(b)            A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1)            the lawyer reasonably believes the representation will not be adversely affected; and

(2)            the client consents after consultation.  When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

OPINION

Ethical Rule 1.7 governs conflicts of interest in situations where parties may have divergent interests, and distinguishes between actual and potential conflicts of interest.  An actual conflict exists where a lawyer "act[s] as advocate against a person the lawyer represents in some other matter, even if it is wholly unrelated."  Comment, ER 1.7, Ariz. R. S. Ct. 42.  This rule prohibits situations where "the representation of one client would be directly adverse to the other."  Id.  In such situations, the prohibition is absolute and is not waivable.  A potential conflict exists pursuant to ER 1.7(b) when a lawyer's duty of loyalty or ability to effectively represent a client's interest may be materially limited or compromised.

The official comments to ER 1.7 state that a conflict of interest exists when the "lawyer cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer's other responsibilities or interests" such that "[t]he conflict in effect forecloses alternatives that would otherwise be available to the client."  One such situation is simultaneous representation of parties in litigation whose interests only potentially conflict, such as co-plaintiffs or co-defendants.  See Comment, ER 1.7.  Co-defendants share a common goal of defeating the plaintiff.  Nonetheless, although not directly adverse, the interests of co-defendants are considered to be in conflict because of the common interest of deflecting any possible liability onto the other co-defendant. In such situations, the rule is flexible: if the situation poses a potential conflict of interest such that the lawyer's representation may be materially and adversely affected, the arrangement can proceed only if the client consents after consultation.  Before seeking such consent, the lawyer must reasonably believe that the client will not be adversely affected and that it is reasonable for the client to consent to such an arrangement.   See Annotated Model Rules of Professional Conduct, at 112 (4th ed. 1999).

In contrast to the co-defendant situation, a person named as a non-party at fault pursuant to Ariz. R. Civ. P. 26(b)(5) is not a party to the litigation and is not subject to liability for its conduct.  A.R.S. § 12-2506(B).  ("Assessment of fault against nonparties does not subject any nonparty to liability in this or any other action, and it may not be introduced as evidence of liability in any action.")  However, if the statute of limitations has not run, the plaintiff or another party may amend the complaint to add the newly-named non-party at fault (Client B) as a party.  In such a situation, a lawyer's naming Client B as a non-party at fault in Client A's litigation would have the effect of alerting other parties to the possibility of naming Client B as a party.  The lawyer creates an unwaivable conflict by naming Client B as a non-party at fault and subjecting it to possible liability and damages in Client A's litigation.

If the statute of limitations has run, the naming of Client B as a non-party at fault would serve to potentially reduce liability assessed against the named defendant (Client A), but there is no concomitant detriment to the non-party at fault because the non-party cannot be assessed damages.  Cf. Birth Hope Adoption Agency, Inc. v. Doe, 190 Ariz. 285, 289, 947 P.2d 859, 863 (App. 1997) (finding that separate counsel was not necessary for defendants and adoption agency because, inter alia, both had common interest in defeating plaintiff, and action did not subject agency to civil damages) (citing Commercial Standard Ins. Co. v. Cleveland, 86 Ariz. 288, 296, 345 P.2d 210, 216 (1959)).  Therefore, the interests of Client A and Client B would not be adverse.  Still, a lawyer should carefully assess whether there is a substantial risk of detriment to, or limitation upon, his ability to provide adequate representation to Client A because of his relationship with Client B.  Comment, ER 1.7 ("Loyalty to a client is also impaired when a lawyer cannot consider, recommend or carry out an appropriate course of action for the client because of the lawyer's other responsibilities or interests.").  If the lawyer perceives that his representation of Client A may be materially limited by his relationship with Client B, a conflict of interest exists pursuant to ER 1.7(b). 

If the lawyer reasonably believes his representation of Client A will not be adversely affected by his relationship with Client B, then the lawyer must still obtain Client A's consent to continue as its counsel in the litigation.  Whether the conflict is waivable under ER 1.7(b) will depend on such facts as whether the statute of limitations has run, the legal sophistication of the affected client, and the ancillary effects of naming the client as a non-party at fault.  If the conflict is waivable, then pursuant to ER 1.7(b)(2), the client named as a non-party at fault must give informed consent to the waiver.

Even in the absence of a possible detriment to the adequacy of representation of Client A, naming Client B as a non-party at fault implicates the lawyer's duty of loyalty to Client B.  For example, Client B may feel betrayed by the lawyer or that his reputation has been damaged by being named a non-party at fault.  Therefore, in the event that the statute of limitations has run and Client B consents to being named as a non-party at fault, the lawyer must remain attentive to confidentiality issues with regard to both clients. 

CONCLUSION

If the applicable statue of limitations has run, identifying a client as a non-party at fault in another client's litigation, pursuant to Ariz. R. Civ. P. 26(b)(5), does not necessarily establish a conflict of interest under ER 1.7 because a non-party at fault cannot be assessed liability.  A.R.S. § 12-2506(B).  However, if the statute of limitations has not run, naming a client as a non-party at fault does create a conflict under ER 1.7, because it identifies the client as a potential defendant to other parties, who may then amend the complaint to add the client as a party. 

Whether the conflict is waivable under ER 1.7(b) will depend on such facts as whether the statute of limitations has run, the legal sophistication of the affected client, and the ancillary effects of naming the client as a non-party at fault.  If the conflict is waivable, then pursuant to ER 1.7(b)(2), the client named as a non-party at fault must give informed consent to the waiver.