent can enhance cooperation between disputing parties, see Ronald J. Gilson & Robert H. Mnookin, Disputing Through Agents: Cooperation and Conflict Between Lawyers in Litigation, 94 Colum. L. Rev. 509 (1994). For papers applying economic agency theory to the attorney-client relationship, see, for example, Coffee, supra note 9; Epstein, supra note 5; Langevoort & Rasmussen, supra note 10; Macey & Miller, supra note 9.
24. Leading articles in the area of agency theory in economics include Sanford Grossman & Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7 (1983) (describing a simple approach for analyzing the principal-agency cost minimization problem using computational methods); Milton Harris & Arthur Raviv, Optimal Incentive Contracts with Imperfect Information, 20 J. Econ. Theory 231 (1979) (describing a theory of optimal contracts in the employment, or agency, context); Bengt Homstrom & Paul Milgrom, Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, J.L. Econ. & Org., Fall 1991, at 24 (analyzing a number of variants of a linear principal-agent model); Stephen A. Ross, The Economic Theory of Agency: The Principal's Problem, Am. Econ. Rev., May 1973, at 134 (examining the canonical agency problem using von-Neumann Morgenstern utility functions); Steven Shavell, Risk Sharing and Incentives in the Principal and Agent Relationship, Bell J. Econ., Spring 1979, at 55 (studying arrangements concerning the payment of a fee by a principal to his agents). For an interesting paper modeling some forms of representation as means by which the attorney as agent can enhance cooperation between disputing parties, see Ronald J. Gilson & Robert H. Mnookin, Disputing Through Agents: Cooperation and Conflict Between Lawyers in Litigation, 94 Colum. L. Rev. 509 (1994). For papers applying economic agency theory to the attorney-client relationship, see, for example, Coffee, supra note 9; Epstein, supra note 5; Langevoort & Rasmussen, supra note 10; Macey & Miller, supra note 9.
25. Leading articles in the area of agency theory in economics include Sanford Grossman & Oliver D. Hart, An Analysis of the Principal-Agent Problem, 51 Econometrica 7 (1983) (describing a simple approach for analyzing the principal-agency cost minimization problem using computational methods); Milton Harris & Arthur Raviv, Optimal Incentive Contracts with Imperfect Information, 20 J. Econ. Theory 231 (1979) (describing a theory of optimal contracts in the employment, or agency, context); Bengt Homstrom & Paul Milgrom, Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design, J.L. Econ. & Org., Fall 1991, at 24 (analyzing a number of variants of a linear principal-agent model); Stephen A. Ross, The Economic Theory of Agency: The Principal's Problem, Am. Econ. Rev., May 1973, at 134 (examining the canonical agency problem using von-Neumann Morgenstern utility functions); Steven Shavell, Risk Sharing and Incentives in the Principal and Agent Relationship, Bell J. Econ., Spring 1979, at 55 (studying arrangements concerning the payment of a fee by a principal to his agents). For an interesting paper modeling some forms of representation as means by which the attorney as agent can enhance cooperation between disputing parties, see Ronald J. Gilson & Robert H. Mnookin, Disputing Through Agents: Cooperation and Conflict Between Lawyers in Litigation, 94 Colum. L. Rev. 509 (1994). For papers applying economic agency theory to the attorney-client relationship, see, for example, Coffee, supra note 9; Epstein, supra note 5; Langevoort & Rasmussen, supra note 10; Macey & Miller, supra note 9.
26. This point is frequently stressed in the literature. See, e.g., Ronald J. Gilson, The Devolution of the Legal Profession: A Demand Side Perspective, 49 Md. L. Rev. 869, 884-88 (1990) (noting that attorneys possess specialized knowledge but positing that information asymmetry between lawyers and clients may be decreasing); Langevoort & Rasmussen, supra note 10 (noting that attorneys have the ability to overstate legal risks because clients lack the ability to evaluate risks accurately on their own); Miller, supra note 8 (stating that even though clients have formal legal control over settlement, the attorney's specialized knowledge gives him or her a degree of de facto power).
