U.S. Sen. Dianne Feinstein, D-Calif., sin front of the B-2 stealth bomber in 2007 at the Northrop Grumman Corp.'s facility in Palmdale, California. Photographer/Susan Goldman.
U.S. Sen. Dianne Feinstein, D-Calif., sin front of the B-2 stealth bomber in 2007 at the Northrop Grumman Corp.'s facility in Palmdale, California. Photographer/Susan Goldman.

Inside the Secret World of Government Contracts Client Conflicts

It’s the issue no government contracts lawyer wants to discuss, the matter they wish would go away.

Yet some government contracts practice groups are being forced to spend more time than ever trying to prevent, or at least mitigate, conflicts between clients.

Client conflicts are one of the most sensitive issues facing law firms and some of their biggest contracting clients, such as Boeing, General Dynamics and Northrop Grumman. They go to the heart of law firm-client relationships—and how important it is to keep existing clients happy while also pursuing new work.

Client conflicts are on the rise because of a number of factors, including the purchases of contracting companies by private equity funds, and an increased number of multiple-award contract bids that can involve dozens of winners, losers and protesters, attorneys said.

The issue is forcing law firms and their contractor clients to reevaluate how they handle conflicts, and their relationships with each other.

At their worst, conflict-related issues can cause mass departures of attorneys from one practice to another, as happened in Washington last year with a group that left Jenner & Block for Morrison & Foerster (MoFo).

“If you talk to anybody in the government contracts arena who has a book of business, they will tell you that conflicts are the bane of their existence,” Paul Khoury, a partner with Wiley Rein and co-chair of the firm’s government contracts practice group, told Bloomberg BNA. “This is kind of the juiciest part of what doesn’t get talked about.”

Jenner Exodus

The issue reared its head most prominently in April 2016, with the departures of eight Jenner partners to MoFo. The jump bolstered the firm’s government contracts group from two to 10 partners, including three new group co-chairs from the Jenner pack.

Since then, at least five associates from Jenner’s contracts group have also moved over to MoFo, according to the lawyers’ firm and LinkedIn web pages.

At the time the eight-partner move was announced, the new MoFo attorneys and their public affairs representatives gave reporters several reasons for the move, including the assertion that they moved primarily because they were eager to join a firm that boasted a larger international presence than Jenner had.

But none of the stated causes included the key underlying reason for the move, said a source familiar with the move: the growing concerns of one prominent Jenner client, defense contractor General Dynamics, about the firm’s simultaneous representation of another leading Defense Department (DOD) contractor that has competed with them in the past on several types of military contracts.

The issues between General Dynamics and Jenner’s government contracts group began about two years ago, according to the source familiar with the Jenner-to-MoFo move who spoke with Bloomberg BNA on condition of anonymity.

This coincided with the Jenner contracts group’s ongoing representation of Northrop Grumman, which included Jenner’s successful defense of the Air Force’s award to Northrop to build an $80 billion long-range strike bomber, the B-21 Raider. Boeing had protested the award to the Government Accountability Office.

General Dynamics’s senior vice president and general counsel, Greg Gallopoulos, started taking issue with Jenner’s assistance to Northrop in the spring of 2015, the source familiar with the matter told Bloomberg BNA, even though, according to the source, there was no apparent conflict in place at the time. Jenner had represented General Dynamics for several decades on a wide range of multimillion-dollar and billion-dollar-plus acquisitions, as well as securities and restructuring matters, according to the firm’s website.

After hearing Gallopoulos’s concerns, Jenner leadership wanted to find a way to hold on to both clients, and worked on several possible solutions, including the use of waivers, the source said. But a deal could not be struck that satisfied General Dynamics’s in-house attorneys. This spurred Jenner to disallow further firm dealings with Northrop, the source said.

‘Northrop Doesn’t Build Tanks’

At about the same time, Jenner’s government contracts team decided it made sense to start looking for a firm that wanted to support Northrop. MoFo simultaneously was in the market to boost its government contracts practice in Washington. A match was made, and the move was announced in April 2016.

Over time, the Jenner government contracts team became convinced that the proposed move to MoFo needed to be made, the source said.

Yet in the end, the source suggested the move should not have been necessary, inasmuch as there wasn’t really a business conflict between the two companies for Jenner, given that they currently build fundamentally different types of military hardware. “GD doesn’t build military airplanes. Northrop doesn’t build tanks,” the source said.

A US Air force F-16, by General Dynamics, taxies for take off during the "Max Thunder" South Korea-US military joint air exercise in Gunsan, South Korea on April 20, 2017. Photo by Jung Yeon-Je (AFP/Getty Images)

A US Air force F-16, by General Dynamics, taxies for take off during the “Max Thunder” South Korea-US military joint air exercise in Gunsan, South Korea on April 20, 2017. Photo by Jung Yeon-Je (AFP/Getty Images)

 

The ties between General Dynamics’s legal shop and Jenner go deep. Prior to joining General Dynamics in 2008, Gallopoulos was Jenner’s managing partner, and had represented the contractor in a variety of government and commercial contracts matters, according to his General Dynamics corporate web page.

