Disqualification

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Do you toil in the pressure cooker of a firm, but dream of going in-house? Many lawyers have that goal.  But the churn works in the other direction, too, with in-house lawyers migrating to firms or solo practice.  When they do, they can face conflict of interest issues leading to disqualification, as a former in-house lawyer for Rolls-Royce discovered earlier this year.

A luxury ride

Donald Little was in-house counsel for Rolls-Royce for more than 10 years.  A couple years after he left, he represented Rolls-Royce as outside counsel in a suit by Davis S.R. Aviation, defending against allegations that Rolls-Royce made false statements about airplane engine parts in order to prevent Davis from selling engines on the open market. That case settled.

Then, in 2016, a different plaintiff filed suit against Rolls-Royce under the False Claims Act, but based on the same constellation of facts as Davis, centering on the alleged use of defective parts in a U.S. Air Force aircraft.  The qui tam plaintiff alleged that Rolls-Royce improperly used the parts, resulting in a crash, and that it submitted false documents and invoices for payment to the air force.

Little became one of the lawyers for the qui tam plaintiff in the False Claims Act case.

Rolls-Royce moved to disqualify Little, as well as to dismiss the case. The magistrate judge recommended disqualification and dismissal, and the U.S. district court for the Western District of Texas overruled the plaintiff’s objections and accepted the recommendation.

The rubber meets the road

In its opinion, the district court noted that the magistrate judge had “expressed disbelief at Little’s insistence that he should not be disqualified” in light of his prior work for Rolls-Royce, in a matter substantially related to the qui tam suit.

The Texas version of Model Rule 1.9 (Duties to Former Clients) is codified in Rule 1.09(a) of the Texas Disciplinary Rules of Professional Conduct.  Like the Model Rule, the Texas version bars representation adverse to a former client in the same or a substantially related matter, except with the former client’s consent.

In the view of the magistrate judge and the district court, this was a no-brainer: it was “a clear violation” of the conflict rules for Little to represent the plaintiff adverse to Rolls-Royce in the qui tam action, because it was substantially related to his prior work in-house for Rolls-Royce, and to the Davis case, in which Little had represented Rolls-Royce as outside counsel.

In-house counsel take heed

Migrating from a berth as in-house counsel to being outside counsel raises former-client conflict issues that you – and your new employer – must be aware of.  As the Association of Corporate Counsel has pointed out, all the ethics rules apply with equal force to in-house counsel.  Even lateral moves, from a company law department to the same post with a competitor can raise some thorny former-client conflict issues.  See Dynamic 3D Geosolutions LLC v. Schlumberger Ltd. (Schlumberger N.V.), 837 F.3d 1280 (Fed. Cir. 2016) (affirming disqualification of plaintiff’s in-house counsel and outside counsel in patent infringement case; plaintiff’s in-house counsel was defendant’s previous deputy GC).  Be aware, and you can avoid the risk of disqualification.

* Joy A. Wilson is a rising second-year law student at the University of Illinois College of Law where she is a finalist on the university negotiations team and client counseling team and an event coordinator for the Black Law Student Association and Sports and Entertainment Law Society.

What are your ethics obligations when your client gives you documents that the client may not be entitled to have?  Model Rule 4.4(b), adopted in some form by most jurisdictions, provides some guidance.  Applying it, together with other principles, a New Jersey appeals court, in an unpublished ruling, recently disqualified a firm from representing the plaintiff in a  wrongful termination case.

“Burn files”

The disqualified firm’s client, Sanchez, was the former chief compliance officer at a pharmaceutical company.  After receiving a disciplinary warning as a result of complaints about his “deportment” involving employees who reported to him, Sanchez told management that he had personal copies of confidential files of his employer, which he called his “burn files.”  He said that he would use these “‘burn files’ to ‘f–k'” the employer “when they try to get [him].'”

Sanchez was fired two months later, and sued his employer for wrongful termination in New Jersey state court under the Garden State’s whistleblower law.

Sanchez gave the documents to his lawyers.  In discovery, the employer asked for any confidential documents that Sanchez had taken.  By the time Sanchez’s lawyers responded and acknowledged the “burn files,” nine months had passed.  Asserting that the documents had been improperly taken, contained trade secrets and were privileged, the employer moved to preclude their use and to disqualify Sanchez’s lawyers.

The trial court granted the motion, leading to the appeal.