27. See Coffee, supra note 9, at 667-68; Macey & Miller, supra note 9, at 8.
28. Despite the difficulties in specifying an objective measure of performance, some firms engage in "value billing" for major transactions, a system in which the fee is based on the value produced by the legal services rather than the time spent performing the services.
29. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
30. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
31. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
32. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
33. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
34. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
35. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
36. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
37. See Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 Yale L.J. 87, 87-101 (1989); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 729-32 (1992); Lucian A. Bebchuk, Limiting Contractual Freedom in Corporate Law: The Desirable Constraints on Charter Amendments, 102 Harv. L. Rev. 1820 (1989); Frank H. Easterbrook & Daniel R. Fischel, Close Corporations and Agency Costs, 38 Stan. L. Rev. 271 (1986); Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261 (1985); Jason Scott Johnston, Strategic Bargaining and the Economic Theory of Contract Default Rules, 100 Yale L.J. 615 (1990); Avery Katz, When Should an Offer Stick?: The Economics of Promissory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1250-59 (1996); Steven Shavell, The Design of Contracts and Remedies for Breach, 99 Q.J. Econ. 121 (1984). For a wide-ranging philosophical treatment of the issue of default rules, see David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 Mich. L. Rev. 1815, 1815-17 (1991).
38. See Goetz & Scott, supra note 16, at 286-87.
39. In securities markets, for example, the market price does reflect a discount for differences in governance structures, thus making standardized governance terms less desirable for publicly traded firms than, say, for small or nonpublic firms. See Larry E. Ribstein, Statutory Forms for Closely Held Firms: Theories and Evidence from LLCs, 73 Wash. U. L.Q. 369, 375 (1995).
40. See id. at 378.
41. We exclude from the analysis here, and throughout the paper, the possibility that the attorney-client relationship will have external effects on third parties that cannot be controlled entirely by means of a contract between attorney and client, even if the contract is perfect and complete. This exclusion is intended to simplify the analysis, which, even excluding externalities, turns out to be surprisingly complex. A more complete theory of the conflicts of interest would have to deal with what are undoubtedly significant third party effects in the attorney-client relationship. For literature that does consider external effects in certain aspects of the attorney-client relationship, see, for example, Stephen McG. Bundy & Einer Elhauge, Knowledge About Legal Sanctions, 92 Mich. L. Rev. 261 (1993) (discussing when and if legal sanctions are socially desirable and how sanctions affect legal advice); Louis Kaplow & Steven Shavell, Legal Advice About Acts Already Committed, 10 Int'l Rev. L. & Econ. 149 (1990) (arguing that legal advice can be irrelevant, socially desirable, or socially undesirable); Louis Kaplow & Steven Shavell, Legal Advice About Information to Present in Litigation: Its Effects and Social Desirability, 102 Harv. L. Rev. 565 (1989) (discussing generally whether to seek legal advice); Louis Kaplow & Steven Shavell, Private Versus Socially Optimal Provision of Legal Advice, 8 J.L. Econ. & Org. 306 (1992) (suggesting specific situations when ex ante legal advice is appropriate); Steven Shavell, Legal Advice About Contemplated Acts: The Decisions to Obtain Advice, Its Social Desirability, and Protection of Confidentiality, 17 J. Legal Stud. 123 (1988) (discussing generally whether to seek legal advice).
