A recent decision of the Delaware Superior Court featured an unusual ruling in Delaware: A motion to disqualify counsel was granted based on a conflict of interest under Rule of Professional Conduct 1.9, relating to prior representation of a client.

Why the Decision is Notable:

Although the facts in the 21-page decision styled Sun Life Assurance Company of Canada v. Wilmington Savings Fund Society, C.A. No. N18C-08-074  PRW-CCLD (Del. Super. Dec. 19, 2019), are somewhat unique, and not likely to be often repeated, the court’s opinion is a useful reference that should be in the toolbox of litigators because it provides copious citations to Delaware court decisions that address the standards applicable to motions to disqualify counsel based on a conflict of interest, as well as reciting the familiar and well-established “high-threshold” that must be met because motions to disqualify counsel are looked upon with disfavor.

This ruling is a reminder that it is not sufficient for purposes of disqualifying counsel that a Rule of Professional Conduct be violated. Rather, for purposes of disqualifying counsel, the conflict must be “so extreme that it calls into question the fairness of the proceeding.” See Slip op. at 4 and accompanying footnotes.  Other cases and articles on these pages dealing with motions to qualify are available via these hyperlinks.

A recent Order by the Delaware Court of Chancery restated the well-established case law that a motion to disqualify counsel that is based an alleged violation of the Delaware Lawyers’ Rules of Professional Conduct will not be granted unless it is shown by clear and convincing evidence that there is not only a violation of the DLRPC, but also the breach must be “so extreme that it calls into question the fairness or the efficiency of the administration of justice.”  Indemnity Insurance Corporation, RRG, v. Cohen, C.A. No. 8985-VCZ (Del. Ch. Apr. 22, 2019) (Order)(citing Dunlap v. State Farm Fire & Cas. Co., 2008 WL 2415043, at * 1 (Table) (Del. May 6, 2018)).  The Order added that trial courts do not have jurisdiction in Delaware to consider applications for breach of the DLRPC unless the challenged conduct prejudices the fairness of the proceedings. (citing In re Infotechnology, Inc., 582 A.2d 215, 221 (Del. 1990)).

Court’s Rationale & Key Rules Cited:

An eminently quotable passage from the Order in this case deserves to be highlighted:

“A corporation being a purely metaphysical creature, having no mind with which to think, no will with which to determine and no voice with which to speak, must depend upon the faculties of natural persons to determine for it its policies and direct the agencies through which they are to be effectuated.” 

(citing N. Assur. Co. v. Rachlin Clothes Shop, 125 A.184, 188 (Del. 1924)); see 8 Del. C. § 141(a); 18 Del. C. § 5911.  See also, DLRPC 1.13 which recognizes that an organizational entity cannot act except through its officers, directors, employees, shareholders or other constituents and that a lawyer representing an organization represents it through its duly authorized constituents. 

The court also discussed DLRPC 1.7 which provides, with exceptions not relevant here, that a lawyer shall not represent a client if the representation involves a concurrent conflict of interest, which exists if: “(1) the representation of one or more clients will be directly adverse to another client; or (2) if there is a significant risk that the representation of one or more clients will be materially limited by the lawyers’ responsibilities to another client, a former client or a third person or by personal interest of the lawyer.”

The court’s reasoning is included in the following conclusion: simply because the firm [that was the subject of the motion to disqualify] was hired by the board to represent the corporation initially, does not disqualify it from representing the corporation on behalf of a receiver appointed by the insurance commissioner.

Concluding Note:

This case involves a lengthy procedural history of prolonged litigation by the Delaware insurance commissioner due to financial improprieties by the controlling stockholder of the insurance company that was forced into a receivership by the insurance commissioner. 

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.

 In the Matter of the Rehabilitation of Indemnity Insurance Corp., C.A. No 8601-VCL (Del. Ch. Feb. 19, 2014). Takeaway: This succinct letter ruling from the Court of Chancery provides one of many examples of why a motion to disqualify counsel based on alleged violations of the Delaware Lawyers’ Rules of Professional Conduct, such as for an alleged conflict of interest based on Rule 1.9, is often a fool’s errand–at least in state court.  Other examples abound. See, e.g., prior examples here and here.