Careful company policies

Several policies of the employer helped the court conclude that Sanchez wrongfully took the “burn files.”

  • Employees in general were required to protect the company’s confidential information and barred from “improperly possessing or using” it.
  • Another policy prohibited employees from accessing confidential or secret information outside the scope of their work responsibilities, and misusing or disclosing it.
  • As a high-level manager, Sanchez had also signed a contract agreeing to return documents and work-related data after leaving the company.

Interplay of discovery rules, ethics principles, other law

The court of appeals upheld the trial court’s orders, including disqualifying Sanchez’s lawyers.  New Jersey’s version of Model Rule 4.4, said the court, “impose[s] an ethical obligation on attorneys to safeguard confidential information of third persons.”  It provides that “a lawyer who receives a document … and has reasonable cause to believe that the document … was inadvertently sent shall not read the document … [and] shall (1) promptly notify the sender [and] (2) return the document to the sender…”

This rule, the court held, is coupled with the state’s discovery rules, which provide that a party who is notified that information produced in discovery is subject to a claim of privilege must promptly return, sequester or destroy it, and not use it until the privilege claim is resolved.  (New Jersey’s rule is like those in many other jurisdictions, and Rule 26(b)(5)(B) of the federal civil rules.)

The court also analyzed the state supreme court’s 2010 multi-factor test in Quinlan v. Curtiss-Wright Corp., holding that in some circumstances employees can  take and use employer confidential documents to prove claims under the state’s anti-discrimination statute.  Here, though, the court of appeals agreed that Sanchez was required to return the “burn files” that he removed “through self-help, pre-litigation measures.”

This case underscores that you must consider different sources of law in working through the issues presented when your client gives you documents that the client may not be entitled to have.  Both the discovery rules and ethics rules potentially apply, plus the rules on attorney-client privilege and relevant case law.

“Chaotic self-help battle”

The appeals court concluded there was reasonable cause here to believe that the documents Sanchez improperly took were privileged, and said that the judiciary must “prevent the discovery process from degenerating into a chaotic self-help battle.”

As for disqualification, the court said that having an opponent’s privileged documents weighs in favor of disqualification, because less-severe remedies “fail to adequately address both the [Rule 4.4(b)] violation and the attendant harm of access and exposure to privileged documents.”

The key to the ethics violation here, said the court of appeals, was the nine-month delay during which Sanchez’s lawyers failed to notify opposing counsel that they had the “burn files.”  That was an “unreasonable delay” that “rendered futile” any attempt to mitigate the harm caused by disclosing the documents.

Don’t get burned

Rule 4.4(b) and the obligation to notify the sender extends to documents that are “inadvertently sent.”  The question implicitly raised by this case is whether documents that the lawyer obtains as a result of being improperly taken by a party should be treated the same as those that are “inadvertently sent.”  The court here seems to conclude that the answer is “yes,” but without any explicit analysis that would provide guidance.  Nonetheless, the lawyer’s mere exposure to the opposing party’s privileged documents would apparently have been enough, in this court’s view, to mandate the remedy of disqualification.

Bottom line:  be sure you consider all the sources of law that might apply, including ethics rules, when your client drops “burn files” in your lap — otherwise, you might end up getting burned with a DQ order.

A Pennsylvania state court judge disqualified Drinker Biddle & Reath LLP earlier this month from appearing for either defendant in a shareholder dispute involving a Philadelphia LLC that provides services to pharmaceutical companies.  The opinion spotlights the conflict issues that can come up when representing an entity and its controlling member against a claimed minority owner.

Pharma company faceoff

The plaintiff and the individual defendant apparently agreed to form a company in 2010, and the resulting LLC retained Drinker Biddle. In his complaint, the plaintiff alleged that Drinker Biddle prepared operating agreements that (although unexecuted) resulted in an implied agreement giving him an 18 percent stake in the company.

Three years later, however, the plaintiff claimed, the same Drinker Biddle lawyer prepared another operating agreement that froze the plaintiff out and gave the individual defendant 100 percent of the company.

When the plaintiff sued the company and the individual defendant, he included a derivative claim on behalf of the company, asserting that the individual defendant had breached his fiduciary duties.  Drinker Biddle lawyers entered appearances for both the company and the individual, leading to the DQ motion.