42. We exclude from the analysis here, and throughout the paper, the possibility that the attorney-client relationship will have external effects on third parties that cannot be controlled entirely by means of a contract between attorney and client, even if the contract is perfect and complete. This exclusion is intended to simplify the analysis, which, even excluding externalities, turns out to be surprisingly complex. A more complete theory of the conflicts of interest would have to deal with what are undoubtedly significant third party effects in the attorney-client relationship. For literature that does consider external effects in certain aspects of the attorney-client relationship, see, for example, Stephen McG. Bundy & Einer Elhauge, Knowledge About Legal Sanctions, 92 Mich. L. Rev. 261 (1993) (discussing when and if legal sanctions are socially desirable and how sanctions affect legal advice); Louis Kaplow & Steven Shavell, Legal Advice About Acts Already Committed, 10 Int'l Rev. L. & Econ. 149 (1990) (arguing that legal advice can be irrelevant, socially desirable, or socially undesirable); Louis Kaplow & Steven Shavell, Legal Advice About Information to Present in Litigation: Its Effects and Social Desirability, 102 Harv. L. Rev. 565 (1989) (discussing generally whether to seek legal advice); Louis Kaplow & Steven Shavell, Private Versus Socially Optimal Provision of Legal Advice, 8 J.L. Econ. & Org. 306 (1992) (suggesting specific situations when ex ante legal advice is appropriate); Steven Shavell, Legal Advice About Contemplated Acts: The Decisions to Obtain Advice, Its Social Desirability, and Protection of Confidentiality, 17 J. Legal Stud. 123 (1988) (discussing generally whether to seek legal advice).
43. We exclude from the analysis here, and throughout the paper, the possibility that the attorney-client relationship will have external effects on third parties that cannot be controlled entirely by means of a contract between attorney and client, even if the contract is perfect and complete. This exclusion is intended to simplify the analysis, which, even excluding externalities, turns out to be surprisingly complex. A more complete theory of the conflicts of interest would have to deal with what are undoubtedly significant third party effects in the attorney-client relationship. For literature that does consider external effects in certain aspects of the attorney-client relationship, see, for example, Stephen McG. Bundy & Einer Elhauge, Knowledge About Legal Sanctions, 92 Mich. L. Rev. 261 (1993) (discussing when and if legal sanctions are socially desirable and how sanctions affect legal advice); Louis Kaplow & Steven Shavell, Legal Advice About Acts Already Committed, 10 Int'l Rev. L. & Econ. 149 (1990) (arguing that legal advice can be irrelevant, socially desirable, or socially undesirable); Louis Kaplow & Steven Shavell, Legal Advice About Information to Present in Litigation: Its Effects and Social Desirability, 102 Harv. L. Rev. 565 (1989) (discussing generally whether to seek legal advice); Louis Kaplow & Steven Shavell, Private Versus Socially Optimal Provision of Legal Advice, 8 J.L. Econ. & Org. 306 (1992) (suggesting specific situations when ex ante legal advice is appropriate); Steven Shavell, Legal Advice About Contemplated Acts: The Decisions to Obtain Advice, Its Social Desirability, and Protection of Confidentiality, 17 J. Legal Stud. 123 (1988) (discussing generally whether to seek legal advice).
44. We exclude from the analysis here, and throughout the paper, the possibility that the attorney-client relationship will have external effects on third parties that cannot be controlled entirely by means of a contract between attorney and client, even if the contract is perfect and complete. This exclusion is intended to simplify the analysis, which, even excluding externalities, turns out to be surprisingly complex. A more complete theory of the conflicts of interest would have to deal with what are undoubtedly significant third party effects in the attorney-client relationship. For literature that does consider external effects in certain aspects of the attorney-client relationship, see, for example, Stephen McG. Bundy & Einer Elhauge, Knowledge About Legal Sanctions, 92 Mich. L. Rev. 261 (1993) (discussing when and if legal sanctions are socially desirable and how sanctions affect legal advice); Louis Kaplow & Steven Shavell, Legal Advice About Acts Already Committed, 10 Int'l Rev. L. & Econ. 149 (1990) (arguing that legal advice can be irrelevant, socially desirable, or socially undesirable); Louis Kaplow & Steven Shavell, Legal Advice About Information to Present in Litigation: Its Effects and Social Desirability, 102 Harv. L. Rev. 565 (1989) (discussing generally whether to seek legal advice); Louis Kaplow & Steven Shavell, Private Versus Socially Optimal Provision of Legal Advice, 8 J.L. Econ. & Org. 306 (1992) (suggesting specific situations when ex ante legal advice is appropriate); Steven Shavell, Legal Advice About Contemplated Acts: The Decisions to Obtain Advice, Its Social Desirability, and Protection of Confidentiality, 17 J. Legal Stud. 123 (1988) (discussing generally whether to seek legal advice).
