BASIC PRINCIPLES APPLICABLE TO CONFLICTS BETWEEN LAW FIRMS AND CORPORATE CLIENTS

I. Introduction

The following summarizes some of the key issues pertaining to the relationship between in-house legal departments and the law firms they retain. Specifically, this memo discusses advance conflict waivers, actions against subsidiaries and affiliates, and the effect of lateral moves as set forth in the Model Rules of Professional Conduct (“Model Rules”) and surrounding guidance.

II. Discussion

Advance Conflict Waivers

• The Model Rules provide the framework for evaluating whether a conflict of interest exists among current clients, and if so, whether that conflict may be waived. They note that a waiver requires “informed consent”.1

• The effectiveness of an advance waiver turns on the degree to which the client's consent to the conflict is deemed to be informed. In an advance waiver situation:

o The client should be informed of the types of possible future adverse representation that the lawyer envisions, as well as the types of clients and matters that may present such conflicts.

o The client should be informed of any “screening” measures that will be undertaken.

o The appropriateness and effectiveness of any advance waiver may turn on the “sophistication and experience” of the client.2

• The Model Rules support the likely validity of an open-ended informed consent if the client is an experienced user of legal services, particularly if the consent is limited to matters not substantially related to the subject of the prior representation, thus limiting the risk of misuse of confidential information.

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• Texas diverges significantly from the Model Rules by incorporating a substantial relationship test into the analysis of what constitutes a conflict.

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• The trend is that broad advance waivers are becoming more likely to be upheld – at least where the consenting entity is a substantial corporation with an in-house legal

Accordingly, the principal subject of most advance waivers – consent to be adverse in unrelated matters – is obviated by the Texas rule. Nevertheless, federal courts do not apply the Texas rule.

1 Model Rule 1.7. 2 (Comment 22 to Model Rule 1.7). “Sophistication and experience” are not defined by the Model Rules and are generally interpreted on a case by case basis within each court. 3 ABA Formal Opinion 05-436. 4 Texas Disciplinary Rules of Professional Conduct (TDRPC) Rule 1.06. This rule is unique among the 50 states.

department, as in Galderma.5

o Galderma was a highly sophisticated client with numerous legal matters and outside law firms engaged on those matters.

The Northern District found Galderma’s consent to be informed and therefore upheld based on the following:

o Galderma was represented by independent legal counsel (an in-house legal department and a general counsel with over 20 years of experience in law).

o Even though the waiver was general and open-ended, it provided a course of conduct by which the parties could manage any future conflicts.

Actions Against Affiliated Companies

• Here the key conflict issue is whether a law firm, while representing one entity in a corporate group, can simultaneously sue another entity in that group without obtaining client consent. The issue is made very complex by the infinite variety of arrangements that corporate groups have with their affiliates. Many times an outside law firm has only limited information about the relationships between a client and its corporate affiliates.

• A lawyer shall not become involved in “representing differing interests.”6

• A lawyer who represents a corporate client is not necessarily barred from a representation that is adverse to a corporate affiliate of that client in an unrelated matter.

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• Factors to be considered in determining whether there is a material conflict are:

o The lawyer has an understanding with the client that he will avoid representation adverse to affiliates.

o The conflicting relationships are likely to adversely affect the lawyer’s exercise of professional judgment.

o The circumstances are such that the client’s affiliate should also be treated as a client.8

• Given the ambiguities inherent in these situations, law firms often seek a provision in engagement letters that specifies that only certain corporate entities are the client and there is no attorney-client relationship with other corporate affiliates. Clients often seek a provision that all corporate affiliates must be treated as the client.

• Case law varies widely and often turns on particular facts either as to the language of the engagement letter or as to the particular corporate structure and interrelationships between the particular corporate entities involved in the dispute.

• Illustrative cases going both ways, including some of the key facts in each, follow:

5 Galderma Laboratories, L.P. v. Actavis Mid Atlantic LLC. 6 Model Rule 1.7. 7 ABA Formal Opinion 95-390. 8 Comment 34 to Model Rule 1.7.

o Counsel not disqualified. Boston Scientific Corp. v. Johnson & Johnson, Inc. (unrelated matters, done out of different offices in different cities, ethical wall in place; holding that any confusion as to which entity the law firm represented was caused by the client and it should not be permitted to take advantage of confusion it created); Brooklyn Navy Yard Cogeneration Partners v. PMNC, (allegedly conflicting matter involved highly specialized work in the Russian Federation, done in Russian office, little risk of misuse of confidential information).

o Counsel disqualified. Discotrade Ltd. v. Wyeth-Ayerst Int’l, Inc. (same parent company, common directors and senior officers, shared computer system, e-mail system, travel department, health plan, common marketing materials); GSI Commerce Solutions, Inc. v. BabyCenter, L.L.C. (language of engagement letter attempting to limit representation to one entity held inconsistent and insufficient; representation was of parent while suit against subsidiary inherently impacted parent’s financial interest); Honeywell Int’l Inc. v. Philips Lumileds Lighting Co. (affiliates shared common legal department, common management, computer networks and marketing; the law firm had broad access to corporate confidential information without regard to corporate boundaries).

Lateral Moves

• When a law firm hires a lateral attorney, the key conflict issue arises when the lateral has worked at his prior firm on an active matter in which the new firm represents an adverse party.

• If the lateral possesses confidential information relevant to the matter, is his knowledge imputed throughout his new firm or can the law firm, without obtaining client consent, unilaterally set up an ethical “screen” to avoid the imputation?

• The Model Rules permit the unilateral screening of a lawyer who moves laterally from one private law firm to another to avoid firm-wide imputation and potential disqualification.9

• 22 states, including Texas, have not adopted the Model Rules on unilateral screening.

Besides screening, the hiring firm must notify the lawyer’s ex-client of the conflict and screening procedures and must exclude the lawyer from receiving fees from the matter.

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• The Second Circuit has adopted a test of “trial taint,” where the hiring firm is given the opportunity to prove that the lateral lawyer has been sufficiently screened as to prevent any undermining of the integrity of the trial process.

In the 22 states where firm-wide imputation of a new lawyer’s knowledge cannot be avoided without client consent, courts still take different positions as to the standard for disqualification of the new firm.

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9 ABA Report 109, amending Rule 1.10.

Meanwhile, both state and federal

10 TDRPC Rule 1.09, Comment 5. 11 Hempstead Video, Inc. v. Village of Valley Stream.

courts in California apply a strict rule of imputation and disqualification absent client consent.12

• A law firm can often avoid the consequences of hiring an “infected” lateral by detecting the conflict before completing the hire and seeking consent, which will often be granted. After the hiring process is completed, it is generally much more difficult to obtain consent, since at that point withholding of consent has become a valuable tactical chip.

12 J2 Global Communications Knc. V. Captaris Inc.

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UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

GALDERMA LABORATORIES, L.P., GALDERMA S.A., and GALDERMA RESEARCH & DEVELOPMENT, S.N.C., Plaintiffs, v. ACTAVIS MID ATLANTIC LLC, Defendant.

§ § § § § § § § § § § §

No. 3:12-cv-2038-K

MEMORANDUM OPINION AND ORDER

Before the Court is Plaintiffs Galderma Laboratories, L.P., Galderma S.A., and

Galderma Research & Development, S.N.C.’s (collectively “Galderma”) Motion to

Disqualify Vinson & Elkins, LLP (Doc. No. 18). The Court conducted a hearing on

this motion on October 28, 2012. The Court has reviewed the motion, the parties’

briefs, the appendices and supplemental appendices. Additionally, the Court has

reviewed the Executive Summaries filed by each party (Docs. No. 54 & 55), has

considered the parties’ arguments at the hearing on October 28, 2012, and the

applicable law. The Court DENIES Galderma’s Motion (Doc. No. 18) because

Galderma gave informed consent to Vinson & Elkins’s (“V&E”) representation of

clients directly adverse to Galderma in matters that are not substantially related to

V&E’s representation of Galderma.

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I. Factual Background

Galderma is a worldwide leader in the research, development, and

manufacturing of branded dermatological products. Galderma is headquartered in

Fort Worth where it employs approximately 240 people. Galderma and its affiliates

have operations around the world, employing thousands of people and reporting

worldwide sales of 1.4 billion euros for the year 2011 alone.

As a complex, global company, Galderma routinely encounters legal issues and

the legal system. Galderma has its own legal department to address these issues. The

legal department is headed by its Vice President and General Counsel, Quinton

Cassady. Mr. Cassady is a lawyer who has practiced law for over 20 years and has

been general counsel for Galderma for over 10 of those years. In addition to an in-

house legal department, Galderma, through Mr. Cassady, frequently engages outside

counsel to assist with a wide range of issues. Over the past 10 years, Galderma has

been represented by large law firms including DLA Piper, Paul Hastings, and Vinson

& Elkins, LLP (“V&E”). Galderma also engages smaller law firms as needed.

In 2003, Galderma and V&E began its attorney-client relationship. V&E sent

Galderma an engagement letter. As part of the engagement letter, V&E sought

Galderma’s consent to broadly waive future conflicts of interest, subject to specific

limitations identified in the engagement letter. The waiver contained in the

engagement letter is as follows:

We understand and agree that this is not an exclusive agreement, and you are free to retain any other counsel of your choosing. We recognize

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that we shall be disqualified from representing any other client with interest materially and directly adverse to yours (i) in any matter which is substantially related to our representation of you and (ii) with respect to any matter where there is a reasonable probability that confidential information you furnished to us could be used to your disadvantage. You understand and agree that, with those exceptions, we are free to represent other clients, including clients whose interests may conflict with ours in litigation, business transactions, or other legal matters. You agree that our representing you in this matter will not prevent or disqualify us from representing clients adverse to you in other matters and that you consent in advance to our undertaking such adverse representations.

On behalf of Galderma, Mr. Cassady signed that he understood and, on behalf of

Galderma, agreed to the terms and conditions of engaging V&E, including the waiver

of future conflicts of interest.

Beginning in 2003, Galderma engaged V&E for legal advice relating to

employee benefit plans, Galderma’s 401(k) plan, health care benefit programs,

employment issues, and other issues relating to the administration of such programs.

V&E continued to advise Galderma on employment and benefits issues into July of

2012.

In June 2012, while V&E was advising Galderma on employment issues,

Galderma, represented by DLA Piper and Munck Wilson Mandala, filed this

intellectual property lawsuit against Actavis Mid Atlantic, LLC (“Actavis”). At that

time, V&E had already represented various Actavis entities in intellectual property

matters for six years. Without any additional communication to Galderma, V&E

began working on this matter for Actavis, and in July 2012, V&E filed Actavis’s

answer and counterclaims.

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In July 2012, Galderma received a copy of Actavis’s answer and counterclaims,

and became aware that V&E was representing Actavis. After brief discussions in late

July between Mr. Cassady and V&E, Galderma asked V&E to withdraw from

representing Actavis. On August 6, 2012, V&E chose to terminate its attorney-client

relationship with Galderma rather than Actavis. On that same day, V&E stated that

it would not withdraw from representing Actavis, because Galderma had consented to

V&E representing adverse parties in litigation when it signed the waiver of future

conflicts in the 2003 engagement letter. Galderma then brought this motion to

disqualify.

II. Galderma’s Motion to Disqualify

Galderma now moves to disqualify V&E from representing Actavis in the

underlying patent litigation. The briefing of the parties has been wide-ranging, but at

oral arguments, counsel acknowledged that the crux of the issue is this: whether or

not Galderama, a sophisticated client, represented by in-house counsel gave informed

consent when it agreed to a general, open-ended waiver of future conflicts of interest

in V&E’s 2003 engagement letter. Galderma argues that its consent was not

“informed consent” when its own, in-house lawyer signed the agreement on its behalf

because V&E did not advise Galderma of any specifics with regards to what future

conflicts Galderma may be waiving. V&E argues that in this case, because Galderma

is a highly sophisticated client who is a regular user of legal services and was

represented by its own counsel, the waiver language is reasonably adequate to advise

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Galderma of the material risks of waiving future conflicts, despite being general and

open-ended.

A. Legal Framework for Resolving Ethics Questions

Fifth Circuit precedent requires the court to consider several relevant ethical

standards in determining whether there has been an ethical violation.

Disqualification cases are guided by state and national ethical standards adopted by

the Fifth Circuit. In re American Airlines, 972 F.2d 605, 610 (5th Cir. 1992). In the

Fifth Circuit, the source for the standards of the profession has been the canons of

ethics developed by the American Bar Association. In re Dresser, 972 F.2d at 543.

Additionally, consideration of the Texas Disciplinary Rules of Professional Conduct is

also necessary, because they govern attorneys practicing in Texas generally. See FDIC

v. U.S. Fire Ins. Co., 50 F.3d 1304, 1312 (5th Cir. 1995). The Court also considers,

when applicable, local rules promulgated by the local court itself. Id. Because

motions to disqualify are substantive motions, which affect the rights of the parties, a

party cannot be deprived of its right to counsel on the basis of local rules alone. In re

Dresser, 972 F.2d at 543.

The Court must give careful consideration to motions to disqualify because of

the potential for abuse. Disqualification motions may be used as “procedural

weapons” to advance purely tactical purposes. In re American Airlines, Inc., 972 F.2d at

611. A disqualification inquiry, particularly when instigated by an opponent,

presents a palpable risk of unfairly denying a party the counsel of his choosing. U.S.