Organization as client

The court said that Pennsylvania’s version of Model Rule 1.13 (they are substantively identical) governed.  Titled “Organization as Client,” a rule comment deals with the question “whether counsel for the organization may defend … [a derivative] action.”  The comment says that “if the claim involves serious charges of wrongdoing by those in control of the organization, a conflict may arise between the lawyer’s duty to the organization and the lawyer’s relationship” with individual constituents of the organization.

The court said that such a conflict arises “because the interests of those who control the company (and with whom the attorney has had a preexisting relationship) may diverge from the interests of the company itself.”  Quoting a federal Third Circuit case, the court said that “except in patently frivolous cases[,] allegations of directors’ fraud, intentional misconduct, or self-dealing require separate counsel.”

That was the case here, the court said, because the plaintiff alleged that the individual defendant engaged in self-dealing, facilitated by legal advice from Drinker Biddle, and involving an agreement that excluded the plaintiff.

Scarce law?

In a Law360 article, counsel for the plaintiff said that there was surprisingly little law on the issue, given that “any time there’s a closely held [company] dispute, you routinely have one firm representing the company and also representing the majority and the founding shareholder.”

The court also ruled that Drinker Biddle couldn’t drop one defendant and stay on as counsel to the other, reasoning that its lawyers might be witnesses (Model Rule 3.7), and that remaining for one of its clients in the case would involve the firm in a conflict with the other client (Model Rules 1.7 and 1.9), particularly given the possibility of cross-claims.

Although the opinion is from a state trial court, it is instructive reading if you are involved in a derivative claim situation like this, or are considering representing more than one party in a company control dispute.

If you’re driving from state to state, the rules of the road are generally consistent.  While details may differ, a red light means “stop” in every state of the Union.  But under our federal system, each U.S. jurisdiction has authority to regulate the practice of law — and under the resulting state ethics rules, not only the details, but even some of the basics may differ.

That’s spotlighted in a district court opinion issued earlier this year, denying a motion to disqualify counsel in a defamation case because plaintiff was not a “prospective client” under South Carolina’s ethics rules.

“If there is no conflict”

The plaintiff sued ten John and Jane Does, alleging he was defamed in a blog post.  The plaintiff first threatened suit against the blogger, who hired counsel at a Greenville, S.C. firm, (“Wyche”).  Ten days later, plaintiff’s lead counsel reached out to a different lawyer at Wyche.  They discussed the possibility of the Wyche lawyer serving as local counsel for plaintiff, and plaintiff’s lead lawyer asked for a fee agreement “if there is no conflict.”  The Wyche lawyer took the relevant names “for conflict purposes,” provided the firm’s rates, and said in an e-mail that “I hope we get the opportunity to work together.”

You can see where this is going, right?  The next day, the Wyche lawyer — having discovered that the firm already represented the blogger — told plaintiff’s lawyer that the firm had a conflict and declined the representation.

Later, plaintiff issued a subpoena to the blogger, claiming that she had knowledge of the Does’ identities.  When the Wyche firm appeared on behalf of the blogger, plaintiff moved to disqualify.

That’s where the Palmetto State’s ethics rules on prospective clients came into play.

Prospective client?

To safeguard the confidentiality interests of prospective clients, Model Rule 1.18 provides that if you obtain “information from [a] prospective client that could be significantly harmful to that person in the matter,” you and your firm are generally disqualified from adverse representation in the same or a substantially-related matter.

Who is a “prospective client” under the Model Rule? Anyone who consults with you “about the possibility of forming a client-lawyer relationship with respect to a matter” — even when no lawyer-client relationship ensues.

But South Carolina’s Rule 1.18 is more restrictive.  It’s version defines a “prospective client” as someone who consults with a lawyer — but “only when there is a reasonable expectation that the lawyer is likely to form the relationship.”

That made all the difference to the court in ruling on plaintiff’s DQ motion.  The court said that there was no evidence that a “commitment” was “likely” that the Wyche firm would represent the plaintiff.  The “hope-we-can-work-together” comment was only a “polite courtesy,” the court said.

“Niceties,” are not binding commitments to represent someone, the court held, and “are not, absent unusual circumstances, reasonably interpreted to indicate a commitment is likely.”  The plaintiff’s lawyer also clearly understood that before any engagement, Wyche had to check for conflicts.