45. We exclude from the analysis here, and throughout the paper, the possibility that the attorney-client relationship will have external effects on third parties that cannot be controlled entirely by means of a contract between attorney and client, even if the contract is perfect and complete. This exclusion is intended to simplify the analysis, which, even excluding externalities, turns out to be surprisingly complex. A more complete theory of the conflicts of interest would have to deal with what are undoubtedly significant third party effects in the attorney-client relationship. For literature that does consider external effects in certain aspects of the attorney-client relationship, see, for example, Stephen McG. Bundy & Einer Elhauge, Knowledge About Legal Sanctions, 92 Mich. L. Rev. 261 (1993) (discussing when and if legal sanctions are socially desirable and how sanctions affect legal advice); Louis Kaplow & Steven Shavell, Legal Advice About Acts Already Committed, 10 Int'l Rev. L. & Econ. 149 (1990) (arguing that legal advice can be irrelevant, socially desirable, or socially undesirable); Louis Kaplow & Steven Shavell, Legal Advice About Information to Present in Litigation: Its Effects and Social Desirability, 102 Harv. L. Rev. 565 (1989) (discussing generally whether to seek legal advice); Louis Kaplow & Steven Shavell, Private Versus Socially Optimal Provision of Legal Advice, 8 J.L. Econ. & Org. 306 (1992) (suggesting specific situations when ex ante legal advice is appropriate); Steven Shavell, Legal Advice About Contemplated Acts: The Decisions to Obtain Advice, Its Social Desirability, and Protection of Confidentiality, 17 J. Legal Stud. 123 (1988) (discussing generally whether to seek legal advice).
46. Clients may also have an interest in maintaining the integrity of the work-product which their attorneys generate. For example, clients may legitimately expect that an attorney who drafts a contractual term for them will not turn around and seek to nullify the force of the same term during representation of a subsequent party.
47. See generally Oliver E. Williamson, Transaction Cost Economics: The Governance of Contractual Relations, 22 J.L. & Econ. 233, 235-58 (1979) (discussing the complexities of contract law and its associated transaction costs). The economics of incomplete contracts are explored in Oliver Hart, Firms, Contracts, and Financial Structure (1995); Charny, supra note 16, at 1819; Goetz & Scott, supra note 16, at 270; Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. Pol. Econ. 691 (1986); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. Pol. Econ. 1119 (1990).
48. See generally Oliver E. Williamson, Transaction Cost Economics: The Governance of Contractual Relations, 22 J.L. & Econ. 233, 235-58 (1979) (discussing the complexities of contract law and its associated transaction costs). The economics of incomplete contracts are explored in Oliver Hart, Firms, Contracts, and Financial Structure (1995); Charny, supra note 16, at 1819; Goetz & Scott, supra note 16, at 270; Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. Pol. Econ. 691 (1986); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. Pol. Econ. 1119 (1990).
49. See generally Oliver E. Williamson, Transaction Cost Economics: The Governance of Contractual Relations, 22 J.L. & Econ. 233, 235-58 (1979) (discussing the complexities of contract law and its associated transaction costs). The economics of incomplete contracts are explored in Oliver Hart, Firms, Contracts, and Financial Structure (1995); Charny, supra note 16, at 1819; Goetz & Scott, supra note 16, at 270; Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. Pol. Econ. 691 (1986); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. Pol. Econ. 1119 (1990).
50. See generally Oliver E. Williamson, Transaction Cost Economics: The Governance of Contractual Relations, 22 J.L. & Econ. 233, 235-58 (1979) (discussing the complexities of contract law and its associated transaction costs). The economics of incomplete contracts are explored in Oliver Hart, Firms, Contracts, and Financial Structure (1995); Charny, supra note 16, at 1819; Goetz & Scott, supra note 16, at 270; Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. Pol. Econ. 691 (1986); Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. Pol. Econ. 1119 (1990).