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Fire Ins. Co., 50 F.3d at 1316. When the Model Rules are invoked as procedural

weapons, the party subverts the purpose of the ethical rules. MODEL RULES OF PROF’L

CONDUCT, Scope, cmt. 20 (2010).

When a client hires multiple firms, that creates inadvertent problems for the

ethical system in at least two ways. One is when the client hires every large and small

firm possible to prevent any local firm from being on the other side. The second

problem happens in cases such as this, where a client hires a firm for work that is

important, but small in size compared to some unrelated large matters. The ABA

recognized this problem may occur:

When corporate clients with multiple operating divisions hire tens if not hundreds of law firms, the idea that, for example, a corporation in Miami retaining the Florida office of a national law firm to negotiate a lease should preclude that firm’s New York office from taking an adverse position in a totally unrelated commercial dispute against another division of the same corporation strikes some as placing unreasonable limitations on the opportunities of both clients and lawyers. ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-372 (1993) (withdrawn by ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 05-436 (2005)).

Sophisticated clients can retain their adversary’s counsel of choice in unrelated

matters while attempting to invalidate prospective waivers of future conflicts

when that counsel later becomes adverse to them. Large firms would never be

able to take on small, specialized matters for a client unless the firms could

reasonably protect against this potential abuse by preserving their ability to

practice in other areas where the client has chosen to retain different counsel.

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B. Ethical Standards for Waiver of Future Conflicts With the ABA canons of ethics as a guide, informed by state and local rules,

the Court considers the ethical standards relevant to this specific case.

As a general rule, a lawyer is not allowed to sue his own client, which he

concurrently represents in other matters. In re Dresser, 972 F.2d at 540. This holding

mirrors the position of the ABA Model Rules of Professional Conduct (“Model

rules”), which provide that, “[e]xcept as provided in paragraph (b) a lawyer shall not

represent a client if the representation involves a concurrent conflict of interest.”

MODEL RULES OF PROF’L CONDUCT R. 1.7 (2010). Rule 1.7(b) creates an exception.

Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing. Id. R. 1.7(b).

“Informed consent” denotes the agreement by a person to a proposed

course of conduct after the lawyer has communicated adequate information

and explanation about the material risks of and reasonably available

alternatives to the proposed course of conduct. Id. R. 1.0(e).

No Northern District rule speaks directly to the issues raised in this case

– informed consent and unrelated conflicts of interest pertaining to current

clients. Local rules do require that all lawyers who practice before the

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Northern District of Texas follow the Texas Disciplinary Rules of Professional

Conduct. Loc. R. 83.8(e). The Texas rule on conflicts of interest involving

current clients is more lenient than the Model Rules. See Tex. Disciplinary

Rules Prof’l Conduct R. 1.06 reprinted in Tex. Gov’t Code Ann., tit. 2, subtit.

G, app. A (West 2005). That rule permits representing clients against current

clients so long as the two matters are not substantially related or reasonably

appears to be or become adversely limited. Id. Under the Texas rule, there is

no need for informed consent. See id. A lawyer representing an enterprise with

diverse operations may accept employment as an advocate against the

enterprise in a matter unrelated to any matter being handled for the enterprise.

Id., Cmt 11.

In a past case, the Fifth Circuit noted that the dissimilar, arguably

contradictory standards set by the Model Rules and the Texas Rules requires a

court to weigh the relative merits of each of the various competing

disqualification rules as the court proceeds through each step of the analysis.

US Fire Ins. Co., 50 F.3d at 1312. Unlike US Fire Ins. Co., it is undisputed that

there is a conflict of interest. The difference between the Model Rule and the

Texas Rule goes to the central issue in this case, the need for informed consent.

To give weight to the Texas Rule over the Model Rule in this case would vitiate

the cornerstone of the national standard, the requirement of informed consent.

Thus, while the Court has considered the applicable Texas Rules, the Model

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Rules and authority related to them must control in determining Galderma’s

motion to disqualify. See In re Dresser, 972 F.2d at 543–45 (reversing the

district court for applying Texas Disciplinary Rules instead of the more

restrictive national standards).

Under the Model Rules, a client’s waiver of future conflicts is valid when

the client gives informed consent. MODEL RULES OF PROF’L CONDUCT R.

1.7(b) (2010). Clearly, all clients, even the most sophisticated, must give

informed consent. Id. What disclosure from an attorney is reasonably

adequate to allow for informed consent for a particular client is not clear. The

Model Rules, the Comments to the Model Rules, and the Formal Opinions of

the ABA’s Committee on Ethics and Professional Responsibility outline a

number of factors for courts to consider in determining whether a client has

given informed consent to waive future conflicts of interest.

1. ABA Model Rules and Applicable Comments

One source for determining how to apply the Model Rules is the

comments to the Model Rules. The comments do not add obligations to the

Model Rules but provide guidance for practicing in compliance with the Rules.

Id. Preamble, cmt. 14. The text of each Rule is authoritative, but the

Comments are intended as guides to interpretation. Id. Preamble, cmt. 21.

The Comments to Rule 1.7, governing current client conflicts, recognize

that a lawyer may properly request a client to waive future conflicts, subject to

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the test in Rule 1.7(b). Id. 1.7, cmt. 22. The effectiveness of the waiver is

generally determined by the extent to which the client reasonably understands

the material risk that the waiver entails. Id.

When dealing with a waiver of future conflicts, a specific waiver of a

particular type of conflict has the greatest likelihood of being effective. Id. A

general and open-ended waiver will ordinarily be ineffective, because the client

will likely not have understood the material risks involved. Id. Consent using

a general or open-ended waiver is not per se ineffective, but considering the

entire spectrum of clients, a general and open-ended waiver is likely to be

ineffective because the vast majority of clients are not in a position to

understand the material risks from the open-ended language of the waiver

itself.

The same comment highlights that consent to a general, open-ended

waiver is more likely to be effective when dealing with a narrow set of

circumstances. If the client is an experienced user of the legal services involved

and is reasonably informed regarding the risk that a conflict may arise, that

consent is more likely to be effective. Id. The consent is particularly likely to

be effective when the client is independently represented by other counsel in

giving consent and the consent is limited to future conflicts unrelated to the

subject of the representation. Id.

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The comments to Rule 1.0, which defines “informed consent,” mirror

the comments to Rule 1.7. For consent to be “informed,” the lawyer must take

reasonable steps to ensure that the client or other person possesses information

reasonably adequate to make an informed decision. Id. R. 1.0, cmt. 6.

Ordinarily, this requires communication that includes a disclosure of the facts

and circumstances giving rise to the situation, any explanation reasonably

necessary to inform the client or other person of the material advantages and

disadvantages of the proposed course of conduct and a discussion of the

client’s or other person’s options and alternatives. Id. The more experienced

the client is in legal matters generally and in making decisions of the type

involved, the less information and explanation is needed for a client’s consent

to be informed. Id. When dealing with a client who is independently

represented by other counsel in giving the consent, generally the client should

be assumed to have given informed consent. Id. Just like Rule 1.7, Rule 1.0

shows there is a vast difference in what type of disclosure is necessary to ensure

that a client has reasonably adequate information to make an informed

decision, depending on the sophistication of the client and, importantly,

whether or not the client is represented by an independent lawyer.

2. ABA Committee on Ethics and Professional Responsibility Formal Ethics Opinions

The ABA’s Standing Committee on Ethics and Professional

Responsibility has also issued a formal ethics opinion dealing expressly with

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informed consent to future conflicts. ABA Comm. on Ethics & Prof’l

Responsibility, Formal Op. 05-436 (2005) [hereinafter ABA Formal Op. 05-

436]. As amended in February 2002, Rule 1.7 permits a lawyer to obtain

effective informed consent to a wider range of future conflicts than would have

been possible under the Model Rules prior to their amendment. Id. Prior to

the 2002 Amendment of the Model Rules, informed consent was limited to

circumstances in which the lawyer was able to and did identify the potential

party or class of parties that may be represented in the future matter. Id.; ABA

Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-372 (1993)

(withdrawn) [hereinafter ABA Formal Op. 93-372]. Additionally, informed

consent may have been limited further by the need to identify the nature of

the likely future matter. ABA Formal Op. 05-436; ABA Formal Op. 93-372.

Relying on Comment 22, the Committee opined that, following the

amendment, open-ended, general informed consent was likely to be valid if the

client is an experienced user of legal services. ABA Formal Op. 05-436. The

opinion gave significant weight to the sophistication of the client and its use of

independent counsel, factors which previously had not been relevant to

informed consent. See ABA Formal Op. 05-436 (Opinion 93-372 does not

vary its conclusions as to the likely effectiveness of informed consent to future

conflicts when the client is an experienced user of legal services or has had the

opportunity to be represented by independent counsel in relation to such

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consent). The Committee concluded that because Comment 22 supported the

validity of a general, open-ended waiver in particular circumstances, the limits

on effective consent established in ABA Formal Opinion 93-372 were no

longer consistent with the Model Rules. ABA Formal Op. 05-436.

C. Burden of Proof

On a motion to disqualify, the movant bears the ultimate burden of

proof. Galderma must establish that there is a conflict of interest under the

applicable ethics standards and if so, that disqualification is the proper remedy.

See Forsyth v. Barr, 19 F.3d 1527, 1546 (placing the burden of establishing a

conflict on the client seeking disqualification). V&E does not dispute the

concurrent representation of Galderma and Actavis establishes a conflict of

interest under the Model Rules. V&E argues that Galderma gave informed

consent for V&E to represent clients adverse to it in litigation, which waives

any right to claim a conflict of interest. Absent informed consent, there is no

question that V&E’s contemporaneous representation of Actavis and Galderma

is a current client conflict on an unrelated matter. See In re Dresser, 972 F.2d at

545; MODEL RULES OF PROF’L CONDUCT R. 1.7 (2010).

With regards to allocating the burden of proof, the issue of “informed

consent” is similar to the issue of exceptional circumstances that the court

addressed in In re Dresser. See In re Dresser, 972 F.2d at 545. On the issue of

exceptional circumstances, the court noted that it would be the attorney’s

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burden to show a reason why the court should allow the otherwise

impermissible dual representation. Id. Other courts considering informed

consent in this context have also concluded that shifting the burden is

appropriate, so that the attorney bears the burden of showing informed

consent. See Celgene Corp. v. KV Pharmaceutical Co., No. 07-4819, 2008 WL

2937415, at *6 (D.N.J. July 29, 2008); El Camino Res., Ltd. V. Huntington Nat’l

Bank, 623 F. Supp. 2d 863, 869 (W.D. Mich. 2007). Because, absent

informed consent, there is no question that V&E’s contemporaneous

representation of Actavis and Galderma is a current client conflict on an

unrelated matter, Galderma need prove nothing more to establish a violation

of Model Rule 1.7. V&E has raised the issue of informed consent in response

to the otherwise established violation. Because V&E has raised the issue in its

defense, the Court concludes that V&E has the burden to show that Galderma

gave informed consent. Because the Court concludes that Galderma gave

informed consent, the Court need not address whether Galderma has proved

that disqualification of V&E is warranted.

D. Whether or Not Galderma Gave Informed Consent to the Waiver of Future Conflicts

To meet its burden of showing informed consent, V&E must show that it

provided reasonably adequate information for Galderma to understand the material

risks of waiving future conflicts of interest. MODEL RULES OF PROF’L CONDUCT R.

1.0, cmt. 6 (2010). Two related questions in this test form the analysis. The first

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question is whether the information disclosed is reasonably adequate for a client to

form informed consent. If the waiver does, the second question is, whether or not the

disclosure is reasonably adequate for the particular client involved in this case. The

focus of the first question is on what information is being disclosed, and the focus of

the second question is on circumstances pertaining to the client.

1. Whether V&E’s Disclosure Is Reasonably Adequate for a Client to Form Informed Consent

Rule 1.0 provides three basic factors to help determine whether a disclosure is

reasonably adequate to allow for informed consent. See id, 1.0(e). Rule 1.0(e)

identifies that informed consent is characterized by: 1) agreement to a proposed

course of conduct, 2) after the lawyer has communicated adequate information and

explanation about the material risks, and 3) the lawyer has proposed reasonably

available alternatives to the proposed course of conduct. Id. The language of the

agreement is a primary source for determining whether or not a particular client’s

consent is informed. See Celgene Corp., 2008 WL 2937415, at *8 (July 29, 2008

D.N.J.).

The waiver language at issue in this case is found in V&E’s 2003 engagement

letter. First, the 2003 engagement letter identifies a course of conduct with regard to

concurrent conflicts of interest. Second, the engagement letter includes an

explanation of the material risk in waiving future conflicts of interest. Third, the

letter explains an alternative course of conduct for Galderma. All of these favor a

finding that Galderma’s agreement manifested informed consent.

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First, the Court examines the language for whether or not the parties agreed to

a course of conduct with regard to conflicts of interest. The letter, in relevant part,

states:

We recognize that we shall be disqualified from representing any other client with interests materially and directly adverse to yours (i) in any matter which is substantially related to our representation of you and (ii) with respect to any matter where there is a reasonable probability that confidential information you furnished to us could be used to your disadvantage. You understand and agree that, with those exceptions, we are free to represent other clients, including clients whose interests may conflict with yours in litigation, business transactions, or other legal matters.

These sentences, the bulk of the waiver language, identify a course of conduct for the

parties. The course of conduct identified is that V&E is given wide ranging freedom

to represent other clients, including those whose interests conflict with Galderma.