More recently, in 2015, Mark Nackman migrated to Jenner from General Dynamics, where he worked as general counsel for the company’s advanced information systems unit. Since then, he’s returned to the contractor as general counsel of the company’s ship design division, according to his LinkedIn page.

Gallopoulos declined comment through a General Dynamics spokeswoman. “We are not going to comment on our engagements with outside counsel,” said company spokeswoman Lucy Ryan in a written statement.

Sheila Cheston, Northrop Grumman corporate vice president and general counsel, likewise declined to comment. A Jenner spokeswoman and a MoFo spokesman also declined to answer questions about the move, as did several lawyers familiar with the move with both firms, including Jenner’s managing partner, Terrence Truax.

The Jenner-to-MoFo move wasn’t the first mass government contracts upheaval in recent years.

In May 2015, 20 government contracts lawyers moved from McKenna, Long & Aldridge to Covington & Burling. The move was preceded by the announcement that McKenna would be merging with Dentons. And in early 2007, six government contracts lawyers moved from Holland & Knight to Arnold & Porter (now called Arnold & Porter Kaye Scholer).

Lawyers who have knowledge of those two moves said on condition that they not be named that they weren’t connected to client conflict-related disputes.

An Everyday Occurrence

Client conflicts are a highly touchy issue both for firms and contractors and can play a key role law firm-client relationships. For firms, the resolution of these conflicts often influences decisions about pursuing new work.

This often means asking existing clients for permission, in the form of a written waiver, to pursue work in individual cases from companies that compete with the existing client—which some companies are generally happy to sign, and many others are not. When signing new clients, government contracts groups often try to convince the client to include advance client waiver provisions in their contract, through which clients waive their rights to claim client-related conflicts of interest.

“A number of companies have the philosophy that, if we’re going to give you a lot of business, you better not be sleeping with the enemy—at all,” said Paul Khoury, of Wiley Rein.

When firms can’t obtain waivers, they’re often faced with a choice based on the strength of an existing client relationship and the promise of more work from them, compared with how much a new client might bring in. Sometimes new work is turned down. Other times, firms let existing clients go because of the conflict calculus.

It is considered ethical for firms to drive decisions based on financial considerations, Tom Spahn, a partner with McGuireWoods and the firm’s in-house ethics counsel, told Bloomberg BNA.

Because so much of how firms resolve client conflicts is case-specific, Spahn said, “I’m not sure anyone can tell you how to resolve the issue” in a general sense.

There are multiple ethics issues surrounding client conflicts, Spahn said—matters that come to a head more often in government contracts practice groups because of the nature of the process by which companies bid for federal work.

“In [the] government contract world, this can be an everyday occurrence,” said Spahn.

Another legal ethics expert, William Freivogel, told Bloomberg BNA that he understood the concerns a large defense contractor might have when another major DOD contractor is heavily involved with the first company’s main law firm—whether or not the two companies happen to be in direct competition.

Say you’re Northrop, said Freivogel, a Chicago-based independent consultant for law firms on ethics and professional liability issues, and you have a strong, decades-old relationship with a particular law firm. “You sure as hell don’t want your lawyers regularly hobnobbing with the folks over at Boeing Field,” he said.

Clear-Cut Conflicts

Government contract-related client conflicts occur in three main instances, legal ethics experts said: during the bid protest process; during civil disputes between prime and subcontractors; and during transactions in which contracting companies are buying and selling subsidiaries and other parts of each other.

Throughout law firms generally, client conflicts come in several varieties, ethics experts said. There are actual or representational conflicts, positional or situational conflicts—known generally as ethics conflicts—and more often, business conflicts.

An actual conflict, which can’t be waived, would involve suing your own client in a matter that is substantially related to work that you’ve done. A situational conflict can occur when clients don’t want their lawyers to take positions that are adversarial to their positions.

Business conflicts often are the most clear-cut. “A number of companies have the philosophy that, if we’re going to give you a lot of business, you better not be sleeping with the enemy—at all,” Khoury said.

Larger law firms usually include staff offices that check for potential conflicts when new clients are in the process of being signed—and in some cases, lawyers send emails to each other with news of potential new clients to see if they should warn of possible conflicts. In tricky cases, firms also go to their own in-house ethics counsel or, when dealing with business conflicts, at least one firm has put together an in-house committee to handle such disputes. In the thorniest of cases, it’s not unheard of for firms to turn to specialist attorneys outside their firm, to make sure they’re handling the matter correctly.