Without having become a “prospective client” under South Carolina’s version of Rule 1.18, the plaintiff had no basis for disqualifying the Wyche firm.

Different rules, different outcome

The plaintiff here might have met the definition of “prospective client,” and been entitled to the protection of Rule 1.18, in a state that hews to the broader Model Rule language, instead of South Carolina’s more-restrictive version.  So you must be aware of such nuances in the ethics rules of the road.

But you also must be diligent in not “hearing too much” when a prospective client reaches out to you.  The Wyche lawyer who talked to the plaintiff’s lead counsel in this case didn’t get confidential information about the plaintiff before checking for conflicts.

That’s good policy.  There are plenty of examples of successful DQ motions where a lawyer has listened to details — which prospective clients often want to relate — and only then discovered a conflict.  The always-excellent Freivogel on Conflicts collects the cases.  In worst-case scenarios, that can result in needing to decline the prospective engagement and step away from the one that raises the conflict.  That’s the message of ABA Ethics Opinion 90-358 (1990) — an outcome no one wants.

potatoes covered in soil against whiteEven though a Mississippi lawyer’s conflict of interest lasted only one day, that was enough for a U.S. magistrate judge to disqualify him from representing a client adverse to Allstate Insurance Co. on a coverage claim, in a ruling issued last week.  Sending a termination letter to the insurer the day after accepting the new client’s case didn’t help the lawyer.  The judge found that the lawyer’s duty of loyalty required him to turn down the case, in light of the fact that he had pending cases in which he was directly representing Allstate.

Hot potato doctrine

The court recognized that the key issue in the case was whether the lawyer could drop Allstate as a client, turning it into a “former client” for purposes of the conflict-of-interest rules.  If so, then the “more lenient” substantial-relationship test would apply, in which the court looks at whether the new client’s matter is substantially related to the work the lawyer did for the former client.  But if the lawyer takes on the new client and represents it concurrently with the now-adverse existing client without both clients’ consent, then the duty of loyalty under Model Rule 1.7 has been breached.

The “hot potato” doctrine prohibits a lawyer from turning an existing client into a former client by “firing” it in order to accept an engagement adverse to the existing client.  The 1987 case that gave the principle its name is Picker International, Inc. v. Varian Associates, in which the federal district court judge said that “A firm may not drop a client like a hot potato, especially if it is in order to keep happy a far more lucrative client.”

Termination didn’t cure impropriety

In the Mississippi case, the court said that the lawyer’s conduct was understandable:  he hadn’t received any new work from Allstate in over a year; his firm was wrapping up its work on the “handful” of cases it still had, the majority of which were near the end of their life-spans; and the firm planned to end its relationship with the insurer based on the fact that it was not getting new work.

Nonetheless, said the judge, the lawyer and his firm had an attorney-client relationship with Allstate when the lawyer signed a contract to represent the claimant against the insurer, and he couldn’t abandon his existing client by dropping it like a hot potato:  “In withdrawing representation of Allstate to pursue a new, more attractive representation, [the lawyer] violated the duty of loyalty he owed to Allstate.”

Game of spuds

The question of when a client becomes a former client under conflict rules can be a nuanced one.  For instance, the hot-potato doctrine may not operate when a conflict is “thrust upon” a law firm as a result of a client merger, the addition or new parties or other circumstance over which the firm has no control.  Then, the firm may be able to choose to avoid disqualification by withdrawing from the representation that creates the conflict.  See, e.g., Sabrix, Inc. v. Carolina Casualty Ins. Co. (D. Ore. 2003) (hot-potato rule did not apply where withdrawal followed another party’s naming of additional defendant that created conflict).  And timing matters, too.  For example, if a firm has a new client in mind for the future, may it terminate an existing relationship in order to prevent a conflict?

Bottom line:  Be careful in working through these conflict issues so you don’t drop the ball — or the potato.

Viral marketing conceptWhen a conflict of interest crops up during a case, Ethics 101 tells us that the “taint” of that conflict can spread, and potentially disqualify all the lawyers of the affected firm.  Model Rule 1.10, “Imputation of Conflicts” explains the rule.  But how far does that disqualification go?  A New York appeals court examined this question in December, and reversed a DQ order in a personal injury suit.

“Associated in a firm”?