The outer boundaries of the parties agreed course of conduct is defined in the

previous sentence. Despite V&E’s freedom to represent other clients with conflicting

interests, V&E would not be able to represent a client in a material and directly

adverse manner where the adverse representation is substantially related to the

representation of Galderma, or there is a reasonable probability that confidential

information Galderma furnished could be used to its disadvantage. The course of

conduct identified in the waiver language provides for broad freedom for V&E to

represent clients with whom it would otherwise have a conflict of interest, limited by

specifically identified situations.

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Galderma argues the waiver is open-ended and vague, which makes it

unenforceable. First, an open-ended waiver is not per se unenforceable. See MODEL

RULES OF PROF’L CONDUCT R. 1.7, cmt. 22 (2010) (allowing for the validity of open-

ended waivers). Second, simply because a waiver is general, does not mean it is

vague. The waiver language in the contract signed by Galderma provides a

framework for determining in the future, when a conflict arises, whether or not V&E

will be disqualified.

Galderma maintains that the provisions of the waiver must be more specific so

that a person who reads the waiver can know whether the parties anticipated a

particular party or a particular type of legal matter. Naming a potential party and the

nature of a future matter were requirements identified by the ABA Committee on

Ethics prior to the 2002 amendments. ABA Formal Ethics Op. 93-372. The

amendments, for the first time specifically included guidance on informed consent to

future conflicts of interest. ABA Formal Ethics Op. 05-436. The 2002 amendments,

which support the validity of general, open-ended waivers, permit informed consent

to a wider range of future conflicts that would have been possible prior to the

amendments. Id. Because the 2002 amendments changed the standard for when a

client’s waiver of future conflicts is effective, and in response to those changes, the

ABA subsequently withdrew Formal Opinion 93-372, a lawyer is no longer required

to meet the limitations established in ABA Formal Ethics Opinion 93-372 to obtain

informed consent from all clients. See ABA Formal Op. 05-436. While specifying a

18

particular party or type of legal matter does make it more likely that the waiver will

be effective for a wider range of clients, using a general framework for determining a

course of conduct does not render the waiver unenforceable. The waiver language

supports a finding of informed consent because it provides a course of conduct by

which the parties can manage future conflicts relating to the attorney-client

relationship.

Second, the Court looks to see whether or not the waiver language includes

any explanation of the material risk of waiving future conflicts of interest. Waiver

language that informs the client of the material risk of waiving future conflicts

supports a finding of informed consent. See MODEL RULES OF PROF’L CONDUCT R.

1.0(e) (2010); Celgene, 2008 WL 2937415, at *8. V&E waiver language in this case

informs Galderma that if they agree, Vinson and Elkins representation of Galderma,

“will not prevent or disqualify us from representing clients adverse to you in other

matters.” The previous language explains that V&E is not necessarily disqualified

when representing another client with interests “materially and directly adverse to

[Galderma].” The waiver explains that agreeing to the waiver risks V&E advocating

for another client directly against Galderma. This is exactly the risk of which

Galderma now claims they were not informed. This language explains the material

risk in waiving future conflicts, and so this language also supports a finding of

informed consent.

19

Third, the Court looks to see whether the waiver language contains any

explanation of reasonably available alternatives to the proposed course of conduct.

When the waiver language includes explanation of alternatives to the course of

conduct, this also supports a finding that the client gave informed consent. See

MODEL RULES OF PROF’L CONDUCT R. 1.0 (e) (2010); Celgene, 2008 WL 2937415, at

*8. In this case, the alternative course of conduct is for Galderma to hire other

counsel. The waiver language tells Galderma, “You are free to retain any other

counsel of your choosing.” Elsewhere, the engagement letter tells Galderma that

V&E’s representation of Galderma is based on the parties’ mutual consent. The

language in the waiver and the agreement as a whole identifies at least one

alternative; Galderma need not engage V&E on this matter if they do not wish to

consent to the proposed terms and conditions. This language, although the least clear

of the three factors, also supports a finding of informed consent.

Galderma largely relies on the rationale of the Celgene court to argue that the

waiver language in this case is not reasonably adequate for a client to make an

informed decision. The Celgene court considered similar waiver language in that case.

Id. at *2. In holding that the waiver language was not reasonably adequate, the

Celgene court reasoned that the attorneys seeking the waiver of future conflicts needed

to further identify risks to Celgene, such as particularizing generic pharmaceutical

companies as a potentially conflicted client and identifying patent disputes as a

potential matter where the attorneys may represent a client with conflicting interests.

20

Id. at *8. The court also reasoned that the attorneys needed to further explain

alternatives such as defining substantially related matters or considering broader

limitations such as refraining from representing all general drug companies. Id.

While such language is even better evidence of a client giving informed

consent, the Court disagrees with the Celgene Court that this type of language is

always necessary to show informed consent. The examples given by the Celgene court

are all examples of ways in which attorneys may identify a particular party, class of

parties, or the nature of the potentially conflicting future matter. This type of

language is not always necessary for a client to give informed consent, given the 2002

amendments to the Model Rules. ABA Formal Op. 05-436. If such language was

always required, general and open-ended consent would never be valid. See id. To

the contrary, the Committee recognized that under particular circumstances, general

and open-ended consent is still likely to be valid. Id.; MODEL RULES OF PROF’L

CONDUCT R. 1.7, cmt. 22 (2010).

The Court concludes that the waiver in the 2003 engagement letter is

reasonably adequate to allow clients in some circumstances to understand the

material risk of waiving future conflicts of interest. The language discloses a course of

conduct for determining when V&E will be disqualified, explains the material risk

that V&E may be directly adverse to the client, and explains an alternative, that the

client need not hire V&E if it does not wish to consent. The Court must next

examine Galderma’s sophistication and whether Galderma was independently

21

represented in the waiver to determine whether or not the disclosure provided was

reasonably adequate to allow Galderma to understand the material risks of waiving

future conflicts. Id. R. 1.0, cmt. 6 & R. 1.7, cmt. 22.

2. Whether V&E’s Disclosure is Reasonably Adequate for Galderma to Form Informed Consent

For the general, open-ended waiver to be valid in this case, V&E must still

establish that the disclosure was reasonably adequate to allow Galderma to

understand the material risks involved. The communication necessary to obtain

informed consent varies with the situation involved. Id. R. 1.0, cmt. 6. The principal

considerations at this point in the analysis are the sophistication of the parties and

whether the client was represented by counsel independent of the law firm seeking

the waiver. See RESTATEMENT (THIRD) LAW GOVERNING LAWYERS § 122, cmt. c(i)

(2000).

a. The Client’s Sophistication

The parties have disagreed sharply as to whether or not the client’s

sophistication is relevant to resolving this issue. Galderma argues that the

sophistication of the client is not relevant, whereas V&E argues that a client’s

sophistication is a critical factor.

The Comments to the Model Rules and the ABA Committee on Ethics

Opinions state that client sophistication is indeed relevant. A lawyer need not inform

a client of facts or implications already known to the client. MODEL RULES OF PROF’L

CONDUCT R. 1.0, cmt. 6 (2010); RESTATEMENT (THIRD) OF LAW GOVERNING

22

LAWYERS § 122, cmt. c(i) (2000). Thus, the client’s existing knowledge affects

whether the disclosure in a case is reasonably adequate. Additionally, a client is also

sophisticated when “the client…is experienced in legal matters generally and in

making decision of the type involved….” MODEL RULES OF PROF’L CONDUCT R. 1.0,

cmt. 6 (2010). Normally, such persons need less information and explanation than

others. Id. The comments to Model Rule 1.7, specifically dealing with conflicts of

interest, also consider the knowledge and experience of the client in determining

whether or not a client’s consent is effective. See MODEL RULES OF PROF’L CONDUCT

R. 1.7, cmt. 22 (2010). Since the addition of these Comments to the Model Rules,

the Committee on Ethics has also changed its position, concluding that the

effectiveness of client consent does vary with the client’s level of sophistication. ABA

Formal Op. 05-436 (withdrawing its prior Formal Op. 93-372 as now inconsistent

with the Model Rules). Under the 2002 changes to the Model Rules, a sophisticated

client need not be provided as much information for the disclosure to be reasonably

adequate for the client to give informed consent.

Galderma is highly sophisticated client. Galderma describes itself as one of the

world’s leading dermatology companies. In 2011, Galderma and its affiliates reported

worldwide sales of 1.4 billion euros, which is approximately 1.87 billion dollars.

Galderma is involved in extensive research as part of its normal operations, having

filed approximately 5,500 patent applications and patents. Galderma operates

23

worldwide with either R&D centers or manufacturing centers in France, Sweden,

Canada, Brazil, Japan, and the United States.

Galderma is also sophisticated in its legal experience. Galderma is presently

involved in approximately a dozen different lawsuits, many involving large, complex

patent disputes. Galderma litigates in state and federal courts across the country,

including Texas, New York, Massachusetts, Florida, Georgia, Illinois, Wisconsin, and

Delaware. In doing so, Galderma routinely retains different, large law firms to advise

the corporation on various matters across the country including, DLA Piper, Paul

Hastings, and V&E. Galderma is experienced in retaining large, national law firms

and has signed waivers of future conflicts as part of engaging a national law firm on at

least two other occasions, including as recently as February of 2012. Quinton

Cassady, who signed the 2003 V&E engagement letter, is the same person who

signed engagement letters with DLA Piper which also contained waivers of future

conflicts. In one case, Mr. Cassady even initialed the future conflicts waiver portion

of an engagement letter. The record in this case demonstrates that Galderma is a

client who is highly sophisticated in both legal matters generally and in making

decisions to retain large, national firms. This level of sophistication weighs in favor of

finding informed consent in this case.

Galderma relies on Woolley v. Sweeney to argue that that the Fifth Circuit

requires the same full disclosure from an attorney regarding conflicts without regard

to the client’s sophistication. See No. 3:01-cv-1331, 2003 WL 21488411 (N.D. Tex.

24

May 13, 2003, Stickney, J.). Woolley is inapposite, however, as the case dealt with a

conflict known to the attorneys at the time the client retained the attorneys and the

attorneys sought the waiver. See id. at *1. If a conflict of interest is known to an

attorney at the time he seeks a waiver, the attorney is not allowed to hide that

conflict, regardless of whether the client is sophisticated or not. See id. But here, the

attorney is not withholding information regarding a conflict of which the attorney is

already aware.

Even if the holding in Woolley were applicable, the Court would still be

compelled to hold that Galderma’s sophistication and independent representation

were factors in the informed consent decision. The precedent relied on by the court

in Woolley predates the 2002 changes to the Model Rules. See id. at *6, 11 (citing

Horaist v. Doctor’s Hosp. of Opelousas, 255 F.3d 261, 268 (5th Cir. 2001) & E.F. Hutton

& Co., Inc. v. Brown, 305 F. Supp. 371, 398 (S.D. Tex. 1969)). The Fifth Circuit’s

current framework establishes that the national standard guide the court’s analysis,

and that standard is determined by the current ABA Model Rules and related

authority. In re Dresser, 972 F.2d 540, 541 (5th Cir. 1992).

b. Independent Counsel

Another related, but different factor the Court considers is whether the client

is represented by independent counsel. A client represented by independent counsel

needs less information and explanation than others for its consent to be informed.

MODEL RULES OF PROF’L CONDUCT R. 1.0, cmt. 6 & R. 1.7, cmt. 22 (2010); ABA

25

Formal Op. 05-436. For the purposes of determining informed consent, the effect is

the same whether that independent lawyer is inside the client’s organization or is

other, outside counsel. RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS, § 122,

cmt. C(i) (2000). The importance of this factor is obvious. The ultimate test for

determining whether a client gave informed consent is whether the disclosure is

reasonably adequate to allow a client to understand the material risks involved.

MODEL RULES OF PROF’L CONDUCT R. 1.0, cmt. 6 & R. 1.7, cmt. 22 (2010). When

the client has the benefit of its own lawyer, who is bound by and familiar with the

same ethical obligations of the lawyers seeking a waiver, less disclosure is needed to

reveal to the independent counsel and its client the consequences of agreeing to the

proposed waiver of future conflicts. Another lawyer, who is familiar with the ethical

requirements of practicing law, is inherently more informed than even the most

sophisticated lay person. The comments to the Model Rules reflect the importance of

this factor, going so far as to say that “generally a client…who is independently

represented by other counsel in giving the consent should be assumed to have given

informed consent.” Id. R. 1.0, cmt. 6 (emphasis added).

Galderma has its own legal department. Galderma has a general counsel with

over 20 years of experience practicing law, who is a member of both the Texas state

bar and the federal bar. Galderma relies on its general counsel, Mr. Cassady, and the

corporate legal department to give competent legal advice pertaining to complex legal

matters. Mr. Cassady, as an inside counsel, is still lawyer independent from V&E,

26

advising Galderma on whether or not Galderma should give its consent. See

RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS, § 122, cmt. C(i) (2000).

Mr. Cassady claims now that he did not intend to consent to V&E

representing a generic drug manufacturer when he signed the 2003 engagement letter.

The language in the Model Rules is clear; informed consent turns on an objective

standard of reasonable disclosure and reasonable understanding. See MODEL RULES

OF PROF’L CONDUCT R. 1.0 & 1.7 (2010). Mr. Cassady’s current declaration that he

did not actually intend for Galderma to consent does make a general waiver invalid

because when a sophisticated party is represented by independent counsel a general,

open-ended waiver is still likely to be reasonably adequate disclosure.