51. For valuable discussion of the problem of opportunism in incompletely specified contracts, see generally Timothy J. Muris, Opportunistic Behavior and the Law of Contracts, 65 Minn. L. Rev. 521 (1981).
52. We are grateful to Ian Ayres for oral comments which suggest the possibility that ex ante agreements between A and C1 waiving C1's rights on conflicts of interest might run into enforcement problems in the courts.
53. Stephen Gillers pointed out in comments on this paper that sophisticated clients and sophisticated law firms do bargain for conflict rules that differ from the default rules in the Model Rules: [F]or example, a law firm that is particularly skilled in a specialized area of law will demand that new clients seeking its services in that area agree to waiver of certain prospective conflicts. . . . A firm with specialized expertise will often be able to secure the waiver. Separately, substantial clients are able to negotiate for conflict rules more demanding of a law firm than the default rules provide. Memorandum from Stephen Gillers, Professor of Law, New York University, to Jonathan R. Macey, J. DuPratt Professor of Law, Cornell University, and Geoffrey P. Miller, Professor of Law, New York University (Aug. 8, 1996) (on file with authors) [hereinafter Memorandum from Stephen Gillers].
54. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
55. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
56. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
57. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
58. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
59. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
60. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
61. See Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 Harv. L. Rev. 713, 715 (1996) (discussing the property rule/liability rule distinction, and arguing that generally, a person's possessory interest in a thing should be protected by a property rule, whereas an interest in being protected from the effects of harmful externalities should generally be governed by liability rules). For other recent works dealing with property and liability rules, see generally Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 Yale L.J. 235 (1995); Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 Yale L.J. 1027 (1995) [hereinafter Ayres & Talley, Solomonic Bargaining]; Louis Kaplow & Steven Shavell, Do Liability Rules Facilitate Bargaining? A Reply To Ayres and Talley, 105 Yale L.J. 221 (1995); James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. Rev. 440 (1995); Ian Ayres & Jack Balkin, Legal Entitlements as Auctions: Property Rules, Liability Rules, and Beyond, 106 Yale L.J. 703 (1996). The seminal work on property and liability rules is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
62. On lemons problems, see George A. Akerlof, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, 84 Q.J. Econ. 488 (1970). A lemons problem occurs when a particular attribute of quality is not observable by a buyer. This forces the buyer to rely on a proxy to measure the desired quality. Because the proxy is inexact, sellers may increase their profits by substituting lower quality goods. Buyers, however, know that sellers are likely to make such substitutions and accordingly reduce the amount they are willing to pay. Because buyers pay less, suppliers of higher quality goods are driven out of the market and only inferior goods remain.
63. This observation is similar to the point made by Ronald Allen, Mark Grady, Daniel Polsby, and Michael Yashko, who argued that the law protects attorney-client confidences against disclosure in court, even though the cost of doing so is that less information is made available to the legal system, because doing so encourages clients to divulge to their attorneys unfavorable information on which valid legal claims may depend. See Ronald J. Allen et al., A Positive Theory of the Attorney-Client Privilege and the Work Product Doctrine, 19 J. Legal Stud. 359, 361 (1990).
64. The analysis in this section profited greatly from discussions with Louis Kaplow, Professor of Law, Harvard University.
65. A judge or jury might systematically underestimate damages if, for example, the rules of the jurisdiction exclude forms of consequential damages that could not be proven with a high degree of confidence or if the jurisdiction limited C1's ability to recover damages for nonpecuniary losses that might flow from A's disclosures of C1's confidences.
66. We have assumed in this paper that A captures all the rents associated with the C2 representation; in actuality, A would share these rents with C2, so that the effect of a liability rule in which C1 was entitled only to compensatory damages would be to allocate part of the joint product of the subsequent representation to C2.
67. This does not, however, appear to be a situation where effectively dividing the property right between A and C1 will facilitate efficient trading between them, given the extreme difficulties in reaching an independent valuation in court. For discussion of cases where liability rules might facilitate efficient trading, see generally Ayres & Talley, Solomonic Bargaining, supra note 26 (discussing ways in which dividing the entitlement can mitigate strategic incentives to misrepresent private valuations).