In sum, this decision made quick work of dueling motions based on the high threshold that was not met for such motions. Namely, violation of the rules of professional conduct applicable to lawyers is usually not sufficient, ipso facto, to disqualify a lawyer from representing a party in a pending matter. The same approach does not apply in other courts in other states. The reasoning in Delaware is that the agency of the Delaware Supreme Court known as the Office of Disciplinary Counsel is the proper forum where issues of violations by lawyers of the rules of legal ethics are investigated and enforced–not in the courtroom. In addition, the Court of Chancery is often skeptical of the tactical motives for filing such motions.

Stated another way, a motion to disqualify counsel based on an alleged violation of legal ethics will not prevail in Delaware unless the following standard is satisfied:

“Absent misconduct which taints the proceedings, thereby obstructing the orderly administration of justice, there is no independent right of counsel to challenge another lawyer’s alleged breach of the Rules [of legal ethics] outside of a disciplinary proceeding.” Slip op. at 3 (citation omitted). That is, a violation of the rules of professional conduct does not suffice to disqualify an attorney. Rather, the litigant “must show that the conflict prejudiced the fairness of the proceeding, not merely a violation of the Rules had occurred.” Id. (citation omitted). Clear enough?

Bottom line: Motions to disqualify counsel from representing a client in a pending matter, based on an alleged ethical violation, usually fail in Delaware state courts.

A prior Chancery decision in this case was highlighted on these pages.

Courtesy of LexisNexis and their Corporate and Securities Practice page comes a videocast in which Steve Berstler of LexisNexis tapes yours truly in a short clip that discusses the recent Delaware Chancery decision in Manning v. Vellardita, highlighted on these pages, which addresses a motion to disqualify counsel based on an argument that the movant failed to disclose in his motion for admission pro hac vice that he was a member of a firm that had represented a party adverse to his client.

Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice.

Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow.

Background

This is a summary proceeding pursuant to DGCL Section 225 (which is limited to the determination of who the valid members of the Board of Directors are, when one or more of those positions are contested.) In this matter, that determination will turn, in part, on whether the Board of ValCom, Inc. approved the terms of a loan which included the pledge of 50 million shares of stock as collateral pending the repayment of the debt. The New York law firm of Shiboleth, LLP represented ValCom in the loan transaction.

The lawyer whom defendants seek to have disqualifed and whose pro hac vice admission they seek also to have revoked (“the Non-Delaware Attorney”), did not include in his motion pro hac vice the fact that he is the head of litigation for the Shiboleth firm. Instead he listed himself on his application for admission pro hac vice merely as being with his own eponymous firm. This Non-Delaware Attorney was admitted pro hac vice to represent the plaintiffs in this matter, but the defendants only found out later by chance about his position at the Shiboleth firm.

Defendants’ Main Argument

In light of the Non-Delaware Attorney being a member of the Shiboleth firm, and the Shiboleth firm having represented ValCom in connection with the disputed loan transaction that is at the core of the present matter, defendants argued that Non-Delaware Attorney should be disqualified due to his violation of Delaware Lawyers’ Rule of Professional Conduct (“DLRPC”) Rule 1.9, regarding “Duties to Former Clients”.

Legal Analysis–Ethics Rules

Rule 1.9(a) prohibits a lawyer from representing a client in a matter adverse to a former client in the same or a “substantially related matter”. Comment 3 to DLRPC Rule 1.9 explains that matters are substantially related if there is “… a substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.” In addition, Rule 1.10 imputes such a conflict of one member of a firm to the other members of that same firm. See generally, my most recent ethics column entitled: The Moral Aspects of a Lawyers’ Fiduciary Duty.