Galderma argues that existing case law holds that even a sophisticated client,

represented by its own independent counsel cannot give informed consent based on

general, open-ended waiver language. The national standard set by the ABA Model

Rules and the Restatement (Third) of the Law Governing Lawyers do not take such a

position, and the cases cited by Galderma are distinguishable in critical ways.

Galderma argues that the rationale of a pair of cases out of California

persuasively demonstrate why V&E’s waiver language is not sufficient for a client to

form informed consent. See Visa U.S.A., Inc. v. First Data Corp., 241 F. Supp.2d 1100

(N.D. Cal. 2003); Concat, L.P. v. Unilever, P.L.C., 350 F. Supp.2d 769 (N.D. Cal.

2004). Galderma’s reliance is misplaced for several reasons. First, the Concat court

relying on Visa U.S.A., held that to obtain informed consent, the prospective waiver

27

must disclose the nature of the subsequent conflict. Concat, L.P., 350 F. Supp.2d at

820. There is no requirement under the current Model Rules that all prospective

waivers must disclose a specific nature of a subsequent conflict to be valid. See

MODEL RULES OF PROF’L CONDUCT R. 1.7 (2010).

Second, the Concat court found that the waiver language was not sufficient to

form informed consent, because it did not name a specific party like the advance

waiver in Visa U.S.A., Inc. See Concat 350 F. Supp.2d at 821. The Visa U.S.A., Inc.

court relied, in part, on Formal Opinion 93-372, which stated that the closer the

lawyer who seeks a prospective waiver can get to circumstances where not only the

actual adverse client but also the actual potential future dispute is identified, the

more likely the prospective waiver is ethically permissible. Visa U.S.A., Inc., 241

F.Supp.2d at 1107. While still true, a disclosure, identifying a particular client no

longer a requirement for every client to form informed consent. See ABA Formal Op.

05-436 (withdrawing and expanding on ABA Formal Op. 93-372). Critically,

nothing in either case suggests the courts examined the national standard for

informed consent in light of the changes to the Model Rules and the new comments,

on which the parties have focused in this case. Because of that court’s reliance on

ABA Formal Opinion 93-372, which the ABA has since withdrawn, and because ABA

Formal Opinion 05-436 expanded the situations for which a waiver provides a basis

for informed consent, the difference between Visa and Concat is no longer persuasive

for whether a particular waiver is insufficient to form the basis of informed consent.

28

See ABA Formal Op. 05-436 (stating that Opinion 93-372 concludes informed

consent is limited to circumstances in which the lawyer is able to and does identify

the potential party or class of parties that may be represented in the future matter(s),

and Opinion 93-372 is no longer consistent with the Model Rules).

Galderma also relies heavily on the rationale in Celgene Corp. v. KV

Pharmaceutical Co., where the court concluded that the general open-ended waiver

language was not sufficient to show the lawyers seeking a waiver obtained informed

consent. See 2008 WL 2937415, at *12 (July 29, 2008, D.N.J.). Both the law and

the rationale of the Celgene court are distinguishable.

As to the law, the Celgene court considered itself bound by Third Circuit and

New Jersey Supreme Court precedent which differs from the national standard

because the precedent incorporated New Jersey state rules, which elucidate a

different, more stringent standard. See In re Congoleum Corp. 426 F.3d 675 (3rd Cir.

2005). Under New Jersey rules the test for informed consent is whether the attorney

provided both “full disclosure and consultation.” See id. at *4 (discussing In re

Congoleum Corp., 426 F.3d 675 (3d Cir. 2005)). To meet the “consultation” part of

the test under New Jersey law, the Third Circuit concluded that, an attorney should

have to first indicate in specific detail all of the areas of potential conflict that

foreseeably might arise. In re Congoleum, 426 F.3d at 691. Bound by precedent, the

Celgene court could not find Celgene had given informed consent unless the lawyers

seeking the waiver told Celgene of specific implications and the specific possibility

29

that the lawyers might represented a generic pharmaceutical company in future

patent litigation. Celgene, 2008 WL 2937415, at*11.

In the Fifth Circuit, the Model Rules, are the primary source of guidance for

this Court, and the test for informed consent is whether the client understands the

material risks involved in waiving the future conflict. MODEL RULES OF PROF’L

CONDUCT R. 1.0 (e) & 1.7, cmt. 22 (2010). Additional consultation outside of the

waiver is not a requirement to obtain informed consent. A lawyer need not inform

the client through additional consultation of facts or implications already known to

the client. Id. 1.0, cmt. 6; RESTATEMENT (THIRD) LAW GOVERNING LAWYERS § 122,

cmt. c(i)(2000). Accordingly, under the national standard, as opposed to the New

Jersey standard, additional consultation is not required for a client to give informed

consent when, without it, the client is aware of sufficient information reasonably

adequate to make an informed decision. MODEL RULES OF PROF’L CONDUCT R. 1.0,

cmt. 6 (2010); RESTATEMENT (THIRD) LAW GOVERNING LAWYERS § 122, cmt. c(i)

(2000).

The Court also disagrees with The Celgene court’s analysis regarding the role of

independent counsel in determining whether a client gave informed consent. See

Celgene, 2008 WL 2937415, at *9–10. The Celgene court acknowledged Comment 22

to Model Rule 1.7 and ABA Formal Opinion 05-436, but determined that these

authorities merely acknowledged that a consent that is otherwise “informed, but

general is likely to be valid if the client was represented by independent counsel in

30

the waiver transaction.” Id. at 10. The court concluded that using independent

counsel was not relevant to whether or not a client’s consent is informed. Id.

Comment 22 to Model Rule 1.7, Comment Six to Model Rule 1.0, ABA

Formal Opinion 05-436, and Section 122 of the Restatement (Third) of Law

Governing Lawyers all incorporate independent counsel as an important factor to

determine whether or not a client gave informed consent. Comment Six explains, in

determining whether the information and explanation provided are reasonably

adequate, relevant factors include whether the client is independently represented by

other counsel in giving the consent. MODEL RULES OF PROF’L CONDUCT R. 1.0, cmt.

6 (2010). When a client has their own lawyer who reviews the waiver, the client does

not need the same type of explanation from the lawyer seeking a waiver because the

client’s own lawyer can review what the language of the waiver plainly says and advise

the client accordingly. The court cannot agree with the Celgene court because to do so

would ignore the knowledge and advantage that clients gain by employing their own

counsel to advise them, and the national ethical standards clearly compel the court to

consider a client’s use of independent counsel.

3. Whether Galderma Gave Informed Consent to the Waiver of Future Conflicts of Interest

V&E’s disclosure is general and open-ended. In many cases, and for many

clients, the disclosure in this case would likely not be reasonably adequate to allow a

client to make an informed decision. Even though general, the disclosure language

does lay out a course of action for when V&E would be disqualified for a conflict of

31

interest and when not. The disclosure warns in plain language that Galderma’s

consent means V&E may appear directly adverse to Galderma in litigation, the very

risk of which Galderma now claims they were not made aware. Galderma is a

sophisticated client who has experience engaging multiple large law firms and has

twice signed similar waiver provisions with at least one other law firm it has hired.

Finally, having the benefit of its own independent counsel to advise Galderma on

what the language meant, Galderma, through its own counsel, chose to sign the

engagement letter which included the waiver of future conflicts.

Given the 2002 amendment to the Model Rules on informed consent and

waivers of future conflicts, the authority related to those changes, and the evidence in

this case, the Court concludes that Galderma gave informed consent to V&E's

representation of clients directly adverse to Galderma in substantially unrelated

litigation. Because V&E’s representation of Actavis falls within the scope of that

informed consent, V&E is not disqualified from representing Actavis.

III. Conclusion

Galderma gave informed consent for V&E to represent other clients in

litigation directly adverse to Galderma, subject to the limitations specifically

identified in the waiver language. V&E’s representation of Actavis falls within the

scope of that informed consent. Therefore, V&E’s representation of Actavis is not a

32

violation of ethical standards, and disqualification is not warranted.

SO ORDERED.

SIGNED on February 21st, 2013.

ED KINKEADE UNITED STATES DISTRICT JUDGE

Opinions of the Colorado Supreme Court are available to thepublic and can be accessed through the Court's homepage at

http: //www.courts. state.co.us and are posted on the Colorado Bar Associationhomepage at www.cobar.org.

ADVANCE SHEET HEADNOTEFebruary 4, 2013

2013 CO 8

No. 12SA83, In Re Liebnow v. Boston Enterprises —Pro Hac Vice Admission —Colo.RPC 1.7—Colo. RPC 1.10- Confidential Client Information

The supreme court affirms the district court's order disqualifying the plaintiff's

motion for pro hac vice admission of out-of-state counsel, where defense counsel had

previously consulted out-of-state counsel at the same firm on the same case. The

supreme court holds that the trial court did not abuse its discretion in finding (1) that

the consultation between defense counsel and out-of-state counsel concerned

confidential information, which created a conflict under Colo. RPC 1.7(a)(2);and (2) that

the conflict was not waivable under Colo. RPC 1.7(b) because allowing the consulted

attorney to represent the plaintiff would undermine the fairness of the trial. The

supreme court further holds that the district court did not abuse its discretion in

imputing the conflict to the rest of the firm under Colo. RPC 1.10and disqualifying the

Supreme Court of the State of Colorado2 East 14"Avenue ~ Denver, Colorado 80203

2013 CO 8

Supreme Court Case No. 12SA83Original Proceeding Pursuant to C.A.R. 21

Pueblo County District Court Case No. 11CV493Honorable Victor I. Reyes, Judge

In Re:Plaintiff:

Emily Liebnow, a minor, by and through her next best friends and natural parents,Randy Liebnow and Suzanne Liebnow,

V.

Defendants:

Boston Enterprises Incorporated, a Colorado corporation, d/b/a Giacomo's; U.S.Foodservice, a foreign corporation; Tanimura 8z Antle Fresh Foods, lnc., a Californiacorporation; Tanimura 8z Antle Farming Company LLC, a Delaware limited liability

company; and Tanimura k Antle Land Company, a California limited liabilitycompany.

Rule Dischargeden banc

February 4, 2013

Attorneys for Plaintiff:James E. Freemeyer P.C.Robert K. Reimann

Denver, Colorado

Attorneys for Defendant Boston Enterprises, Incorporated, d/b/a Giacomo's:Hunter 6 AssociatesKaren R. Wasson

Denver, Colorado

Attorneys for Amicus Curiae Colorado Bar Association, Mark A. Fogg, President,through Its Ethics Committee:

Bennett S. AisenbergDenver, Colorado

Wheeler Trigg O'Donnell LLPNancy L. Cohen

Denver, Colorado

White & Steele, PCJohn Lebsack

Denver, Colorado

Holland & Hart, LLPWiley E. Mayne

Denver, Colorado

TW TelecomPeter R. Nadel

Littleton, Colorado

Pratt & Landry, LLPGerald D. Pratt

Lone Tree, Colorado

Fennemore Craig, P.C.Troy Rackham

Denver, Colorado

Attorneys for Amicus Curiae Colorado Defense Lawyers Association:Ruebel & Quillen, LLCJeffrey Clay Ruebel

Westminster, Colorado

No appearance by or on behalf of Defendants U.S. Foodservice, Inc.; Tanimura & AntleFresh Foods, Inc; Tanimura & Antle Farming Company LLC; or Tanimura & Antle LandCompany

43

CHIEF JUSTICE BENDER delivered the Opinion of the CourtJUSTICE EID dissents, and JUSTICE HOBBS joins in the dissent.

f Ke granted this petition for original jurisdiction under C.A.R. 21 to review the

trial court's order denying a law firm's motion for pro hac vice admission to represent

the plaintiff where an attorney at that same law firm had previously consulted with

defense counsel about the case.

This is a personal injury case against a restaurant resulting from an alleged food-

borne illness. The plaintiff sought to have a small out-of-state law firm that specializes

in food-borne illness claims admitted pro hac vice to aid in the preparation and

presentation of the case. The defendant objected on grounds that defense counsel had

previously consulted with an attorney at the out-of-state firm about the case and her

trial strategy.

The trial court denied the out-of-state law firm's motion for pro hac vice

admission, thus disqualifying the firm from representing the plaintiff. In support of its

ruling, the trial court found that the consultation between defense counsel and the out-

of-state firm's attorney concerned confidential information that included defense

counsel's theory of the case and her trial strategy, which created a conflict under Colo.

RPC 1.7(a)(2). The conflict, the trial court concluded, was nonwaivable under Colo.

RPC 1.7(b) because allowing the consulted attorney to represent the plaintiff would

undermine the fairness of the proceedings. The trial court then imputed the conflict to

the out-of-state firm under Colo. RPC 1.10and denied the motion, thus disqualifying

the firm from representing the plaintiff.

On appeal to us, the plaintiff argues that Colo. RPC 1.7applies only to situations

where an attorney-client relationship is established, and that the trial court's

disqualification of the out-of-state law firm was an abuse of discretion. Our review of

Colo. RPC 1.7(a)(2) reveals that the rule expressly applies not only to attorney-client

relationships but also to attorneys'elationships with third persons. Accordingly, we

hold that the trial court did not abuse its discretion in finding (1) that the consultation

between defense counsel and the out-of-state firm's attorney concerned confidential

information that included defense counsel's theory of the case and her trial strategy,

which created a conflict under Colo. RPC 1.7(a)(2); and (2) that the conflict is

nonwaivable under Colo. RPC 1.7(b) because allowing the consulted attorney to

represent the plaintiff would undermine the fairness of the proceedings. We further

hold that the trial court did not abuse its discretion by imputing the consulted

attorney's conflict to the rest of his law firm under Colo. RPC 1.10 and denying the

motion, thus disqualifying the firm from representing the plaintiff. Hence, we

discharge the rule and remand the case to the trial court for proceedings consistent with

this opinion.