68. One approach might be to require A to inform C1 of the C2 representation in all close cases, without giving C1 the power to veto the representation; C1 would then have the burden of convincing A that the harm to C1 is more than slight or of seeking judicial relief if A continues with the representation.
69. This case differs from the standard franchising problem in which one of the parties to the franchise contract may be able opportunistically to expropriate the other's sunk costs to the party's own advantage; here, C1 is not seeking to expropriate the value of the sunk costs but only threatening to cause A to forfeit it. See generally Gillian Hadfield, Problematic Relations: Franchising and the Law of Incomplete Contracts, 42 Stan. L. Rev. 927 (1990) (discussing problems of opportunism in the law of contracts).
70. This is not necessarily true, of course; as Stephen Gillers pointed out, attorneys are sometimes sloppy, and even if they do due exercise diligence beforehand, they may not fully understand the conflict rules or the harm against which they protect the former client. Memorandum from Stephen Gillers, supra note 25, at 4.
71. We are grateful for personal conversations with Donald Langevoort, during which he made this observation.
72. Model Rules of Professional Conduct (1983).
73. Modern Rules of Professional Conduct (1981).
74. For a discussion of the process of promulgating codes of legal ethics, see Recent Development, Developments in the Law: Lawyers' Responsibilities and Lawyers' Responses, 107 Harv. L. Rev. 1547, 1581-82 (1994).
75. See Model Rules of Professional Conduct Rule 1.6 (1983); Model Code of Professional Responsibility DR 4-101 (1981).
76. See Model Rules of Professional Conduct Rule 1.6 (1983); Model Code of Professional Responsibility DR 4-101 (1981).
77. See Model Rules of Professional Conduct Rules 1.7-1.9 (1983); Model Code of Professional Responsibility DR 5-105 (1981).
78. See Model Rules of Professional Conduct Rules 1.7-1.9 (1983); Model Code of Professional Responsibility DR 5-105 (1981).
79. Confidentiality rules enjoy fairly widespread approbation among the commentators. See Epstein, supra note 5, at 593 (praising the rules governing attorney-client conflicts of interests). However, they have also been challenged as not being adequately justified and as serving the interests of the organized bar more than that of the public. See Fred C. Zacharias, Rethinking Confidentiality, 74 Iowa L. Rev. 351, 361-70 (1989) (questioning the strength of traditional justifications for confidentiality rules); Fred C. Zacharias, Rethinking Confidentiality II: Is Confidentiality Constitutional?, 75 Iowa L. Rev. 601, 629 (1991) (describing the self-serving nature of strict confidentiality provisions). Confidentiality rules can implicate third party interests, such as the interest of other persons in being able to avoid or rectify a client's criminal or fraudulent behavior; the Model Code and Model Rules contain limited "whistleblower" exceptions to deal with these situations, which have been quite controversial. See generally Richard W. Painter, Toward a Market for Lawyer Disclosure Services: In Search of Optimal Whistleblowing Rules, 63 Geo. Wash. L. Rev. 21 (1995) (proposing a voluntary regime that permits individual lawyers to decide which whistleblowing rules they will follow).
80. Confidentiality rules enjoy fairly widespread approbation among the commentators. See Epstein, supra note 5, at 593 (praising the rules governing attorney-client conflicts of interests). However, they have also been challenged as not being adequately justified and as serving the interests of the organized bar more than that of the public. See Fred C. Zacharias, Rethinking Confidentiality, 74 Iowa L. Rev. 351, 361-70 (1989) (questioning the strength of traditional justifications for confidentiality rules); Fred C. Zacharias, Rethinking Confidentiality II: Is Confidentiality Constitutional?, 75 Iowa L. Rev. 601, 629 (1991) (describing the self-serving nature of strict confidentiality provisions). Confidentiality rules can implicate third party interests, such as the interest of other persons in being able to avoid or rectify a client's criminal or fraudulent behavior; the Model Code and Model Rules contain limited "whistleblower" exceptions to deal with these situations, which have been quite controversial. See generally Richard W. Painter, Toward a Market for Lawyer Disclosure Services: In Search of Optimal Whistleblowing Rules, 63 Geo. Wash. L. Rev. 21 (1995) (proposing a voluntary regime that permits individual lawyers to decide which whistleblowing rules they will follow).