“Conflicts are difficult and are becoming more difficult to manage,” said Jessica Abrahams, of Dentons. “We’re all spending more time dealing with them.”

Firms have ethics guidelines to follow in conflict cases, through the rules of professional responsibility set out by their state bar associations. State rules are typically adopted from the American Bar Association’s templates on the matter, as set out in its Model Rules of Professional Conduct.

“(A)bsent consent, a lawyer may not act as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated,” reads the comment page for ABA Model Rule 1.7. “The client as to whom the representation is directly adverse is likely to feel betrayed, and the resulting damage to the client-lawyer relationship is likely to impair the lawyer’s ability to represent the client effectively.”

‘Difficult to Manage’

Conflicts within government contracts practices rarely result in the type of jolt that struck Jenner, which hired three new government contracts partners a week after losing the group of eight.

Yet conflicts are taking up more time than ever within law firm government contracts practices—as well as with the in-house counsel offices that deal with them. Several contracts attorneys attributed this rise to:

• Contractor consolidation, including among defense and information technology companies, which has caused these companies and their individual operating units to spread work to more firms.

• A growth in law firm size and consolidation among government contracts practices.

• A rise in the purchase of midsize contractors by private equity funds. A relatively new phenomenon, equity funds in recent years have purchased notable contractors such as Booz Allen Hamilton and Harris Corp.’s government IT services division. When funds purchase contracting companies, law firms need to conduct an additional round of potential conflict checks—with the fund itself and with connected companies.

• An increase in the number of multiple-award contracts, which can involve dozens or even scores of companies involved in award protests.

Contracts lawyers—generally reluctant to go into any detail that could result in a client being named—say bid protests have become increasingly complex matters. And because multiple-award protests can involve so many parties, it’s increasingly likely that their firm is found representing two competing protesters or, in a trickier example, companies that both won and lost the contract bid.

“Conflicts are difficult and are becoming more difficult to manage,” Jessica Abrahams, chair of Dentons US’s government contracts practice, told Bloomberg BNA. “We’re all spending more time dealing with them.”

“The common term is these companies are ‘competimates.’ They’re teammates and they’re competitors, depending on which day of the week and which project they’re chasing,” said Mark Colley, of Arnold & Porter.

“The larger your firm, the trickier it can be” to handle conflicts that arise, Abrahams said. “We try to navigate the conflicts, but it sometimes becomes complicated.”

Competitors and ‘Competimates’

As both law firm government contracts groups and contracting companies are consolidating, the conflict issues have gotten more frequent and more pronounced, Mark Colley, a partner with Arnold & Porter Kaye Scholer who has focused primarily on contracts law since the late-1980s, told Bloomberg BNA.

They’ve even coined a term for among competing defense industry contractors, he said. “The common term is these companies are ‘competimates.’ They’re teammates and they’re competitors, depending on which day of the week and which project they’re chasing.”

“You could run down the list of the top ten competitors, and I would hazard a guess that for every one of them, they are sometimes teaming on programs and sometimes competing with each other,” he said.

Colley noted as an example the partnership between Boeing’s defense, space and security unit and Lockheed Martin Space Systems in their joint venture called the United Launch Alliance, which provides spacecraft launch services to the government.

At the same time, the two companies have scrapped repeatedly in recent years in efforts to win a range of military contracts.

Keeping the Door Open

Although many government contracts groups typically use more of an ad hoc approach to client conflicts, one firm plays things differently.

At Wiley Rein, the government contracts group—one of the more prominent such practices in Washington—decided long ago that in an effort to limit client conflicts, it made sense for the firm to select individual clients in certain product and service spaces to dedicate themselves to, Khoury said.

This has meant that in fields such as defense and IT contracting, Wiley has made it clear that it will not work with other companies, as a result, at least for the short and medium terms, Khoury said.

“You have to make business choices, and you have to give up work, and when you do, you try to make the best of it that you can,” Khoury said.

Wiley’s policy of selecting some companies and rejecting others doesn’t apply in certain fields, Khoury said. Even in cases in which Wiley has chosen a client, the firm is reluctant to permanently close the door on the possibility of working for the companies that, for the time being, they have rejected.

Despite Wiley’s cut-and-dried solution, the firm’s government contracts lawyers still regularly need to figure out how to handle extra-thorny situations.

For example, other Wiley attorneys sometimes approach Khoury to say they have a potentially big matter to pursue — but need his client to provide a waiver, if the firm hasn’t already procured an advance waiver, Khoury said. And sometimes, the other attorney notes to Khoury that the firm already has an advance waiver, but still needs to ask if it’s OK to sue Khoury’s client.

However, making such “asks” and having difficult conversations with clients, even if the answer is “no,” are often a necessary part of the conflicts process, Khoury said.

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