I. Facts and Procedural History

This case involves a child who allegedly became ill from E. coli after eating salad

at the defendant restaurant. After the case was filed, defense counsel contacted lawyer

Drew Falkenstein at a small law firm in Seattle, Washington that specializes in food-

borne illness cases. Defense counsel and Falkenstein had been opposing counsel in a

previous Colorado case and had maintained a cordial relationship. Before discussing

the case with defense counsel, Falkenstein first determined that his law firm was not

already involved in this litigation. Over the next few days, defense counsel and

Falkenstein had one telephone conversation and exchanged several e-mails. Defense

counsel did not tell Falkenstein that she wanted the information they were exchanging

about the case kept confidential.

In their telephone conversation and e-mail exchange, defense counsel and

Falkenstein discussed three aspects of the case. First, they talked about defense

counsel's planned theory of the case, which at that time was that the child's illness had

resulted from visiting a petting zoo rather than from eating salad at the restaurant.

Falkenstein advised defense counsel against that theory. Second, defense counsel asked

Falkenstein for advice on a trial expert, and Falkenstein recommended an expert.

Falkenstein stated that the recommended expert would "work [the] file hard and well"

and "may... help to dig up documents." Third, Falkenstein recommended adding a

lettuce distributor as a nonparty defendant after researching E. coli outbreaks for

defense counsel using his law firm's publicly accessible database and finding an E. coli

outbreak at another local restaurant chain. Although defense counsel did not take

Falkenstein's advice to add that particular distributor as a nonparty, she did consider

other lettuce distributors and lettuce growers as nonparty defendants instead. She

abandoned her initial petting zoo strategy as Falkenstein had advised and hired the

expert whom Falkenstein had recommended.

Several months after the consultation between defense counsel and Falkenstein,

plaintiff's counsel contacted another attorney at Falkenstein's law firm to discuss the

case. The record is unclear whether that attorney checked to see if Falkenstein or

anyone else at the firm had been involved in the case. Soon after, it was agreed that the

out-of-state law firm would join plaintiff's counsel in the case, and this firm filed a

motion for admission pro hac vice. The defendant objected to the firm's admission

because of defense counsel's earlier consultation and e-mail exchange with Falkenstein,

an associate in this firm. In support of the defendant's objection to the motion, defense

counsel submitted an affidavit stating that she had disclosed "confidential facts about

the case" to Falkenstein. Nothing in the record indicates that defense counsel had

consulted Falkenstein for the purpose of disqualifying him or his firm from later

representing the plaintiff.

In its ruling the trial court reasoned that when defense counsel sought advice

from Falkenstein about the case, she had divulged confidential information that she

would not have shared with opposing counsel, including discussing her theory of the

case, asking for a recommendation about an expert witness, and requesting research

assistance to identify potential nonparty defendants. The trial court concluded that

because Falkenstein had "recommended a particular course or theory for [the] [d]efense

counsel, researched and provided [d]efense [c]ounsel with the information that now

forms the basis for their trial strategy and also provide[d] them with an expert for

whose credibility they vouch for in writing," Falkenstein was placed in a "position of

divided loyalties" that would compromise the fairness of the proceedings if he were

allowed to represent the plaintiff. As such, the trial court concluded that Falkenstein's

consultation with defense counsel created a nonwaivable conflict of interest that would

prohibit him from representing the plaintiff under Colo. RPC 1.7. Imputing the conflict

to the out-of-state firm under Colo. RPC 1.10,the trial court denied the firm's motion for

pro hac vice admission and disqualified the firm from representing the plaintiff.

Plaintiff then petitioned this court under C.A.R. 21 to review the trial court's order. We

granted the petition and now discharge the rule.

II. Preliminary Matters

Original Jurisdiction

Before we begin our review of the trial court's order, we first address whether an

original proceeding is the proper method to review the trial court order challenged by

the plaintiff. This court's choice to exercise its original jurisdiction is "entirely within its

discretion." Vinton v. Virzi, 2012 CO 10, $ 9. "This court may exercise original

jurisdiction under C.A.R. 21 where a trial court proceeds without or in excess of its

jurisdiction or to review a serious abuse of trial court discretion, and where an appeal

would not be an adequate remedy." People v. Ray, 252 P.3d 1042, 1047 (Colo. 2011).

We have previously exercised original jurisdiction over matters of attorney

disqualification in both civil and criminal cases. See, e.g., Fognani v. Young, 115 P.3d

1268, 1271 (Colo. 2005) (exercising original jurisdiction in civil disqualification case and

citing criminal disqualification cases); People v. C.V., 64 P.3d 272, 274 (Colo. 2003).

Here, if the trial court's ruling disqualifying the out-of-state law firm from

representing the plaintiff were overturned on appeal after disposition of the case, the

parties would have to incur the significant and additional expense of a retrial with the

full participation of the disqualified firm. We therefore conclude that ordinary

appellate remedies are inadequate, and it is appropriate to exercise our original

jurisdiction and proceed with our analysis.

Review of Claimed Ethical Violation

Next, we address whether it is proper for this court to consider the alleged

conflict involving Falkenstein and his law firm under the Colorado Rules of

Professional Conduct when the law firm's potential client, the plaintiff, has not raised

the issue. Generally, courts do not consider claimed violations of ethics rules raised by

nonclients. Mercantile Adjustment Bureau, L.L.C. v. Flood, 12 CO 38, ]I15. However,

"where the Rules of Professional Conduct become intertwined with litigation and a

potential ethical violation threatens to prejudice the fairness of the proceedings," a court

may consider an ethical violation within the context of the litigation. Id. at fI$~

16-17

(holding that defendant had grounds to raise the potential ethical violations of the

plaintiff's attorney where defendant would have had to pay attorney fees incurred as

part of the agreement alleged to be unethical); see also In re Appeal of Infoteclmologv,

Inc. 582 A.2d 215, 219 (Del. 1990) (a court may consider a violation of the ethics rules

when the moving party "proves a personal detriment or misconduct which taints the

fairness of the proceeding"). Whether there is a conflict under Colo. RPC 1.7that would

prohibit the firm from representing the plaintiff and would impact the fairness of the

proceedings in this case is a matter intertwined with the litigation and is therefore

proper for us to examine.

Standard of Review

The plaintiff asks us to review the trial court's order denying pro hac vice

admission of the out-of-state law firm and disqualifying the law firm from representing

the plaintiff.~ A trial court's broad discretion to disqualify counsel derives from the

court's "inherent power to ensure the integrity of the process and fairness to the

parties." In re Estate of Myers, 130 P.3d 1023, 1025 (Colo. 2006).

By itself, a violation of the Colorado Rules of Professional Conduct may or may

not be sufficient grounds for disqualification. Taylor v. Grogan, 900 P.2d 60, 63 (Colo.

1995). "The critical question is whether the litigation can be conducted in fairness to all

parties." Id. The Colorado Rules of Professional Conduct concerning conflicts of

interest ensure fairness to the parties and protect the integrity of the process. In

addition, they serve as guidelines to a court deciding disqualification. Estate of Myers,

130 P.3d at 1025-26. Ultimately, it is within the exclusive province of the trial court to

determine whether a violation of the rules regarding conflict harms the fairness of the

proceedings and warrants disqualification. Id.. Taylor, 900 P.2d at 63. This "inherent

power to disqualify counsel may be exercised only when necessary to avoid unfairness

to a party or protect the integrity of the proceedings, and not to discipline or punish."

Estate of Myers, 130 P.3d at 1026.~ Courts balance this need to protect the integrity of

~ The trial court's denial of the motion for pro hac vice admission resulted in the lawfirm's nonparticipation in the case and is effectively the same as a disqualification. Weuse this characterization of the trial court's ruling interchangeably.~ See also Hempstead Video, Inc. v. Incorporated Village of Valley Stream, 409 F.3d 127,132 (2d Cir. 2005) (the ethical rules provide guidelines, but courts look to the fairness ofthe underlying trial when deciding disqualification); Schuff v. A.T. Klemens 6 Son,2000 MT 357, $ 35, 303 Mont. 274, 287-88, 16 P.3d 1002, 1012 (a court's decision todisqualify is properly based on the court's determination that there would be prejudiceto the parties and not solely on a rule violation).

the trial with the countervailing importance of the party's continued representation by

counsel of choice. Id. at 1025.

When a trial court disqualifies counsel, we review the basis for disqualification

under an abuse of discretion standard.~ People v. Harlan, 54 P.3d 871, 877 (Colo. 2002).

A trial court abuses its discretion if its decision is "manifestly unreasonable, arbitrary,

or unfair." Freedom Colo. Info., Inc. v. El Paso Cnty. Sheriff's Dep't, 196 P.3d 892, 899

(Colo. 2008). "It is not necessary that we agree with the trial court's decision." Streu v.

Citv of Colo. Springs ex rel. Colo. Springs Utils., 239 P.3d 1264, 1268 (Colo. 2010); accord

In re Bueno, 248 B.R.581, 582-83 (Bankr. D. Colo. 2000) (explaining that under an abuse-

of-discretion standard the trial court's reason "need not be one that is agreeable to the

reviewing court"). "The trial court's decision simply must not 'exceed[ ] the bounds of

the rationally available choices.' Streu, 239 P.3d at 1268 (quoting Big Sky Network

Can., Ltd. v. Sichuan Provincial Gov't, 533 F.3d 1183, 1186 (10th Cir. 2008) (omission in

original)). With this standard in mind, we now turn to the issues presented in this case.

The result of a trial court's denial of a motion seeking pro hac vice admission iseffectively the same as a disqualification, and our caselaw sets forth the standard ofreview for a disqualification as abuse of discretion. Harlan, 54 P.3d at 877. WhileColorado has not addressed the standard of review for a denial of a motion foradmission, other jurisdictions review a trial court's denial of a motion for pro hac viceadmission under an abuse of discretion standard. See People of State of N. Y. v. Epton,248 F. Supp. 276, 277 (S.D.N.Y. 1965) ("In New York the admission of out-of-stateattorneys to practice in a given case is left to the discretion of any court of record.");Mivashiro v. Roehrig, Roehrir., Wilson Sz Hara, 228 P.3d 341, 354 (Haw. Ct. App. 2010)("This court... reviews the denial or limitation of pro hac vice status for an abuse ofdiscretion."); PCG Tradinp, LLC v. Sevfarth Shaw, LLP, 951 N.E.2d 315, 318 (Mass.2011) ("[T]he degree of discretion accorded a judge in deciding whether to admit anout-of-State attorney is broad.").

10

III. Analysis

In support of this appeal, the plaintiff makes three arguments. First, the plaintiff

contends that because the Colorado Rules of Professional Conduct apply only to

attorney-client relationships, and because no attorney-client relationship was formed

between Falkenstein and defense counsel or between Falkenstein and the defendant, the

trial court improperly applied Colo. RPC 1.7 in this case. Second, the plaintiff argues

that even if Colo. RPC 1.7 does apply, the consultation between defense counsel and

Falkenstein created no conflict because the consultation did not include confidential

information and would not materially limit Falkenstein's future ability to represent the

plaintiff. Turd, the plaintiff argues that even if there is a conflict, the conflict is

waivable, and that irrespective of waivability, no conflict should be imputed to

Falkenstein's law firm.

In considering the plaintiff's arguments, we first discuss whether Colo. RPC 1.7

applies to an attorney-client relationship and conclude that it does. We then determine

whether the trial court abused its discretion in finding that the consultation here created

a conflict under Colo. RPC 1.7 on grounds that defense counsel divulged confidential

information to Falkenstein, such as her theory of the case and her trial strategy, and

conclude that it did not. We last examine whether the trial court abused its discretion in

determining that the conflict was not waivable and then imputing the conflict to the

out-of-state law firm and disqualifying the firm. Again, we conclude that it did not.

Application of Colo. RPC 1.7

The plaintiff first argues that Colo. RPC 1.7 does not apply in the absence of an

attorney-client relationship. However, Colo. RPC 1.7(a) states in pertinent part that a

lawyer shall not represent a client if there is a significant risk that the lawyer's

representation could be materially limited by the lawyer's responsibilities to another

client, former client, or third person:

Except as provided in paragraph (b), a lawyer shall not represent a clientif the representation involves a concurrent conflict of interest. Aconcurrent conflict of interest exists if:

(2) there is a significant risk that the representation of one or more clientswill be materially limited by the lawyer's responsibilities to another client,a former client or a third person or by a personal interest of the lawyer.

Colo. RPC 1.7(a) (emphasis added). Thus, Colo. RPC 1.7 expressly applies not only to

attorney-client relationships but also to attorneys'elationships with third persons. The

comments to the rule reflect this point: "Concurrent conflicts of interest can arise from

the lawyer's responsibilities to another client, a former client or a third person." Colo.

RPC 1.7, cmt. 1 (emphasis added); id. cmt. 9 ("[A] lawyer's duties of loyalty and

independence may be materially limited by... the lawyer's responsibilities to other

persons.") (emphasis added).