81. Confidentiality rules enjoy fairly widespread approbation among the commentators. See Epstein, supra note 5, at 593 (praising the rules governing attorney-client conflicts of interests). However, they have also been challenged as not being adequately justified and as serving the interests of the organized bar more than that of the public. See Fred C. Zacharias, Rethinking Confidentiality, 74 Iowa L. Rev. 351, 361-70 (1989) (questioning the strength of traditional justifications for confidentiality rules); Fred C. Zacharias, Rethinking Confidentiality II: Is Confidentiality Constitutional?, 75 Iowa L. Rev. 601, 629 (1991) (describing the self-serving nature of strict confidentiality provisions). Confidentiality rules can implicate third party interests, such as the interest of other persons in being able to avoid or rectify a client's criminal or fraudulent behavior; the Model Code and Model Rules contain limited "whistleblower" exceptions to deal with these situations, which have been quite controversial. See generally Richard W. Painter, Toward a Market for Lawyer Disclosure Services: In Search of Optimal Whistleblowing Rules, 63 Geo. Wash. L. Rev. 21 (1995) (proposing a voluntary regime that permits individual lawyers to decide which whistleblowing rules they will follow).
82. Model Rules of Professional Conduct Rule 1.7(a) (1983). To like effect is the Model Code, which provides in Disciplinary Rule 5-101(a) that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests." Model Code of Professional Responsibility DR 5-101(a) (1981). DR 5-105(A) provides that [a] lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C). Model Code of Professional Responsibility DR 5-105(A) (1981). DR 5-105(C) provides that "a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each." Model Code of Professional Responsibility DR 5-105(C) (1981).
83. Model Rules of Professional Conduct Rule 1.7(a) (1983). To like effect is the Model Code, which provides in Disciplinary Rule 5-101(a) that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests." Model Code of Professional Responsibility DR 5-101(a) (1981). DR 5-105(A) provides that [a] lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C). Model Code of Professional Responsibility DR 5-105(A) (1981). DR 5-105(C) provides that "a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each." Model Code of Professional Responsibility DR 5-105(C) (1981).
84. Model Rules of Professional Conduct Rule 1.7(a) (1983). To like effect is the Model Code, which provides in Disciplinary Rule 5-101(a) that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests." Model Code of Professional Responsibility DR 5-101(a) (1981). DR 5-105(A) provides that [a] lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C). Model Code of Professional Responsibility DR 5-105(A) (1981). DR 5-105(C) provides that "a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each." Model Code of Professional Responsibility DR 5-105(C) (1981).
85. Model Rules of Professional Conduct Rule 1.7(a) (1983). To like effect is the Model Code, which provides in Disciplinary Rule 5-101(a) that "[e]xcept with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment on behalf of his client will be or reasonably may be affected by his own financial, business, property, or personal interests." Model Code of Professional Responsibility DR 5-101(a) (1981). DR 5-105(A) provides that [a] lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C). Model Code of Professional Responsibility DR 5-105(A) (1981). DR 5-105(C) provides that "a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each." Model Code of Professional Responsibility DR 5-105(C) (1981).
86. Not all ethics scholars would agree with the proposition that the Model Rules refer implicitly to a continuum of harms and apply only when the quantum of harm reaches a sufficiently high level. Stephen Gillers, for example, argued in comments to this paper that the Rules adopt a categorical, rather than a quantitative, approach. See Memorandum from Stephen Gillers, supra note 25, at 5-7. We believe this objection is largely semantic. Even if the rules attempt to establish a categorical approach, their effect is going to be quantitative: when the degree of conflict becomes severe enough, the rule applies; otherwise, it does not.
