The ethical rules generally permit law firms to be adverse to former clients in broader circumstances than they can be adverse to a current client. Generally speaking, lawyers cannot be adverse to current clients in any matter, even if it is totally unrelated to the matter in which the firm is representing the client, but they can be adverse to former clients so long as the firm's prior representation of that former client is not "substantially related" to the proposed representation adverse to it.
This obviously means that the question of when a representation is "over," and thus the "former client" rule applies, is critical. One way in which that issue gets litigated is where the firm "drops" the client, and then sues it in an unrelated matter. This is the so-called "hot potato" rule. Many say, as a knee-jerk matter, that a lawyer cannot drop a client like a hot potato, and then sue it as if it were a former client.
The law is not so mechanical, however. In fact, depending upon the facts and circumstances of the case and the precise wording of the applicable ethical rules, whether the firm withdraws from representing the client may, or may not, affect the propriety of the representation.
How to structure relationships to avoid the uncertainty that the case law creates -- and to avoid needless hardship to either lawyer or client where, for example, a firm suddenly finds itself representing one client in a small matter that has become adverse to a long-time client -- is an issue that lawyers and clients need to consider.
The problem with a strict approach to "hot potato" is that it cannot be readily reconciled with the fact that the ethics rules permit lawyers to withdraw with no reason for doing so, so long as withdrawal does not cause material adverse effect on the client (Model Rule 1.16(b).) As some leading commentators wrote:
Authorities suggesting that the "hot potato" rule should always govern probably indulged the incorrect assumption that 'firing a client' is always harmful to the client. This approach conflates the issues associated with concurrent and serial representation of conflicting interests, and is certainly inconsistent with the permissive withdrawal scheme of [ABA Model] Rule 1.16(b).
Under that rule, a lawyer may cease representation -- assuming no harm to the client -- for no reason or becuase she is bored or because more lucrative work presents itself. Why should not the more interesting or lucrative work entail suing the former client -- assuming in addition of course, that the matters are not substantially related? Certainly there is no violation of the duty of loyalty.... A definition of loyalty broad enough to encompass the mere act of dropping a client would convert the client-lawyer relationship into one of continuing servitude.
1 Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering Sec. 20.10 at p. 20-24 to 20-25 (2000).
Some case law holding that it was under the particular facts and law proper to "drop and sue" include: D.C. B. Legal Eth. Comm. Op. 272 (1997); Towers Condominium Assoc., Inc. v. Crossland Sav., FSB., 944 F. Supp. 341, 346 & n.4 (D.N.J. 1996); Monaghan v. SZ3 Assocs., L.P., 1994 WL 623185 (S.D.N.Y. Nov. 1994); Hawthorne Partners v. AT&T Tech., Inc., 1993 WL 63003 (N.D. Ill 1993); Molina v. Mallah Org., Inc., 804 F. Supp. 504, 512 (S.D.N.Y 1992); In re Sandahl, 980 F.2d 1118 (7th Cir. 1992); AmSouth Bank, N.A. v. Drummond Co., 589 So.2d 715, 718 (Ala. 1991); Pearson v. Singing River Med. Center, Inc., 757 F. Supp. 768 (S.D. Miss. 1991); Gould, Inc. v. Mitsui Mining & Smelting Co., 738 F. Supp. 1121, 1127 (N.D. Ohio 1990); Tipton v. Canadian Imperial Bank of Commerce, 872 F.2d 1491 (11th Cir. 1989); Pennwalt Corp. v. Plough, Inc., 85 F.R.D. 264 (D. Del. 1980); Chateau de Ville Prods. v. Tams-Witmark Music Lib., Inc., 474 F. Supp. 223, 225-26 (S.D.N.Y. 1979); Rice v. Harrow Property Corp., 456 F. Supp. 1361, 1375-75 (S.D.N.Y. 1978). See also, Cal. St. Bar Comm. on Prof. Resp. Eth. Op. 1989-115 (1989).
Texas generally falls into this side of the debate. See Texas Disciplinary Rule of Professional Conduct 1.06(e); Conoco, Inc. v. Baskin, 803 S.W.2d 416, 419 (Tex. App. -- El Paso 1991, orig. proceeding); Robert P. Schuwerk & John F. Sutton, Jr., A Guide to the Texas Disciplinary Rules of Professional Conduct, 27A Hou. L. Rev. 1, 111 (1990); Davis v. Stansbury, 824 S.W.2d 278, 283 (Tex. App. -- Houston [1st Dist.] 1992, orig. proceeding).
Cases refusing to treat a client like a "hot potato" under the facts and law presented include: Alex Munoz Gen. Contractor, Inc. v. MC3d, Inc., 1998 WL 831806 (N.D. Ill. No. 98 C 4489 Nov. 25, 1998); Ferguson Elec. Co. v. Suffolk Constr. Co., 1998 WL 140101 (Mass. Civ. No. 96-5885-E Mar. 3 1998); Mindscape, Inc. v. Media Depot, Inc.,973 F. Supp. 1130 (N.D. Cal. 1997); Truck Ins. Exchange v. Fireman's Fund Ins. Co., 8 Cal. Rptr.2d 228, 233 (Ct. App. Cal. 1992); Maritrans G.P. Inc. v. Pepper, Hamilton & Scheetz, 602 A.2d 1277 (Pa. 1992); Florida Ins. Guaranty Ass'n. v. Carey Canada, Inc., 749 F. Supp. 255, 260-61 (S.D. Fla. 1990); Harte Biltmore Ltd. v. First Penn. Bank, 655 F. Supp. 419, 421 (S.D. Fla. 1987); Ransburg Corp. v. Champion Spark Plug, Inc. , 648 F. Supp. 1040, 1044 (N.D. Ill. 1986); Picker Int'l, Inc. v. Varian Assocs.,, 670 F. Supp. 1363, 1365 (N.D. Ohio 1987); Unified Sewerage Agency of Washington County v. Jelco Corp., 646 F.2d 1339, 1345 n.4 (9th Cir. 1981). See also, St. B. Mich. Comm. on Prof. & Jud. Eth. Op. RI-139 (1992) .
William Freivogel also has a collection of authority on this issue on his site. I haven't looked at it carefully, but I bet my list and his overlap in some measure.
Note that, even if it does not violate the disciplinary rules for a lawyer to "drop and sue" a client, the lawyer may still face civil liability (e.g., a suit for breach of fiduciary duty) or fee forfeiture.