Although the Colorado Rules of Professional Conduct do not define the term

"third person," there is no limitation on Colo. RPC 1.7's application to situations in

which one lawyer consults another lawyer about a client matter. The American Bar

12

Association (ABA) has considered this very situation.~ ABA Comm. on Ethics Sz Prof'1

Responsibility, Formal Op. 98-411 (1998). ABA Opinion 98-411 cautions that

consultations between lawyers may trigger a conflict of interest that could restrict the

consulted lawyer's ability to represent a current or future client under Rule 1.7. See

ABA Op. 98-411 at 7. For instance, if a lawyer seeks help from another lawyer in

preparing her case and divulges confidential information about her client to that lawyer

during the consultation, then the other lawyer could incur a responsibility to protect

that information's confidentiality, which could limit that lawyer's ability to represent a

current or future client. s Id. at 9.

ABA Opinion 98-411 is persuasive and applicable where, as here, one lawyer has

consulted another lawyer and has revealed confidential information about her case,

including her theory of the case and trial strategy, that could materially limit the

consulted attorney's ability to represent the opposing party in this case due to the

consulted attorney's potential responsibility to keep the information confidential.

~ Although ABA Opinion 98-411 analyzes Model Rule of Professional Conduct 1.7, notColo. RPC 1.7, the two rules are identical.

s A lawyer is impliedly authorized to make disclosures about a client when appropriatein carrying out the representation. Colo. RPC 1.6 cmt. 5. Appropriate disclosures caninclude disclosure of confidential information when the lawyer reasonably believes thedisclosure will further her representation of the client because the lawyer will gainexpertise that will help her present the client's case. ABA Op. 98-411 at 3.Consultations between lawyers are important for testing ideas about complex cases orhelping lawyers gather the information necessary to competently represent a client. SeeABA Op. 98-411 at 2; Colo. RPC 1.1 cmt 2 ("Competent representation... can beprovided through the association of a lawyer of established competence in the field inquestion."). However, such consultations may create "unanticipated consequences" forthe consulting lawyer and the consulted lawyer, such as conflicts of interest. ABA Op.98-411 at 2.

13

Because Colo. RPC 1.7 applies expressly to third persons and because those third

persons can be lawyers, we disagree with the plaintiff's argument and conclude that the

trial court did not err in applying Colo. RPC 1.7to this case.

Falkenstein's Responsibilities to Defense Counsel

The plaintiff next contends that, even if Colo. RPC 1.7 applies here, the

consultation between defense counsel and Falkenstein created no conflict under that

1ule.

A conflict occurs under Colo. RPC 1.7(a)(2) when a lawyer's responsibilities to

another person create a significant risk that the lawyer will be materially limited in his

representation of a client. When a lawyer learns confidential information from another,

the lawyer's knowledge of the information creates a significant risk of materially

limiting the lawyer's representation of his own present or future client. See ABA Op.

98-411 at 7; see also Mitchell v. Wilmore, 981 P.2d 172, 173 (Colo. 1999) (holding that a

non-attorney expert witness had to be disqualified where both the plaintiff and the

defendant had consulted the expert).6 Confidential information includes "mental

impressions and thought processes of counsel" that are in the nature of attorney work

product. Mitchell, 981 P.2d at 176; see also Charles W. Wolfram, Modern Legal Ethics g

6 In Mitchell, both parties consulted the same expert on traffic accidents. Mitchell, 981P.2d at 173-79. Here, both plaintiff and defendant consulted the same law firm withexpertise in food-borne illness cases. Mitchell is therefore analagous because thecircumstances of the lawyer-lawyer consultation here are similar to those of the lawyer-expert consultation in Mitchell. Mitchell recognizes that experts and attorneys playdifferent roles in litigation and that those roles justify a heightened standard forattorneys. Id. at 175.

14

6.6.1 (West 1986) (lawyer's "own thoughts on strategy or legal theories" constitute

opinion work product that is immunized against discovery); Cordv v. Sherwin-

Williams Co., 156 F.R.D. 575, 581-82 (D.N.J. 1994) (a binder of photographs, the

arrangement of which manifested the "mental impressions" of counsel, constituted

confidential information because the arrangement of the photographs revealed

counsel's thought process even though the photographs themselves were discoverable).

Conversely, information that is "mere [ly] teclmical" or that is "routinely

discoverable" does not meet a party's burden to show that confidential information was

exchanged. Mitchell, 981 P.2d at 176; Nikkal indus., Ltd. v. Salton, Inc., 689 F. Supp.

187, 191-92 (S.D.N.Y. 1988) (information on market research was nothing more than

technical information exchanged in an "employment style interview"); Palmer v.

Ozbek, 144 F.R.D. 66, 67-68 (D. Md. 1992) (medical records that would have been

revealed through discovery did not constitute confidential information where only the

records, not litigation strategy, were exchanged). The plaintiff contends that no conflict

was created here, arguing that the exchange of information between defense counsel

and Falkenstein was not confidential but rather wholly technical or discoverable, and

the exchange would not limit representation of the plaintiff. For instance, the plaintiff

argues that defense counsel's theory of the case would have been disclosed during

discovery. The plaintiff further argues that any research leading to the identities of

potential nonparty defendants was a technical matter that anyone could have located

through the out-of-state law firm's publicly accessible database, and, in any event, the

names of the other nonparty defendants are required to be disclosed. The plaintiff also

15

contends that the defendant's choice of an expert witness based on Falkenstein's

recommendation in no way undermines the fairness of the proceedings because the

plaintiff believes her counsel can still effectively cross-examine the expert.

The trial court disagreed with the plaintiff's arguments, finding that defense

counsel altered her theory of the case and shaped her trial strategy based on

Falkenstein's suggestions. First, the trial court found that defense counsel did not

pursue her original theory that the child's illness was caused by a visit to a petting zoo,

but instead sought to determine whether another outbreak made the child ill. Second,

the trial court found that defense counsel chose the expert witness Falkenstein

recommended. Last, the trial court found that Falkenstein conducted research for

defense counsel to identify potential nonparty defendants who were other restaurants,

lettuce distributors, and lettuce growers. In short, defense counsel confided in

Falkenstein in a way that gave him insight into the way she approached this case, and

he provided her with feedback that caused her to change her approach. Despite

plaintiff's argument that Falkenstein does not remember the specifics of the

consultation, Falkenstein's affidavit to the court contradicted that assertion and shows

that he recalled defense counsel's original planned theory of defense. Although the

plaintiff argued that the defendant could be prevented from mentioning that

Falkenstein recommended the defense expert witness, the trial court ruled that it would

not be possible for Falkenstein to cross-examine the expert without the jury hearing

about his recommendation.

The trial court reasoned that because Falkenstein had a hand in defense counsel's

theory of the case and her trial strategy, his resulting responsibilities to her created a

situation of divided loyalties. On the one hand, if Falkenstein were to represent the

plaintiff, he would have a responsibility to act in the plaintiff's best interests by using

the insight he gained from his consultation with defense counsel to the plaintiff's

advantage. On the other hand, Falkenstein, because of his responsibility of

confidentiality to defense counsel, would be prevented from doing so. Nor could an

attorney from the out-of-state law firm successfully impeach defense counsel's chosen

expert without the jury hearing that a member of the firm to which plaintiff's counsel

belonged had recommended the defense expert, which would be detrimental to the

plaintiff. Based on these findings, the trial court concluded that Falkenstein's

consultation with defense counsel created a conflict under Colo. RPC 1.7(a).

Given the evidence before the trial court and the nature of its findings as being

grounded in that evidence, we hold that the trial court was not manifestly arbitrary,

unreasonable, or unfair, and therefore did not abuse its discretion in finding that there

was a conflict under Colo. RPC 1.7(a).

Waiver of the Conflict and Imputation to the Firm

Last, we examine the plaintiff's arguments (1) that even if there is a conflict, it is

waivable by the plaintiff under Colo. RPC 1.7(b);and (2) that irrespective of whether the

conflict is waivable, the trial court abused its discretion when it imputed the conflict to

the small law firm. The plaintiff represents that she would waive any conflict in order

to allow continued representation by the out-of-state law firm. Although the plaintiff

has not yet made a formal waiver, the record reveals that the plaintiff would waive any

conflict and we accept this representation and turn to analyze these issues.

Even if a conflict exists under Colo. RPC 1.7(a), the lawyer may continue to

represent the client if the lawyer "reasonably believes that the lawyer will be able to

provide competent and diligent representation" to his client and if the client waives the

conflict. Colo. RPC 1.7(b)(1). Although Colo. RPC 1.7(b) permits conflicts under the

rule to be waived, the trial court must still decide whether such waiver would impact

the fairness of the proceedings. As such and in order to protect the integrity of the

proceedings, it is within the trial court's power to disqualify counsel, even if the party is

willing to waive the conflict. See Estate of Mvers, 130 P.3d at 1026. "[C]ourts have the

inherent power to ensure both the reality and appearance of integrity and fairness in

proceedings before them." Id. at 1025. Trial courts balance the need to protect the

integrity of the trial with the countervailing importance of the party's continued

representation by counsel of choice when deciding whether to disqualify counsel even

in the presence of a valid waiver. Id. Fognani, 115 P.3d at 1272. The critical question

that governs whether disqualification is necessary is whether the litigation can be

conducted in fairness to all parties. Estate of Mvers, 130 P.3d at 1025; Harlan, 54 P.3d at

876. Here, we look to the Colorado Rules of Professional Conduct to review whether

the trial court abused its disrection when it ruled that the conflict under Colo. RPC

1.7(a) was nonwaivable and imputed Falkenstein's conflict to the entire firm because

otherwise the proceedings would be unfair.

Colo. RPC 1.10prohibits lawyers associated in the same firm from representing a

client if any one of the lawyers is prohibited from doing so by a conflict: "While lawyers

are associated in a firm, none of them shall knowingly represent a client when any one

of them practicing alone would be prohibited from doing so by Rules 1.7or 1.9." Colo.

RPC 1.10(a). "[A] firm of lawyers is essentially one lawyer" for purposes of the rules

governing client conflicts. Colo. RPC 1.10cmt. 2. "The treatment of attorneys in a firm

as one attorney for purposes of loyalty and confidentiality is based on the presumption

that those attorneys have access to confidential information about each other's clients."

People ex rel. Peters v. Dist. Court, 951 P.2d 926, 930 (Colo. 1998).

The trial court concluded that the consultation between Falkenstein and defense

counsel resulted in a nonwaivable conflict that would compromise the fairness of the

proceedings. Applying our abuse of discretion standard, this ruling is within the

"bounds of rationally available choices" and within the trial court's inherent power to

ensure the integrity and fairness of the proceedings. Hence, we do not disturb it on

appeal.

Similarly, the trial court imputed the conflict to the rest of Falkenstein's law firm,

following the same reasoning. The trial court ruled that under Colo. RPC 1.10 and

Colorado caselaw, every lawyer at the small out-of-state firm is presumed to have

access to the confidential information defense counsel divulged to Falkenstein. The law

firm has a single office, specializes in one practice area, and has a small membership. In

addition, we note there is no indication in the record that defense counsel contacted

19

Falkenstein as a trial tactic in an effort purposely to disqualify the out-of-state law firm.7

See ABA Op. 98-411 at 5 n. 8. Hence, we conclude that imputation of the nonwaivable

conflict to this firm under the circumstances of this case was also within the bounds of

rationally available choices and did not constitute an abuse of discretion.

IV. Conclusion

For the reasons stated above, we discharge the rule and remand this case to the

trial court for proceedings consistent with this opinion.

JUSTICE EID dissents, and JUSTICE HOBBS joins in the dissent.

'7 Consulting with a lawyer likely to represent an adverse party for the deliberatepurpose of disqualifying a potential adversary would violate the Rules of ProfessionalConduct, which prohibit conduct involving dishonesty and fraud. ABA Op. 98-411 at 5n. 8.

20

JUSTICE EID, dissenting.

Today, the majority mistakenly deprives the plaintiff, a child who became

seriously ill allegedly after eating a salad at the defendant's restaurant, of her counsel of

choice —one of the most prominent food-borne-illness law firms in the country. It

comes to this conclusion by making two significant errors. First, the majority places

virtually no weight on the importance of allowing parties to be represented by the

counsel of their choice. Second, the majority fails to consider the requirement that

significant prejudice be found before disqualification is appropriate. By failing to give

appropriate weight to plaintiff's choice of counsel and to require a showing of

significant prejudice, the majority erroneously disqualifies counsel in this case and,

moving forward, needlessly chills the casual consultations among attorneys that are so

vital to the profession. For these reasons, I respectfully dissent from the majority's

opinion.

Just a few years ago, we "emphasized the... importance, in both the criminal

and civil contexts, of continued representation of parties by counsel of their choice." In

re Estate of Mvers, 130 P.3d 1023, 1025 (Colo. 2006). Indeed, "the preservation of this

freedom of choice of counsel is a central feature of our adversary system," and "is of

substantial importance to the integrity of the judicial process." Rodriguez v. District

Court, 719 P.2d 699, 706 (Colo. 1986). Thus, "we have made clear that disqualification is

a severe remedy that should be avoided whenever possible," and we have instructed

lower courts that they should "impose less severe sanctions whenever they would be

adequate" "to ensure the integrity of the process and fairness to the parties." In re

Estate of Mvers, 130 P.3d at 1025.

The majority mentions this fundamental tenet only in passing. Maj. op. f~~f[ 1, 27.