Prerequisites for Motion to Disqualify

As previous Delaware decisions have done, the Court in this case expressed its awareness that there is a potential for abuse with motions to disqualify. Thus, the prerequisite for succeeding on a motion to disqualify is more than a showing that there has been a violation of the DLRPC. That is, there must be “clear and convincing evidence establishing a violation of the DLRPC so extreme that it calls into question the fairness or the efficiency of the administration of justice.” See footnote 6. In addition, the Court explained that a non-client third party generally will not have standing to assert such a violation unless that party proves a personal detriment….” See footnote 7. (emphasis in original).

Instructions to Non-Delaware Lawyers Admitted Pro Hac Vice

The Court recognized that the many attorneys from other states who practice before it are among the “finest attorneys in the country” from which Delaware benefits by their skill and expertise. However, the Court emphasized that:

“to maintain the value to this Court of extending the privilege of pro hac vice admission to attorneys from other jurisdictions, it is necessary that those attorneys accorded this privilege are held to a high level of conduct including, importantly, candor with the Court.”

Potential Conflict Must Be Disclosed in Pro Hac Vice Motion

Court of Chancery Rule 170 governs admissions pro hac vice but it does not explicitly require the attorney seeking admission to disclose conflicts under DLRPC Rule 1.9, but now this decision provides a warning that such a duty of disclosure exists, based on the following reasoning:

First: When an attorney seeks pro hac vice admission, a certificate must be submitted to the Court that confirms that the attorney has reviewed, and agrees to be bound by, Delaware rules.

Second: 

A duty of candor dictates that, where a colorable claim of conflict under DLRPC  Rule 1.9 exists, at a minimum facts sufficient to put the Court and opposing counsel on notice should be disclosed in the Rule 170 application.

Third: “The duty of an applicant for admission pro hac vice, however, goes beyond simply not affirmatively attempting to mislead the Court. Here, [the Non-Delaware Attorney] ignored the obvious potential conflict and structured his application in such a way that the conflict was not revealed to the Court and the other parties. [Non-Delaware Attorney] has failed to make the kind of full and candid disclosure this Court expects of attorneys practicing within its jurisdiction.”

See generally, overview of Delaware pro hac vice standards compiled by the former head of the arm of the Delaware Supreme Court that enforces Delaware legal ethics, The Honorable Andrea L. Rocanelli.

Bottom Line

The Court determined that it need not decide whether a conflict exists because the defendants did not meet their burden to show “a violation so extreme that it calls into question the fairness or efficiency of this proceeding.” But because the Court wanted to send a message that such lack of candor would not be condoned, the Court referred this matter to the Office of Disciplinary Counsel in Delaware and the corresponding legal ethics enforcement agency in New York, the home state of the Non-Delaware Attorney, for any action those enforcement agencies deemed appropriate.

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.

Air Products and Chemicals, Inc. v. Airgas, Inc., No. 5249 (Del. Ch., March 5, 2010), transcript of ruling from the bench available here. For anyone who wants to know the latest iteration of law from the Delaware Court of Chancery on motions seeking to disqualify litigation counsel based on alleged conflicts of interest, this short ruling is required reading. In Delaware, such rulings from the bench can still be cited in briefs, by reference to the transcript.

We previously wrote about this high-stakes litigation concerning an unwelcomed takeover attempt and the ability of the target to "just say no". A sideshow of sorts has developed regarding the effort of the target to disqualify the distinguished counsel of the suitor, who is using the Cravath firm.

 Yesterday, Chancellor Chandler ruled from the bench that he would not disqualify the Cravath firm from serving as counsel for Air Products despite allegations by Airgas that Cravath had represented Airgas in related matters just before, allegedly, Cravath dropped Airgas in order to represent Air Products. Students of Delaware law in this area know that efforts to disqualify counsel in Delaware have not had a high success rate in the recent past. See, e.g., here (involving battle between Rohm and Haas v. Dow), here , here, here (despite possible violation of rule, no impact on the integrity of the legal proceeding), and here, for recent Delaware decisions in which the court has denied motions to disqualify counsel. For comparison purposes, see here  for a decision by a federal court in California based on different facts.