In Kelly v. Paulsen, the firm (“HHK”) represented two plaintiffs who had been injured in a motorcycle accident allegedly caused by the defendant.  HHK filed suit on plaintiffs’ behalf in 2009.  Four years later, a sole practitioner joined the plaintiffs’ team as co-counsel.  Very shortly before trial in 2015, the defendant learned — allegedly for the first time — that HHK was representing plaintiffs.  On the first day of trial, the defendant moved to disqualify HHK because the firm had also represented the defendant in “personal and business matters” for the previous 30 years.  (The court didn’t explain these somewhat singular facts, particularly how a party doesn’t learn the identity of opposing counsel’s firm for six years while a suit is pending.)

Based on the conflict, HHK withdrew, leaving the solo as plaintiffs’ only lawyer.  Defendant then moved to disqualify the solo as well, and the trial court granted the motion.  On appeal, the Third Department reversed.

The court of appeals said that New York’s Rule 1.10(a) (like the Model Rule), bars lawyers who are “associated in a firm” from representing a client when a conflict of interest would preclude any one of them from doing so if the lawyer were practicing alone.

This imputation rule thus has the potential for spreading the “taint” (a word courts often use) of the primarily-disqualified lawyer to others.

Although the Rules don’t define the phrase “associated in a firm,” the court in Kelly found that the well-established meaning extends beyond partners and associates who are employed in the same firm — it also can include “of counsel” relationships, for instance.

Nonetheless, the court wrote, “not every lawyer who has any connection or relationship with a firm is considered to be ‘associated’ with that firm” for conflicts and imputation purposes.  The question requires a factual analysis, and turns on whether the lawyer’s relationship with the firm is “sufficiently close, regular and personal.”

More like a contract lawyer

Here, the facts showed that the solo had his own separate office, didn’t receive any support services from HHK, and HHK didn’t “supervise” his work.  The key factor, however, was that the solo averred that he never had access to any HHK files except plaintiffs’, never represented the defendant, was not aware of him or his business affairs before the motorcycle case, and never got any confidential information about the defendant from HHK or had access to such information.

The defendant argued that HHK had “undeniably shared” his confidential information with the solo practitioner, based on plaintiffs’ demand for a high settlement figure.  Defendant said the demand indicated that the solo had received confidential information about his finances.  But the court viewed that argument as mere speculation.

The solo’s role here, said the court, is “more akin to that of a contract lawyer” who gets a case referral and works from his or her own office as co-counsel.  The court noted a 1999 New York ethics opinion that such a contract lawyer is not “associated” with the employing firm for conflicts purposes, and analogized that principle to the solo lawyer.

Key:  sharing confidential information

There are a number of courts that, like Kelly, have held that taint doesn’t affect co-counsel, at least where there is no showing that co-counsel received confidential information about the party moving to disqualify.  The always-excellent Freivogel on Conflicts collects the cases.  But there are still decisions that go the other way, too.  See, e.g., j2 Global Communications Inc. v. Captaris Inc., (C.D. Cal. 2012) (imputing “outside in-house counsel’s” disqualification to firm).  Bottom line:  while information-sharing remains key, this is a fact-specific area, and it pays to be aware of nuances that can vary the outcome.

International communication conceptAs we’ve predicted before, the increasing globalization of high-level legal practice continues to create questions about forms of legal practice – in particular, vereins, a structure aimed at letting firms based in different countries operate under a unified brand.  Mega-firms Fulbright & Jaworski  (subs. req.) and Dentons have faced motions to disqualify centered on such structural issues, and now a Texas ethics opinion issued last month questions whether lawyers in the Lone Star state can use a verein name on pleadings.  (Hat tip to Dan Bressler and the Law Firm Risk Management blog for alerting us to the opinion.)

Five AmLaw 100 firms affected

In Opinion 663, the Texas Professional Ethics Committee concluded that under the state’s Disciplinary Rules of Professional Conduct, Texas lawyers in an organization such as a verein “may not use the name of the organization as their law firm’s name on pleadings or other public communications” unless all the names are those of current or former lawyers in the Texas firm or a predecessor firm.

According to an article in Texas Lawyer, five firms on the AmLaw 100, which lists the highest-grossing U.S. law firms, are Swiss vereins that include Texas lawyers, including DLA Piper, Baker & McKenzie, Hogan Lovells, Norton Rose Fulbright and Squire Patton Boggs.