In fact, it treats this case as if it involved the disqualification of an expert witness,

employing the analysis set forth in Mitchell v. Wilmore, 981 P.2d 172, 173 (Colo. 1999),

which involved the disqualification of an expert that had consulted with both the

plaintiff and defendant in a personal injury suit. See maj. op. f($ 21-22. Not

surprisingly, the court in that case made no mention of the importance of preserving

plaintiff's choice of counsel because the case did not involve the plaintiff's choice of

counsel. By contrast, in In re Estate of Myers, our most recent case involving

disqualification of counsel in a civil case, we emphasized that, although a court

"necessarily retain[s] the discretion to disqualify attorneys from further representation,"

it must consider "the countervailing importance" of continued representation of a party

by her counsel of choice. 130 P.3d at 1025. Here, the majority gives virtually no weight

to the "countervailing" factor of plaintiff's choice of counsel. It is thus not surprising,

then, that it finds that the balance weighs in favor of disqualification.

Under the proper analytical framework, a plaintiff's counsel of choice cannot be

set aside unless it is shown that there is "a clear danger that prejudice to a client or

adversary would result from continued representation." Id. at 1025; see also id. at 1027

(noting that prejudice must be weighed in the disqualification calculus). The required

showing of prejudice cannot be "based on mere speculation or conjecture," but rather is

the sort that would "seriously threaten[]" the integrity and fairness of judicial

proceedings. Id. at 1025, 1027. Even then, there also must be a showing that "any

remedy short of disqualification would be ineffective." Id. at 1027. In this case, a

showing of significant prejudice has not been made.

The trial court based its disqualification of plaintiff's counsel primarily on the

fact that, during the conversation between defense counsel and another attorney at

plaintiff counsel's firm, Drew Falkenstein, Falkenstein recommended that defendant

retain a particular expert, which it went on to do. The majority expresses its concern

that plaintiff's counsel could not "successfully impeach defense counsel's chosen expert

without the jury hearing that a member of the firm to which plaintiff's counsel belonged

had recommended the defense expert, which would be detrimental to the plaintiff."

Maj. op. f[ 24.

The problem with the majority's analysis on this point is that there is no reason

to think that plaintiff counsel's representation would be seriously impeded by this fact.

If the issue were to come up at trial, plaintiff's counsel would deal with it appropriately;

for example, he could say that he holds defendant's expert in the highest regard —and

in fact a member of his law firm recommended that defendant retain him —but he still

questions the expert's conclusions with regard to the case. Moreover, it is undoubtedly

true that plaintiff's firm had worked with the particular expert in the past; otherwise,

Falkenstein would have had no basis for recommending him. Viewed in this light, the

fact that Falkenstein recommended the expert to defense counsel would simply be

cumulative information. In my view, this issue would have a minor impact, if any, on

plaintiff counsel's ability to represent plaintiff, and it plainly falls short of the kind of

prejudice that threatens to undermine the fairness and integrity of the proceedings

requiring disqualification. Compare Rodriguez v. District Court, 719 P.2d 699, 707

(Colo. 1986) (holding that a defendant should not be precluded from waiving conflict-

free representation, especially when "the conflict of interest may prove of relatively

minor significance at trial" ), with Fognani v. Young, 115 P.3d 1268, 1270 (Colo. 2005)

(affirming a trial court's decision to disqualify counsel when attorney was very likely to

be a necessary substantive witness at trial).

The majority also concludes that disqualiflcation is required because plaintiff's

counsel, through Falkenstein, "had a hand in defense counsel's theory of the case and

her trial strategy." Maj. op. $ 24. In this regard, the majority vastly overstates

Falkenstein's advice and involvement. Defense counsel called Falkenstein and told him

she was looking into whether she could argue that plaintiff's illness was caused by

another source of E. coli, specifically a petting zoo. Falkenstein looked at his law firm's

publicly available database, which keeps track of E. coli outbreaks throughout the

country, and suggested that instead of the petting zoo, she look into an E. coli outbreak

connected to another restaurant in southern Colorado. The information about potential

alternate causes cannot be deemed confidential because it was publicly available

information that defense counsel could have gained herself through using the database.

And importantly, defense counsel added neither the petting zoo nor the other

restaurant as third-party defendants in this case. In fact, there is no indication that

those entities ever played a role in the case, let alone a continuing role. At most,

Falkenstein learned that the defense counsel would argue that plaintiff's illness was

caused by a source of E. coli not connected to her client. But again, this is not

confidential information; it is something that plaintiff's counsel would have learned in

any event as the trial progressed.

The majority postulates that plaintiff's counsel could "us[e] the insight [that

Falkenstein] gained from his consultation with defense counsel to the plaintiff's

advantage." Maj. op. $ 24. But as with prejudice toward the plaintiff in this case, there

has been no showing of significant prejudice to the defendant —that is, no showing that

plaintiff's counsel would in fact be able to use the information gleaned from the

conversation to gain an unfair advantage over the defendant. Instead, the majority's

analysis is precisely the sort of "speculation and conjecture" we condemned in In re

Estate of Myers, where the trial court erroneously based its disqualification decision on

the fact that the party should proceed with "untainted counsel." 130 P.3d at 1026.

The majority eventually relies upon In re Estate of Myers in its analysis, but not

for the propositions discussed above. Instead, it notes that under the case, the court has

the inherent authority to disqualify counsel. Maj. op. $$ 13, 27, 29. But there, we

discussed a court's inherent authority to disqualify in the context of the analysis

outlined above; in other words, a trial court cannot merely rely on its inherent authority

to disqualify in issuing a disqualification order. Indeed, in In re Estate of Myers, we

reversed the trial court's order based on its failure to employ the proper analysis,

stating that, standing alone, even an actual [rule] violation... would be insufficient to

support [a disqualification] order. Disqualification as a remedy for such an

impropriety, even where privileged information is actually involved, must turn on a

host of other considerations, including the flagrancy of the attorney's conduct; the

sensitivity of the information and its relevance to the particular proceedings; and the

prejudice to be suffered by the non-moving party.

Because the disqualification of a party's chosen attorney is an extreme remedy,

appropriate only where required to preserve the integrity and fairness of judicial

proceedings, it must be supported by a showing not only that the proceedings appear to

be seriously threatened, but also by a showing that any remedy short of disqualification

would be ineffective. 130 P.3d at 1027 (citations omitted). Thus, even where there is a

rule violation involving confidential information (which, in this case, there is not~), the

"extreme" remedy of disqualification is appropriate only after there has been a showing

of significant prejudice. This standard has not been met in this case —either by the trial

court or by the majority.~

As a result of its errors, the majority needlessly deprives this particular plaintiff

of her counsel of choice. But this case has far broader significance for the legal

profession. Here, defense counsel turned to a colleague in the field of food-borne-

~ Even assuming that a casual conversation that contained no confidential informationsomehow created a duty of confidentiality, this duty would not lead to a violation ofColo. RPC 1.7,as the majority claims. Rule 1.7(a) prohibits a lawyer from representing aclient if the representation would create a concurrent conflict of interest. A concurrentconflict of interest arises if "there is a significant risk that the representation of one ormore clients will be materially limited by the lawyer's responsibilities to another client,a former chent or a third person." Colo. RPC 1.7(a)(2) (emphasis added). As with theprejudice analysis, there has been no showing in this case of "significant risk" or"material limit[ation]."~ Because I would reverse the trial court's conclusion that the conversation betweendefense counsel and Falkenstein required disqualification, I find it unnecessary toconsider the issue of whether the entire firm should be disqualified. Maj. op. $$ 28-30.

illness law for a recommendation of an expert and to vet a possible alternate source of

E. coli. We should be encouraging, not discouraging, this sort of casual consultation

based on non-confidential information. As the American Bar Association has noted,

"[s]eeking advice from knowledgeable colleagues is an important, informal component

of a lawyer's ongoing professional development[, and] [t]esting ideas about complex or

vexing cases can be beneficial to a lawyer's client." ABA Formal Op. 98-411 (Aug. 30,

1998). After today's opinion, these sorts of conversations, so vital to the profession,

simply will not happen.

The majority notes that there is no evidence that the consultation in this case was

committed for purposes of disqualifying plaintiff's counsel. Maj. op. $ 30.~ But the

majority's observation misses the point. Motions to disqualify an opponent's attorney

should be viewed with "skepticism" because of their "potential use as dilatory or

tactical devices." In re Estate of Mvers, 130 P.3d at 1025 (emphasis added); see also

Vinton v. Virzi, 2012 CO 10, )J 11, 269 P.3d 1242, 1246. Rather than proceeding with the

appropriate caution as outlined in our previous caselaw, the majority affirms the trial

court's disqualification order on the ground that it was "within the bounds of rationally

available choices." Maj. op. f( 30.

For the reasons outlined above, I respectfully dissent from the majority's opinion.

I am authorized to state that JUSTICE HOBBS joins in this dissent.

~ Plaintiff implies a strategic motive in this case, noting that defense counsel respondedto the petition with an email stating, "if you let [defendant] out [of the case] —thismatter is moot."

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

PARALLEL IRON, LLC,

Plaintiff,

v. C.A. No. 12-874-RGA

ADOBE SYSTEMS IN CORPORA TED,

Defendant.

MEMORANDUM OPINION

Richard D. Kirk, Esq., Wilmington, Delaware; Marc A. Fenster, Esq., Los Angeles, California (argued); Attorneys for Plaintiff Parallel Iron, LLC.

Richard L. Horwitz, Esq., Wilmington, Delaware; Robert J. Artuz, Esq., Menlo Park, California (argued); Attorneys for Defendant Adobe Systems Incorporated.

March~ 2013 Wilmi~, Delaware

Plaintiff Parallel Iron, LLC brings a patent infringement action (D.I. 1) against Defendant

Adobe Systems Incorporated. Parallel Iron alleges that Adobe infringed U.S. Patent Nos.

7,197,662, 7,543,177, and 7,985,388. 1 Adobe now moves to disqualify Parallel Iron's lead

counsel, the law firm of Russ August & Kabat ("RAK"). Adobe argues that RAK was serving as

its opinion counsel at the time Parallel Iron filed suit, thus creating an impermissible concurrent

conflict of interest.

FACTUAL BACKGROUND

RAK filed suit against Adobe on behalf of Parallel Iron on July 12, 2012. (D.I. 1). On

September 4, 2012, Adobe sent RAK a letter asserting that RAK "currently advises Adobe on

patent matters" and that a concurrent conflict of interest existed based on this dual

representation. (D.I. 23, ~ 25). This alleged conflict of interest is grounded in three previous

engagements between RAK and Adobe involving the preparation of opinion letters. (!d. at~ 2).

These letters represent the full scope of the legal work performed by RAK for Adobe, as RAK

never served as litigation or trial counsel. (!d.). Marc A. Fenster, a partner at RAK, was

responsible for the opinion letters and the client relationship with Adobe. (D.I. 15, ~~ 3-4).

The first engagement began in April2006. (D.I. 23, ~ 4). Mr. Fenster agreed to provide

an opinion on whether Adobe's Excellence products infringed U.S. Patent No. "1 ", a patent held

by a company known as Tech, Inc.2 (!d.). Mr. Fenster was to deliver the final opinion letter with

1 Parallel Iron has filed numerous related cases in the District of Delaware asserting the same patents against other parties.

2 In order to make sure no confidential information is disclosed, the Court has used pseudonyms as the Court thinks appropriate.

an oral presentation to an Adobe "business unit leader." (!d). Mr. Fenster conducted the

infringement analysis and had related telephone conversations with Adobe personnel. (/d. at~

5). He delivered his opinion letter of non-infringement to Adobe in October 2006. (Jd ). This

did not conclude Mr. Fenster's engagement on Tech related work, as Adobe engaged him for

additional infringement analysis of Adobe's Excelsior product and the Tech patent in May 2007.

(/d. at~ 6). Mr. Fenster did this analysis and delivered his final opinion letter of non­

infringement in October 2007, which he orally presented in January 2008. (Jd at~~ 6-7).

RAK's next engagement with Adobe began in May 2009. (Jd at~ 8). This was to

provide an opinion letter as to whether Adobe's Excalibur product infringed U.S. Patent No. "2,"

a patent held by a company known as Services, Inc. Mr. Fenster again performed the

infringement analysis and determined that the product did not infringe the patent. (/d.). The

letter was delivered in July 2009, and was orally presented to Adobe in August 2009. (/d). This

concluded RAK's work for Adobe on the Services patent.

Adobe next engaged RAK in August 2010 for an opinion letter regarding whether

Adobe's Extreme product infringed U.S. Patents Nos. "3" and "4," held by a company known as

Manufacturers LLC. (!d. at~ 1 0). Mr. Fenster did the infringement analysis and concluded that

Adobe's Extreme product did not infringe the Manufacturers' patents. (!d). The opinion letter

was drafted in April 2011 and the opinion was discussed in May 2011. (/d. at ~ 11 ). During the

discussion, Adobe informed RAK that Manufacturers had a third patent, U.S. Patent No. "5," and

Mr. Fenster agreed to perform an infringement analysis in relation to this patent. (/d.). A

revised opinion letter was sent to Adobe in October 2011, which included an analysis ofthe third

Manufacturers patent. (/d.). This was discussed in November 2011, at which time Adobe in­

house personnel requested certain revisions. (/d. at~ 12). In December 2011, Mr. Fenster

2

delivered two final opinion letters of non-infringement to Adobe, which were then orally

presented in February 2012 during a conference call. (!d. at ,-r 13). Mr. Fenster avers that he

asked whether any additional work was needed or requested by Adobe at that time, to which

Adobe in-house personnel replied in the negative. (!d.). Mr. Martini, the Adobe declarant, avers

that neither he nor anyone else at Adobe ever communicated an intention to terminate the

relationship with RAK. (D.I. 15, ,-r 8). He further avers that Adobe expected at all times that it

would be able to continue to rely on RAK as opinion counsel in the ongoing Manufacturers

matter. (!d. at ,-r 4). Adobe's dispute with Manufacturers is ongoing as of Mr. Martini's

November 1, 2012 declaration, and RAK never actually notified Adobe that it would be

unavailable to provide further opinion letter work on the Manufacturers matter. (!d. at ,-r 16).