The denials of these motions should not be viewed as indicating that the Delaware courts do not take the rules of professional responsibility seriously. Rather, it should be seen as a manifestation of the concern that the courts have that litigators may try to use the Rules of Professional Conduct as a litigation tool. The argument is that transgressions of the ethics rules applicable to lawyers generally should be handled by the arm of the Supreme Court, which in Delaware is called Disciplinary Counsel, which is primarily responsible for the enforcement of those rules when alleged violations of those rules do not meet the high threshold of interfering with the administration of justice in a particular lawsuit.

Despite four separate ethics experts opining in this case, on behalf of each of the parties, on the requirements of Rules 1.7 and 1.9 of the Rules of Professional Conduct, the Court did not need to decide that issue.

Though the ruling from the bench is in the form of a transcript, which in Delaware can still be cited in briefs, it reads as if it is a carefully reasoned opinion (which it is). One should read the whole thing to appreciate it fully at the above link, but a few money quotes follow:

Before this Court may enter the Draconian order of disqualification, a moving party seeking that drastic relief must come forward with clear and convincing evidence establishing a violation of the Delaware Rules of Professional Conduct so extreme that it calls into question the fairness or the efficiency of the administration of justice. That is the holding of our Supreme Court in a case styled In Re: Dunlap.

Like Dow Chemical and the Rohm & Haas case, Airgas here has not demonstrated even simply persuasively, let alone clearly and convincingly, that it would be disadvantaged by the presence of its former counsel as advocate for its opponent, Air Products.

The Court found that Cravath did not have access to confidential information that it could use against Airgas in this case. Moreover, the Court observed that ethical walls had been established within the Cravath firm to separate those lawyers that had worked on the prior corporate matters from the lawyers working on the litigation. The Chancellor reasoned further that:

Given the absence of any credible threat of prejudice to Airgas from Cravath’s continued participation in this lawsuit, I think the threat of harm to Air Products from disqualification far outweighs the threat of harm to Airgas from a failure to disqualify.

Postscript. The New York Times’ DealBook blog wrote about yesterday’s decision here.

Boston Scientific Corporation v. Johnson & Johnson, Inc., D.Del., Nos. 07-333; 07-348; 07-409-SLR (Aug. 25, 2009), read opinion here.

This is a memorandum opinion of the U.S. District Court for the District of Delaware, following an evidentiary hearing, in which the Court denies a Motion to Disqualify the law firm of Howrey LLP from representing plaintiffs Boston Scientific Corporation and Boston Scientific Scimed, Inc. in these referenced cases.

Background

Wyeth is a global pharmaceutical company with multiple divisions and subsidiaries. It sought the disqualification of the Howrey firm, which represents plaintiff Boston Scientific against Wyeth in the instant Delaware federal patent litigation, even though a European office of the Howrey firm represents Wyeth in a separate and unrelated patent matter in Europe. The Court discussed several different subsidiaries in the U.S. and in Europe that use very similar variations on the name Wyeth Pharmaceutical, such as Wyeth Pharmaceuticals, Inc. and Wyeth Pharmaceuticals Limited. There was no question that Howrey has handled several matters for what the Court referred to as the “Wyeth family of companies” between 2003 and 2009. However, the Court observed that there was some confusion about exactly which Wyeth entity or division Howrey had been representing, and the Court found that Wyeth contributed to that confusion because for example, in-house attorneys would supervise the work of attorneys in various subsidiaries. Howrey contributed to the confusion by failing to distribute client representation memoranda in each matter it handled for Wyeth. Importantly, however, the Howrey attorneys in the U.S., none of whom worked on the adverse matter in Europe, maintained an ethical wall and the instant case compared to the matter in Europe were completely unrelated.