The Committee based its opinion, which is advisory, on Texas’s Rule 7.01(a), which unlike the analogous Model Rule on firm names, expressly bars lawyers from practicing under a “a firm name containing names other than those of one or more of the lawyers in the firm,” (except for deceased/retired lawyers’ names or names of predecessor firms).

The Committee’s analysis used a hypothetical Texas firm formerly named “Smith Johnson,” that has joined an “international verein” and become known as “Brown Jones Smith.”  The Texas lawyers in the verein would be violating Rule 7.01(a), said the  Committee, because “there has never been a lawyer in the Texas law firm or any predecessor firm named Brown or Jones.”

In addition, like the analogous Model Rule, Texas Rule 7.02 prohibits “misleading” firm names, and the Texas Committee concluded that the use of the “Brown Jones Smith” name would also be misleading, by creating “the appearance that all lawyers in all the law firms that are in the verein are members of a single law firm when in fact they are not.”  The firm’s statements about its composition in advertising disclaimers don’t diminish the misleading nature of the communication, the Committee said.

Be careful what you ask for?

According to Texas Lawyer, the Texas Committee issued Opinion 663 in response to an inquiry from Robert Newman, who is of counsel with Norton Rose Fulbright (a verein with Texas lawyers), and a former chair of the Committee.  Asking for an advisory ethics opinion, and then getting an adverse one, is always a possibility, although even an adverse opinion at least tells you where you stand, ethically speaking.  But the reactions of the current Committee chair and the mega-firms contacted by Texas Lawyer are interesting, and indicate that it will basically be business as usual for the firms, notwithstanding the (advisory) opinion.  The Committee chair said that “Literally nothing is going to happen” unless someone files a grievance against a lawyer for using a verein name, which he said would be a “rare” occurrence.

For their part, two firms contacted by Texas Lawyer — Norton Rose Fulbright and Baker & McKenzie — said they do not plan to make any changes as a result of the ethics opinion.  The magazine quotes the managing partner of Baker’s Dallas office, who said “We’ve been practicing in Texas as Baker & McKenzie since 1986 and plan to continue to do so.”

Whether this ethics opinion will resonate with bar regulators in other jurisdictions, and whether it will generate some disciplinary cases remains to be seen.  Also interesting is the Texas committee’s view that the law firms in the verein are not members of the “same firm,” which might have a potential impact on analyzing future conflict of interest issues, among other things.  Stay tuned for further developments.

Confidentiality stampCourts often analyze motions to disqualify by balancing the need to uphold professional standards against the rights of clients to choose their lawyers freely.  The New Jersey court of appeals struck that balance earlier this month in upholding the disqualification of a lawyer who violated a confidentiality order, finding that the lawyer knowingly disobeyed a court order, among other violations.

Looking for class action plaintiffs

The lawyer sued a car dealership and others in a putative class action, alleging fraud and the violation of various state consumer statutes.  The parties agreed on and the court entered a confidentiality order that allowed any party to designate confidential documents produced in discovery as “Attorneys’ Eyes Only.”

The confidentiality order mandated that the parties could use such material “solely for purposes of the prosecution or defense of this action.”

After several twists and turns, the suit was trimmed of its class allegations and proceeded solely against the dealership.

However, as the trial court wrote, “lo and behold, after the dealer produced the documents under the confidentiality order, a new [class action] lawsuit was filed in [another] county,” against the same defendant, based on the same theories, and initiated by the same lawyer, who admitted that she had used the “Attorneys’ Eyes Only” documents in soliciting the named class-action plaintiffs to file suit in the second action.

The lawyer claimed that this did not violate the confidentiality order; the trial court disagreed, and “relieved [the lawyer] from serving as plaintiff’s counsel” because of the violation.  The trial judge also referred the matter to the state Office of Attorney Ethics.  Following the client’s interlocutory appeal, the appellate division affirmed the disqualification order.

Inherent authority to impose DQ remedy

New Jersey’s Rule of Professional Conduct 3.4(c), identical to Model Rule 3.4(c), forbids a lawyer to “knowingly disobey an obligation under the rules of a tribunal except for an open refusal based on an assertion that no valid obligation exists.”

The appeals court held that the lawyer knowingly used materials designated as “Attorneys’ Eyes Only” to solicit clients and to initiate a separate lawsuit against the car dealership, and that the trial court had not abused its discretion in using its inherent powers to sanction the lawyer for her ethical violation by disqualifying her.