87. Rule 1.7(a)(1) guards against this problem, to an extent, with the requirement that the lawyer must reasonably believe that "the representation will not adversely affect the relationship with the other client," Model Rules of Professional Conduct Rule 1.7(a)(1) (1983), but this does not rule out cases in which the first client's interests could potentially be harmed by the representation, so long as the lawyer reasonably believes that they will not be harmed. See also Model Rules of Professional Conduct Rule 1.7 cmt. ¶ 7 (1983) ("[C]ommon representation of persons having similar interests is proper if the risk of adverse effect is minimal . . . .").
88. Rule 1.7(a)(1) guards against this problem, to an extent, with the requirement that the lawyer must reasonably believe that "the representation will not adversely affect the relationship with the other client," Model Rules of Professional Conduct Rule 1.7(a)(1) (1983), but this does not rule out cases in which the first client's interests could potentially be harmed by the representation, so long as the lawyer reasonably believes that they will not be harmed. See also Model Rules of Professional Conduct Rule 1.7 cmt. ¶ 7 (1983) ("[C]ommon representation of persons having similar interests is proper if the risk of adverse effect is minimal . . . .").
89. See, e.g., Model Rules of Professional Conduct Rule 1.7 cmt. ¶¶ 11-14 (1983).
90. See Ronald Gilson, Value Creation by Business Lawyers: Legal Skills and Asset Pricing 94 Yale L.J. 239, 241 (1984).
91. See Model Rules Rule 1.10 ("While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so . . . ."); Model Code DR 5-105(D) ("If a lawyer is required to decline employment or to withdraw from employment under a Disciplinary Rule, no partner, or associate, or any other lawyer affiliated with him or his firm, may accept or continue such employment.").
92. See Model Rules Rule 1.10 ("While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so . . . ."); Model Code DR 5-105(D) ("If a lawyer is required to decline employment or to withdraw from employment under a Disciplinary Rule, no partner, or associate, or any other lawyer affiliated with him or his firm, may accept or continue such employment.").
93. On firm size, see Marc Galanter & Thomas Palay, Tournament of Lawyers: The Transformation of the Big Law Firm (1991).
94. Model Rules of Professional Conduct Rule 1.9(a) (1983).
95. See Model Rules of Professional Conduct Rule 1.9 cmt. ¶ 2 (1983).
96. In arguing that the deteriorating quality of information is important in the functioning of the rule, we do not mean to say that the rule should be understood to reflect solely this consideration. As Stephen Gillers has pointed out, the rule also protects clients against the danger that their lawyer will subsequently turn on them in a matter related to the former representation, and thus enhances client confidence in attorneys ex ante. See Memorandum from Stephen Gillers, supra note 25, at 6-7.
97. Model Rules of Professional Conduct Rule 1.9(b) (1983).
98. See Kenneth L. Penegar, The Loss of Innocence: A Brief History of Law Firm Disqualification in the Courts, 8 Geo. J. Legal Ethics 831, 856-67 (1995) (noting the rise in the use of motions to disqualify for pragmatic purposes since the 1970s).
99. It may be that, in a particular industry, companies would adopt the practice of giving permission pursuant to an industry-wide norm that such permissions are ordinarily granted. Such practices may currently exist, although we do not know of any; however, they are likely to prove unstable over time because of the temptations firms will face to opt out of the practice in order to obtain compensation from attorneys.
100. Model Code of Professional Responsibility DR 5-105(C) (1981).
101. Model Rules of Professional Conduct Rule 1.7(a)(1) (1983).
102. Stephen Gillers observed that there may be greater justification for a rule of nonwaivable conflicts in the criminal context, namely whether a defendant may want to waive a conflict that would threaten the integrity of a verdict by impeaching the independence of counsel. Memorandum from Stephen Gillers, supra note 25, at 8-9. This is a valid point, but it is limited in scope to certain criminal contexts and does not affect the general run of cases treated in this paper.