A recent decision of the Delaware Court of Chancery serves as a reminder of the high threshold that must be met before a motion to disqualify counsel will be granted–and why such motions are viewed with some skepticism by the court. This ruling also provides a useful guide for corporate and commercial litigators in its description of the various prerequisites for such a motion to be successful, as well as the general principle in Delaware that the trial courts are not the appropriate forum to enforce violations of the Rules of Professional Conduct for Lawyers.

In Dollar Tree Inc. v. Dollar Express LLC, C.A. No. 2017-0411-AGB (Del. Ch. Nov. 21, 2017), the court addressed a motion for disqualification of counsel by an investment bank and the defendant entities who alleged that a local Delaware law firm had represented the investment bank in connection with the challenged transaction.  That same Delaware firm (“the Firm”) represents the plaintiffs in this case alleging wrongdoing regarding the challenged transaction.  The detailed facts are essential in order to grasp a complete understanding of the determinative nuances involved.  But for purposes of this short post, which focuses on the legal principles that can be applied in future cases, I will merely refer to the irreducible minimum essential facts.

Key Facts

The defendants in this case had hired Duff & Phelps to provide a solvency analysis and render an opinion concerning the issuance of a dividend. Duff & Phelps hired the Firm for the limited purpose of advising Duff & Phelps regarding Delaware issues.  The total amount of time billed on the engagement was little more than 12 hours and the Firm’s engagement was limited to advising Duff & Phelps and providing the opinion letter for them regarding the solvency analysis.  Importantly, the Firm represented Duff & Phelps and not the defendant in this action, Dollar Express.

Shortly afterwards, the Firm represented the plaintiff in the instant matter alleging fraudulent transfer claims and illegal distribution claims under 6 Del. C. § 18-607.

Several months after the suit was filed, counsel for the defendant discovered that the Firm had represented Duff & Phelps regarding the solvency analysis and rendered an opinion in connection with the dividend that was being challenged in the instant lawsuit. On the same day that the Firm was asked to withdraw, the Firm implemented an internal ethical wall between those who represented Duff & Phelps and those who were involved in the instant matter — none of whom had been engaged in both representations.

The opinion includes a detailed discussion of the steps that the Firm took to prevent any confidential information from being shared. Through an investigation by its internal IT personnel, the Firm confirmed that none of the Firm’s attorneys who worked on the Duff & Phelps matter accessed information involving the instant litigation matter.

Reasons the Firm Refused to Withdraw:

The reasons the Firm refused to withdraw included the fact that the two matters were not substantially related and that no confidential information from the prior representation was shared with the attorneys involved in the instant matter. The Firm also advised Duff & Phelps that it would not be involved in any examination of Duff & Phelps’ representatives in connection with the current litigation.  Rather, any such examination would be conducted by other counsel.  The Firm also emphasized that it denied the existence of any implied attorney-client relationship between the Firm and the defendants in the instant matter.  Duff & Phelps intervened in the current action to join in a motion to disqualify the Firm.

Applicable Law

Rule 1.9(a) of the Delaware Lawyers’ Rules of Professional Conduct provides that a lawyer who has:  (i) formally represented a client in a matter; (ii) shall not thereafter represent a new client in the same or a substantially related matter; (iii) in which that new client’s interests are materially adverse to the interests of the former client; (iv) unless the former client gives informed consent in writing. There are also impermissible conflicts that cannot be waived.  Conflicts are generally imputed to a lawyer’s entire firm under Rule 1.10(a).

The basis of the unsuccessful motion to disqualify included the following allegations: (1) There was an implied attorney-client relationship between the Firm and the defendants because the Firm received confidential information from Duff & Phelps about the defendants; (2) It would be improper for the Firm to have implicitly advised the defendants on the validity of a transaction that is challenged in the current litigation; (3) The Firm’s participation in this litigation would violate the duty of loyalty owed to Duff & Phelps; and (4) The representation of the plaintiffs in this action by the Firm would require the Firm to discredit the same work it did when it advised Duff & Phelps.

Determination of the Existence of an Implied Attorney-Client Relationship:

The basic test for determining whether contacts between a potential client and a potential lawyer create an attorney-client relationship is whether it would have been reasonable for the client to believe that the attorney was acting on its behalf as counsel. See case cited at footnote 23.  For reasons explained in the opinion, the court concluded that it would not have been reasonable for the defendants to believe that the Firm was acting as their counsel in connection with the Duff & Phelps representation.

For example, the engagement agreement between the Firm and Duff & Phelps limited the representation to Duff & Phelps. In addition, the engagement between Duff & Phelps and the defendants specified that Duff & Phelps would engage their own separate counsel.

Controlling Standard Applied by the Court in Motions to Disqualify:

The controlling factor in a motion to disqualify in Delaware is whether the “challenged conduct prejudices the fairness of the proceedings.” The Delaware Supreme Court in the case styled In Re Appeal of Infotechnology, Inc., made it clear that it is not sufficient for the trial court to find a violation of the Delaware Lawyers’ Rules of Professional Conduct.  By itself that is not sufficient to warrant disqualification of counsel from an action.

Rather, disqualification is appropriate only when the challenged conduct prejudices the fairness of the proceedings. Infotechnology, 582 A.2d 215, 216-17 (Del. 1990).  In Infotechnology, the Supreme Court held that “absent conduct that prejudicially disrupts the proceeding, trial judges have no independent jurisdiction to enforce the Rules of Professional Conduct.” See cases at footnote 33 recognizing that the high threshold for succeeding in such a motion is based in part on the concern that such motions are used as procedural weapons and are often filed for tactical reasons rather than for bona fide concerns.

The Infotechnology decision also explained that the burden of proof on a non-client litigant is to prove by clear and convincing evidence:  (1) the existence of a conflict of interest, and (2) how the conflict will prejudice the fairness of the proceedings.  In this case the court did not need to determine whether a standard less than clear and convincing would apply where the moving party is a former client as opposed to a non-client that moved for disqualification.  The court found it unnecessary to decide that issue because of its conclusion that the prejudice that would be caused to the Firm if it were disqualified outweighed any concerns of Duff & Phelps.

Additional Reasoning of the Court:

The court also based its ruling on the following additional reasoning:

  • The Firm implemented an internal ethical screen on the same day that it learned of an issue being raised about its prior representation.
  • The Firm represented to the court in an affidavit that no attorney who has entered his appearance, in this action has ever accessed information about the Duff & Phelps prior representation, and the attorneys involved in that prior representation have no involvement in the present litigation.
  • The Firm represented that it will not examine Duff & Phelps in this matter.
  • Based on the foregoing, the court was comfortable that the fairness of the proceedings has not been prejudiced and that appropriate measures are in place to insure that they will not be prejudiced in the future, citing Rohm & Haas Co. v. Dow Chem. Co., 2009 WL 445609, at *3 (Del. Ch. Feb. 12, 2009) (highlighted on these pages).
  • There was no need to determine whether Rule 1.9(a) was violated, in part because based on Supreme Court authority, the trial court did not have independent power to enforce disciplinary rules regarding attorney conduct when the challenged conduct did not prejudice the fairness of the proceedings.

Takeaway: In addition to providing the applicable standards and criteria for deciding a motion to disqualify counsel, this decision provides a useful and practical reminder of the very high bar that must be satisfied before such a “disfavored” motion will be granted.