Quoting from its prior holdings on balancing the need for ethical conduct against client choice, the court of appeals said that “there is no right to demand to be represented by an attorney disqualified because of an ethical requirement.”

“We underscore that an attorney’s failure to conform to his or her ethical obligations may imperil their client’s right to counsel of their choice.”

Not only did the lawyer’s client lose out; the lawyer put her own license in jeopardy, with the court’s referral to the state disciplinary agency.

Sinking dollarWhen you start planning to leave your firm for greener pastures, lots of ethics issues can crop up (bad pun). One of the most acute issues is if you get an offer to join a firm that is on the opposite side of a matter you are already handling. That was the situation in a recent bankruptcy case, In re US Bentonite, Inc., and it led the court to order the firm representing a Chapter 11 debtor-in-possession to disgorge several months’ worth of fees. The firm avoided disqualification, however, in part because the lawyer’s new firm had screened him.

Bankruptcy rules of play

As first reported in the excellent DQed blog, a firm represented the debtor-in-possession through a firm associate. Two secured creditors had claims to virtually all the debtor’s assets. The firm representing one of the creditors offered the associate a job, which the associate accepted on March 11, 2015. But the associate failed to disclose the accepted offer to his supervising attorney for six weeks. And even after tardily informing his firm, the associate kept signing and filing pleadings on behalf of the debtor until almost three months after accepting the job offer.

During this time, the debtor and creditors arrived at a settlement “divvying up the debtor’s previously liquidated assets among the secured creditors and stipulating to dismiss the bankruptcy case. On June 5, the associate moved to withdraw (without disclosing the conflict).” It was not until June 15 that the supervising attorney disclosed to the court in a supplement to the firm’s Application for Employment of Attorneys that the associate had accepted a job with the firm representing the creditor. The U.S. Trustee moved to disqualify the firm representing the debtor and to deny all compensation to it.

The Bankruptcy Code and Rules require that lawyers representing debtors and their estates be “disinterested,” and impose a continuing duty to disclose all connections with debtors, creditors, other parties in interest and “their respective attorneys and accountants.”

Although the court’s opinion is lengthy, it was a no-brainer for it to conclude that “accepting a position at a law firm representing one of the largest creditors in a case where one represents the debtor must be disclosed, [and] . . . the connections between the firms and the parties at a minimum created the appearance of impropriety.”

DQ avoided, but disgorgement ordered

The result: although avoiding disqualification and disgorgement of all fees, the firm representing the debtor had to disgorge fees from the date the associate accepted the job offer — even though the firm hadn’t known about the situation for the first month.

The court said and/or implied that DQ was not warranted for several practical reasons:  (1) the lawyer creating the conflict had left the firm representing the debtor; (2) the case was nearly concluded, and the cost and delay involved in having the debtor retain new lawyers at that point would be “of no benefit,” particularly in a case where there was insufficient money to satisfy all claims; (3) the settlement agreement itself was not deemed to be tainted where the evidence established it was reached among four different parties, at arms’ length; and (4) the court obliquely acknowledged that the migrating lawyer had been screened from participation in the case after he arrived at his new firm.

Not just for bankruptcy lawyers….

The scenario that the court dealt with in In re US Bentonite, Inc. — negotiating for a job with counsel representing the opposing party — is not unique to the bankruptcy context.

In 1996, the ABA ethics committee considered it in Formal Op. 96-400, concluding that “a lawyer’s pursuit of employment with a firm or party that [the lawyer] is opposing in a matter may materially limit [the lawyer’s]is representation of [the] client, in violation of Model Rule 1.7(b). Therefore, the lawyer must consult with [the] client and obtain the client’s consent before that point in the discussions when such discussions are reasonably likely to materially interfere with the lawyer’s professional judgment.” The more involved the lawyer is in the client’s matter, the more likely it is that a material-limitation conflict will arise.

Comment [10] to Rule 1.7 echoes the committee’s advice: “When a lawyer has discussions concerning possible employment with an opponent of the lawyer’s client, or with a law firm representing the opponent, such discussions could materially limit the lawyer’s representation of the client.”  See also ABA Formal Op. 09-455 (Oct. 8, 2009), “Disclosure of Conflicts Information When Lawyers Move Between Law Firms.”