Discussion

The Court summarized the arguments on which the instant Motion to Disqualify Howrey was based, as follows: (i) Attorney conduct before the Court is governed by the Court’s local rules; (ii) The Court’s local rules provide that attorneys must adhere to the American Bar Association’s Model Rules of Professional Conduct; (iii) The Model Rules provide that an attorney shall not, without consent, represent a client if doing so places the attorney in a position directly adverse to another client; (iv) Howrey’s representation of plaintiffs in the instant cases violates the Model Rules because it places Howrey, without the consent of Wyeth, in a position directly adverse to Wyeth, which is a client of Howrey in another matter; and (v) The appropriate remedy in these circumstances is disqualification. The Court agrees with Wyeth’s arguments only with respect to (i) through (iv), but not with the last argument regarding the need for disqualification.

Review of Applicable Law

The Court referred to Local Rule 83.6(d) of the United States District Court for the District of Delaware as the starting point in its analysis for the application of the ABA’s Model Rules as the governing standards for attorneys admitted to practice before the Court. The Court recognized its power to disqualify attorneys for violation of the Model Rules, but nevertheless observed that such motions to disqualify are generally disfavored. See U.S. v. Miller, 624 F.2d 1198, 1201 (3d Cir. 1980); Integrated Health Services of Cliff Manor, Inc. v. THCI, Co. LLC, 327 B.R. 200, 204 (D.Del. 2005). Moreover, the Court emphasized that disqualification was never automatic (citing Elonex I.P. Holdings, Ltd. v. Apple Computer, Inc., 140 Second F.Supp. 2d 579, 583 (D.Del. 2001)) (See  here for a short article I wrote some time ago about another case that discussed the issues addressed in the Elonex case and cited to the decision).

Violation of Model Rule 1.7

In sum, the Court found that Howrey did violate Model Rule 1.7, but that violation did not warrant disqualification in this case.

The Court summarized the requirements of the relevant parts of Model Rule 1.7 as follows: Rule 1.7(b) provides that a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. Rule 1.7(a) provides that a “concurrent conflict of interest” occurs where the representation of one client will be directly adverse to the other client. There was no dispute in this case that the representation by Howrey of the plaintiffs in this case places it in a position directly adverse to Wyeth. The Court also found that through one of Howrey’s European offices, Wyeth was a client of Howrey.

The U.S. District Court for the District of Delaware in this decision relied on Delaware Chancery Court cases for the Delaware law which recognizes that in the absence of an express contract or a formal retainer agreement evidencing an attorney-client relationship, courts “look at the contacts between the potential client and its potential lawyers to determine whether it would have been reasonable for the ‘client’ to believe that the attorney was acting on its behalf as counsel.” See, e.g., PharmAthen, Inc. v. SIGA Technologies, Inc., 2009 WL 2031793, * 1 (Del. Ch. July 10, 2009) (See summary of that decision on this blog here).

Whether Disqualification Is Appropriate In This Case

Despite the Court’s finding that Model Rule 1.7 was violated by Howrey, the Court nonetheless concluded that disqualification was not an appropriate remedy under the circumstances. The Court reasoned, based on Elonex, supra, that despite the concurrent representations by Howrey in unrelated matters, they were “being done out of different offices and different cities” and were being done with an ethical wall in place between the two matters. See 142 F.Supp. 2d at 583-84.

Importantly, the Court added that the failure of Howrey to comply with Model Rule 1.7 was “to a significant degree, due to Wyeth’s conduct. Among other things, Wyeth’s naming conventions, its use of the same in-house attorneys on matters involving different subsidiaries without consistently identifying to Howrey which entity those in-house attorneys were representing, and the willingness of it and its subsidiaries to receive billing invoices for matters on which they were not directly engaged with Howrey, together created significant confusion for Howrey as to which entity or entities it was representing, confusion which is evident from Howrey’s timesheets, its mailing of billing invoices, and the averments of its attorneys in Europe. Wyeth should not now benefit from such obfuscatory conduct.” In closing, the Court noted that it was aware of case law in other jurisdictions suggesting that a violation of Model Rule 1.7 should result in disqualification, but the Court did not find those decisions persuasive.