Mr. Fenster avers that for each opinion letter, Adobe and RAK came to an agreed upon

budget range and limited the scope of the relationship to an infringement analysis of the subject

patent and products identified by Adobe, which would be embodied in an opinion letter. (D.I.

23, ,-r 16). RAK was never engaged as litigation or trial counsel. (!d. at ,-r 17). In July 2012, five

months subsequent to the delivery of the most recent Manufacturers opinion letter, Parallel Iron

engaged RAK to file suit against Adobe. (!d. at ,-r 22).

DISCUSSION

The American Bar Association Model Rules of Professional Conduct govern attorneys

practicing in the District of Delaware. Boston Scientific Corp. v. Johnson & Johnson Inc., 64 7 F.

Supp. 2d 369, 373 (D. Del. 2009). When an attorney is alleged to breach the Model Rules, the

court must "examine the charge." Webb v. E.l DuPont de Nemours & Co., Inc., 811 F. Supp.

158, 160 (D. Del. 1992). The Court has the power to disqualify attorneys and law firms for

3

violation ofthe Model Rules. See United States v. Miller, 624 F.2d 1198, 1201 (3d Cir. 1980).

Nevertheless, motions to disqualify are generally disfavored. Intellectual Ventures I LLC v.

Checkpoint Software Technologies Ltd, 2011 WL 2692968, *4 (D. Del. 2011). "[T]he court

should disqualify an attorney only when it determines, on the facts of the particular case, that

disqualification is an appropriate means of enforcing the applicable disciplinary rule." Miller,

624 F.2d at 1204. "[D]isqualification is never automatic," Elonex IP. Holdings, Ltd v. Apple

Computer, Inc., 142 F. Supp. 2d 579, 583 (D. Del. 2001), and the Court has "wide discretion in

framing its sanctions to be just and fair to all parties involved." Miller, 624 F .2d at 1201.

Adobe argues that RAK should be disqualified for a breach of Model Rule 1.7(a). Rule

1.7(a) provide that "a lawyer shall not represent a client if the representation involves a

concurrent conflict of interest" absent client consent.3 Parallel Iron argues that there was no

active attorney-client relationship between Adobe and RAK at the time it filed suit. "Under

Delaware law, where there is no express contract or 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." Boston Scientific Corp., 64 7 F. Supp. 2d at

373. 4

The determination of whether an attorney-client relationship exists thus requires a client-

centric focus. The analysis depends on the reasonableness of the client's belief regarding the

status of the relationship. This requires a fact specific inquiry that depends on the client's history

3 There is no dispute that Adobe never consented to being sued by RAK.

4 The Model Rules take a stricter approach to concurrent conflict of interest as opposed to conflicts involving former clients. See Commonwealth Scientific & Indus. Research Organisation v. Toshiba Am. Info. Sys., Inc., 297 F. App'x 970, 974 (Fed. Cir. 2008).

4

with the law firm. Here, the six year history between Adobe and RAK was sufficient to instill in

Adobe a reasonable belief that it would not be sued by RAK, at least absent some sort of prior

notice that RAK would no longer be available to serve as Adobe's opinion counsel. It was fair

for Adobe to believe that its opinion counsel would not transform into adverse counsel without

warning. RAK knew of the active nature of the Manufacturers engagement, as it billed time for

"Research dockets of prior and new Manufacturers patent infringement cases in [State]" in June

2011. (D .I. 15, Exh. I at 3 ). Developments in that litigation, including claim construction, would

certainly bear on RAK's infringement analysis. RAK should thus have expected that Adobe

would desire to rely on RAK's experience with the Manufacturers patents to provide any needed

updates, just as had occurred during the Tech engagement. The Court is aware ofthe limited

nature of the opinion counsel role. Nevertheless, opinion counsel is still counsel, complete with

fiduciary duties to clients and professional obligations under the Model Rules.

It is true that RAK would have been free to reject any Adobe request for further opinion

letters. RAK, however, had never refused work from Adobe in the past, which strengthens the

reasonableness of Adobe's belief that RAK would take further work and the relationship was

ongoing. Moreover, RAK's freedom to reject additional work from Adobe is not dispositive.

Even the most active of attorney-client relationships may be terminated at the option of the

attorney so long as "withdrawal can be accomplished without material adverse effect on the

interests of the client[.]" ABA Model R. Prof. Conduct 1.16(b ). The fact that the law firm,

however, may freely choose to end the relationship and refuse further business does not mean it

is free to sue its client prior to making it clear that the relationship is over. It is the law firm's

responsibility to ensure there are no questions regarding the status of its current client

relationships. Baldasarre v. Butler, 132 N.J. 278,291,625 A.2d 458,464 (1993). It would have

5

been a simple enough task for RAK to notify Adobe that it would no longer be available as

opinion counsel. Although the Court has no reason to believe that RAK acted in bad faith, or

anything approaching bad faith, it is incumbent upon law firms to iron out risks of conflicts

before the risks mature into live controversies.

Parallel Iron refers to Adobe's "Guidelines for Handling All Matters" as evidence that

Adobe itself sharply limited the scope of the relationship, and thus could not have reasonably

believed it was still a client of RAK:

The purpose of this letter is to set forth guidelines that will govern your firm's provision of legal services to Adobe Systems Incorporated and its subsidiaries ("Adobe"), not only with respect to the matters for which you are presently engaged, but also with respect to any other matters for which Adobe may engage you in the future.

Engagement for Projects May Only Be Made by Adobe legal department: Finally, please note that only representatives of the Adobe legal department may assign projects to you or engage your firm's services. If requests for services are made by any other persons within Adobe (and are not otherwise authorized by the Adobe legal department contact), you should consult your Adobe legal department contact before proceeding with the work. Unauthorized work will be ineligible for payment.

(D.I. 23, Exh. J at 1, 3). The Court does not view the Guidelines as an important source of

guidance for the Rule 1. 7(a) analysis. They focus on defining who is authorized to bind Adobe

to agreements for legal services. The question here is not whether RAK engaged with Adobe

personnel who lacked authority to bind the organization. Adobe authorized RAK to perform all

of the services RAK performed as opinion counsel. The question is whether the history between

RAK and Adobe made it such that Adobe reasonably believed that a relationship existed and that

it would expect not to be sued by an RAK-represented party. Parallel Iron argues that the

Guidelines do not mention or require formal notice of termination, but neither do the Guidelines

6

amend the Rules of Professional Responsibility. Finally, Parallel Iron argues that at the end of

the last conference call between Mr. Fenster and Adobe personnel, Mr. Fenster asked whether

anything further was needed from RAK, and Adobe personnel responded in the negative.

According to Parallel Iron, this terminated the attorney-client relationship. The Court disagrees.

Such a customary gesture to conclude a conversation is not sufficient to terminate Adobe's

expectations. For all these reasons, the Court holds that RAK had an ongoing attorney-client

relationship at the time it filed suit on behalf of Parallel Iron against Adobe, and that RAK thus

created a prohibited concurrent conflict of interest under Rule 1.7(a).

The question remains: what to do about RAK's violation? Adobe argues that (1) RAK

should be disqualified from this case and (2) RAK should be forced to build an "ethical wall"

between itself and co-counsel. The Court agrees with the first proposal, and disagrees with the

second. "Because the interest sought to be protected by Rule 1. 7 is one ofloyalty, a per se rule

of disqualification should be applied when that rule is breached." Manoir-Electroalloys Corp. v.

Amalloy Corp., 711 F. Supp. 188, 195 (D.N.J. 1989). Law firms must be aware ofthe

importance of conducting thorough conflict analyses, especially when filing multiple suits

against dozens of defendants. When it became apparent to RAK that Adobe was a tenable target

of Parallel Iron's patent suit, RAK should have been more alert to the delicateness ofthe

situation and been more proactive in extinguishing any questions regarding the existence and

extent of the Adobe relationship. RAK is thus disqualified from further representing Parallel

Iron in its suit against Adobe.

The Court does not find it necessary to force RAK to build an "ethical wall" between

itself and co-counsel. The Court has no reason to believe that RAK operated in bad faith when it

sued Adobe. There is thus no reason to believe that RAK will not comply with the

7

disqualification order by "continuing to litigate against Adobe indirectly, by directing[] Parallel

Iron's other lawyers at the Ni law Firm and Bayard P.A., who are its co-counsel in both this

lawsuit and the other Parallel Iron actions." (Adobe's Brief, D.I. 13, p. 17). The complete bar of

communication between RAK and co-counsel would seriously hamper RAK's ability to litigate

on behalf of Parallel Iron in the other actions. This would result in considerable disruption and

disproportionate punishment, considering the lack ofRAK's bad faith or Parallel Iron's

complicity in the conflict. Further, RAK is not in possession of any confidential information that

is relevant to the instant suit. There is thus no need to order RAK to set up an "ethical wall"

between itself and co-counsel.

The Court has no reason to believe that RAK will not faithfully comply with the

disqualification order. The Court therefore does not believe any further action is necessary.

An order will follow.

8

62292924_1

Some Fundamental Theses About the Approach to Conflicts By Inside Counsel and Their Law Firms

James B. Kobak, Jr.

Hughes Hubbard & Reed LLP

Thesis 1: Both law firms and general counsel offices have obligations to act

reasonably in applying conflicts rules and procedures.

Model rules preamble ¶14 (rules of reason)

Thesis 2: They should have a shared interest in developing a candid, supportive

relationship, at least when truly fundamental competing interests of their

organizations or other clients are not at stake.

Thesis 3: The concurrent conflict rules in most U.S. jurisdictions are too rigid and out

of step with rules in other major jurisdictions. Even so, they refrain from

creating a per se conflicts rule with respect to subsidiaries and affiliates.

Comment 34 to Rule 1.7 and comments 34, 34A and 34B to New York version of Rule

1.7.

Corollary:

The Baby Centers approach should not be extended indiscriminately.

(GSI Commerce Solutions, Inc. v. Baby Centers, L.L.C., 694 F. Supp.2d 333 (S.D.N.Y.),

aff’d., 618 F.3d (2d Cir. 2010)

Thesis 4: It is contrary to the purposes of the rules to dictate in advance that every

subsidiary and affiliate is automatically or by definition “the client”.

2

62292924_1

Corollaries:

- In effect, GC may be taking a position as a lawyer broader than that

which ethics rules require or allow.

- Business interests do not usually trump ethical

obligations for either outside or in-house counsel.

- This puts outside counsel in difficult position not

only with long-time clients but within his or her firm.

- It can breed resentment and discourages loyalty.

- It interferes with other clients’ choice of experienced counsel.

- Strategic use is rare but it happens and is hard to justify

as a matter of professionalism.

Thesis 5: Even when GC has a reasonable approach, it may not permeate legal

staff.

- Counsel for affiliate may be unsure of position and

unwilling to raise complications that are unnecessary

or may be thought to reflect poorly on judgment in

selection of counsel.

- Procedure for clearing may be unclear or take too

much time.

3

62292924_1

Corollaries:

- Efficient, well understood, not overly forbidding process

for raising and resolving issues needs to be in place for

both inside and outside counsel.

- This would seem to dictate a less rigid approach to defining the client in

engagement letters and a more reasonable approach to foreseeable

advance waivers.

Compare Galderma Laboratories, LP. v. Actavis M.D. Atlantia LLC, No. 3:12-CV-2038-K 2013 U.S. Dist. Lexis 24171 (N.D. Texas), with Celgene Corp. v. KV

Pharmaceuticals Co., 2009 WL 2937415 (D.N.J. July 29, 2008).

Thesis 6: At the same time, outside counsel must be sensitive to potential client

conflict concerns and be prepared to discuss them, not hide the ball

until the last minute.

- Surprise appearances of counsel representing an adversary or client

have undoubtedly contributed to the breadth of many clients’

engagement letter forms.

- Conversely, rigid company policies may contribute to an attitude among

some outside lawyers of avoiding discussion or glossing over potential

problems, particularly with laterals.

- This impasse has led to a number of recent decisions involving

disqualification motions and even liability claims.

4

62292924_1

Parallel Iron, LLC v. Adobe Systems, Inc. C.A. No. 12-874-RGA (D. Del March 4,2013); Liebnow v. Boston Enterprises, Inc., No.12 SA 83, 2013 Colo.8 (Colo.

Supreme Ct. February 4, 2013). Thesis 7: Advance waivers are sanctioned by the rules but must be reasonable

and tailored to the foreseeable realities of a firm’s practice and a client’s

legitimate, material business concerns.

See comment 22 to Rule 1.7

Final Thesis:

Too many engagement letters on both sides attempt to be too all-

encompassing.

- The goal is to implement a flexible, cooperative relationship among

attorneys doing their best to represent a common client. It should not

devolve into a battle of forms.