Conflicts Insanity

Am I the only one being driven to the conclusion that the ethics and jurisprudence surrounding "conflicts" are insane?  After reading about the tortured machinations firms go through as part of their pre- and post-merger due diligence, it's clear to me that this system has become detached from economic reality.   Don't get me wrong:  If two firms' clients are on actual or potential opposite sides in litigation, we have a hard-core conflict and Firm A or Firm B has to recuse themselves. 

But particularly if niche practices are involved, the world quickly becomes a very small place (patents and trademarks, e.g.), with less than six degrees of separation between almost any two companies  you can name. 

Let's go back to fundamental principles for a moment:  An economically cognizable "conflict" exists where a firm has (legitimately) obtained confidential information from Client A in the course of representing them, and then proposes to represent Client B who could be materially advantaged or prejudiced if the confidential information were disclosed.  To resolve this problem we have no need to resort to "conflicts" analysis at all:  The case is squarely covered by the duty to keep privileged client disclosures confidential.

Or, consider two clients who compete with each other in the XYZ marketplace.  Why should a law firm be disabled from representing both?  Across the rest of the span of their vendor relationships, the two clients surely have substantial overlaps:  From the certainty that both buy PC's running Windows with Intel chips to the likelihood that they recruit skilled professionals from each other.  So long as client confidentiality is rigorously maintained, I fail to see the ethical impediment to dual representation. 

I propose putting the discretion entirely back in the hands of clients (excepting only cases that would call for mandatory recusal).  Why put the onus on the clients?  I start from the presumption that any client should be permitted to hire any law firm of their choice.  And, if Coke knows that Pepsi uses (hypothetically) Davis-Polk, why should Pepsi be in a position to thwart Coke if it wants Davis-Polk's counsel as well? 

At the extreme, the existing conflicts rules invite the moral hazard of a large company signing retainer agreements with all the top law firms serving its industry, relegating its competitors to hiring second-tier firms.  (Think this is implausible?  How many New York firms do almost all the work for the bulge bracket investment banks?  Only a handful.  Could Goldman-Sachs afford to sign $100,000/year retainer agreements with all those firms?  I rest my case.)

Realistically, conflicts are always in the eye of the client, after all.  The most preposterous example of this occurred years ago before federal law banned smoking on airplanes.  Northwest Airlines, in a bid to stand out, announced it was prohibiting smoking on all its flights.  Northwest and Philip Morris, as it happens, both used the same ad agency.  Philip Morris pulled its account from the poor, side-swiped agency; and nothing can prevent this kind of irrational eruption.

Would this proposed change accelerate the merger wave?  Perhaps; but either way, that is surely an unintended consequence.