SOC-SMG, Inc. v. Day & Zimmerman, C.A. No. 5375-VCS (Del Ch. Sept. 15, 2010), read letter decision here.

Key Issue Addressed

The key issue addressed in this relatively short letter ruling was whether the Court of Chancery should disqualify counsel in a Pennsylvania case and impose other penalties based on conduct that occurred in connection with litigation that took place in Pennsylvania in the context of an arbitration proceeding. There are other procedural niceties and background facts that make this decision worth reading, but I will only highlight this particular issue for purposes of this brief overview.

Short Overview

About a year after the start of an arbitration between the parties in Pennsylvania, SMG filed suit in Delaware to ask the Court of Chancery to disqualify the Pennsylvania counsel for Day & Zimmerman (D & Z),  and also to grant summary judgment in the pending arbitration as a penalty for D & Z’s counsel’s allegedly improper handling of electronically stored information (ESI) that was allegedly covered by an attorney/client privilege–all this while the same issues are arguably being addressed in the parallel arbitration proceeding (or at least are covered by the arbitration clause).

Bottom line: Predictably, the Court of Chancery refused to wade into the morass, and based, in part, on the reality that the issues were already before the arbitration panel, the Court sua sponte granted summary judgment in favor of D & Z, the NON-moving party on the following issues pursued by SMG, the moving party: (i) Motion to Disqualify Counsel; (ii) terminating the claims and defenses of D & Z in the PA arbitration; (iii) prohibiting use by D & Z of the ESI involved; and (iv) impose monetary penalties. That is, in addition to denying the motion of SMG, the moving party, for the foregoing relief, the Court granted summary judgment for the non-moving party, D & Z, on the same issues, sua sponte. See Rule 56.

Brief Summary of Court’s Reasoning

The plaintiff in this case, SMG, argued that public policy required that a court and not an arbitrator decide the issue of disqualification of an attorney based on ethical violations.  However, the attorney against whom the allegations were made was a Pennsylvania attorney involved in a Pennsylvania proceeding and who did the alleged actions in Pennsylvania. It is not clear why SMG did not file this suit in a Pennsylvania court.  The Court of Chancery explained that if SMG was truly concerned about public policy, it would have presented its claims to the PA disciplinary authorities–which it has not. Instead, the Court viewed SMG’s approach as inappropriately: "… using a charge of ethical impropriety for tactical advantage to dictate the outcome of an arbitration it itself commenced."  

This decision is consistent with many Delaware opinions that have declined to grant a motion to disqualify based on charges of ethical violations when they are seen as pretexts for attempts to gain improper tactical advantage in a pending lawsuit.  Additional reasons for the Court not "taking the bait’ in this case include the following: because an arbitration clause covered this issue and thus it should have been addressed in a pending arbitration proceeding. Moreover, the Court reasoned that because the lawyer who SMG sought to disqualify in the Pennsylvania arbitration proceeding "…  was acting at all times as a Pennsylvania lawyer, it would also show a lack of comity for this state’s courts to reach out and to act as a wide-ranging enforcement agent as to the ethical conduct of attorneys practicing law in sister states."

Compare generally: Case highlighted here in which a Federal Court in Pennsylvania is proceeding to trial on a conflict of interest claim against counsel involved in a related proceeding in the Delaware Court of Chancery–and in which the Delaware Court refused to disqualify the same counsel.