Role of ethical screens

In Bentonite, the debtor’s firm avoided disqualification based at least partly on the fact that the migrating associate’s new firm apparently screened him when he arrived. (The court’s order says that the new firm “shall continue to screen” the lawyer from the case.)

If your jurisdiction has adopted a version of Model Rule 1.10 and accepts screening as a way to avoid disqualification of a law firm in this situation, it can help ease lawyer migration quandaries under some circumstances. As comment [7] warns, however, “even where screening mechanisms have been adopted, tribunals may consider additional factors in ruling upon motions to disqualify a lawyer from pending litigation.”

BatteriesCelgard, LLC v. LG Chem, Ltd., a disqualification case decided by the Federal Circuit, continues to make waves.  Insightful commentary from Ronald Rotunda is here; he notes that typing the case name into Google yields more than 5,000 hits.

Last December, when the opinion came out, there was concern (see here and here) that if read broadly, Celgard could signal a dangerous standard under which concurrently representing clients with adverse interests up and down a single supply chain might be sufficient to create a disqualifying conflict of interest.

The ruling should not be read broadly, however — in its opinion, the court expressly rejects such a reading.  But Celgard does yield lessons about possible conflicts in concurrently representing clients who are economic competitors.

Celgard, and LG Chem and Apple, oh my!

The case involves a patent dispute between Celgard and defendant LG Chem, which makes lithium batteries alleged to infringe on Celgard’s patent.  Jones Day sought an injunction on behalf of Celgard against LG Chem.  While not a party to the dispute, Apple uses LG Chem’s batteries in its products.

Rule 1.7 of the North Carolina Rules of Professional Conduct on concurrent conflicts of interest, patterned after Model Rule 1.7(a)(1), bars representation “directly adverse” to another client that the lawyer represents in an unrelated matter.   Jones Day’s representation of Celgard had foreseeable economic consequences for Apple, because Apple’s supply of lithium batteries was subject to potential disruption were Jones Day to win an injunction on behalf of Celgard.

The Federal Circuit upheld the district court’s determination that Jones Day’s representation was “directly adverse” to Apple, and that Apple had the right to intervene and to disqualify Jones Day.

Injunction used as leverage

The key to the Federal Circuit’s disqualification holding was that even before Jones Day became involved as counsel, Celgard had sent Apple a copy of its injunction motion, and “requested to work with Apple to find a mutually beneficial business arrangement to resolve the issues around infringement of Celgard’s intellectual property,” the court said.

Thus, Jones Day’s representation was not adverse to Apple merely in an economic sense; rather, said the court, its client, Celgard, additionally targeted Apple “in an attempt to use the injunction as leverage in negotiating a business relationship [with Apple].”  Thus, the court deemed Jones Day’s representation of Celgard to be adverse to Apple’s interests, including its “legal obligations.”

The court expressly disclaimed any intent to hold that Rule 1.7 covered conflicting representations “merely because the client is up or down the supply chain.”  Thus, contrary to some early expressions of concern, the case does not upset the usual rule, which, as Rotunda says, is that “there is no conflict simply because a law firm represents a client [in a case] and the result in the case would make it more difficult or more expensive for another client [represented by the lawyer in unrelated matters] to purchase a good or service.”

The usual rule is enunciated in comment [6] to Rule 1.7:  “[S]imultaneous representation in unrelated matters of clients whose interests are only economically adverse … does not ordinarily constitute a [direct adversity] conflict of interest.”

No broad reach — but caution still required

Recognizing that Celgard’s holding is a limited one, and that it depended on some unique facts, the ruling is a good opportunity to highlight two additional points about representing clients whose interests are economically adverse to each other:

  • First, while the circumstances might not raise a “direct adversity” conflict under Rule 1.7(a)(1), you may still have a “material limitation” conflict under Model Rule 1.7(a)(2) — which arises when “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client …”  If your ability to consider, recommend or carry out an appropriate course of action for Client A will be materially limited by your loyalty to Client B, as an economic competitor of Client A (or could be perceived to be), then you should consider whether you need consent — from both clients — in order to proceed.
  • Second, check whether you or your firm has agreed to the terms of “outside counsel guidelines,” which an increasing number of large clients require as a condition of the engagement.  Such guidelines may place limits on your ability to take on the representation of economic competitors of those clients.  Knowing what those guidelines provide before you accept the representation of another client is clearly the best way to steer clear of conflicts problems.