Broad Conflict Waiver Saves Firm From Disqualification, N.Y. Court Concludes

The ABA/BNA Lawyers’ Manual on Professional Conduct™ is a trusted resource that helps attorneys understand cases and decisions that directly impacts their work, practice ethically, and...

By Joan C. Rogers  

The Jones Day law firm may continue to represent Macy's in a contract interference action against another current client, J.C. Penney, in light of an advance conflict waiver that JCP signed in 2008 when it asked Jones Day to handle Asia trademark matters for the company, the New York Supreme Court, Appellate Division, First Department, held June 27 (Macy's Inc. v. J.C. Penney Corp., N.Y. Sup. Ct. App. Div. 1st Dep't, No. 10486N, 6/27/13).

Upholding an order that declined to disqualify the firm, the court reasoned that the engagement letter with the advance conflict waiver informed J.C. Penney about the potential for future conflicts and that by accepting it the client waived its right to protest the law firm's representation of other clients in unrelated matters.

Although J.C. Penney said it never countersigned the letter, the court found that the company accepted the terms of the agreement--including the future conflict waiver--by going forward with the representation, because a clause in the retainer letter provided for that outcome.

Battle of Retail Giants

The litigation before the court is an outgrowth of the high-profile spat between retail giants Macy's and J.C. Penney over plans for Martha Stewart Living Omnimedia to sell its products at J.C. Penney stores.

Macy's, represented by Jones Day, sued J.C. Penney in August, accusing the company of interfering with its exclusive contract to sell certain Martha Stewart products. J.C. Penney moved to disqualify Jones Day, arguing that because the firm represents JCP in other matters its appearance on behalf of Macy's was foreclosed by case law and ethics rules that prohibit lawyers from suing current clients.

While the dispute was percolating, Jones Day learned that in 2008, when the firm was asked to represent J.C. Penney in Asia trademark matters, a Jones Day lawyer sent J.C. Penney an engagement letter that addressed future conflicts of interest. (See box.)


Future Conflict Waiver That Saved Law Firm From Disqualification in Suit Against Current Client

   

“Jones Day represents and in the future will represent many other clients. Some may be direct competitors of J.C. Penney or otherwise may have business interests that are contrary to J.C. Penney's interests. It is even possible that, during the time we are working for you, an existing or future client may seek to engage us in connection with an actual or potential transaction or pending or potential litigation or other dispute resolution proceeding in which such client's interests are or potentially may become adverse to J.C. Penney's interests.  

“Jones Day cannot enter into this engagement if it could interfere with our ability to represent existing or future clients who develop relationships or interests adverse to J.C. Penney. We therefore ask J.C. Penney to confirm that Jones Day may continue to represent or may undertake in the future to represent any existing or future client in any matter (including but not limited to transactions, litigation or other dispute resolutions), even if the interests of that client in that other matter are directly adverse to Jones Day's representation of J.C. Penney, as long as that other matter is not substantially related to this or our other engagements on behalf of J.C. Penney. In the event of our representation of another client in a matter directly adverse to J.C. Penney, however, Jones Day lawyers or other service providers who have worked with J.C. Penney will not work for such other client, and appropriate measures will be taken to assure that proprietary or other confidential information of a non-public nature concerning J.C. Penney acquired by Jones Day as a result of our representation of J.C. Penney will not be transmitted to our lawyers or others in the Firm involved in such matter.  

“In other words, we request that J.C. Penney confirm that (1) no engagement that we have undertaken or may undertake on behalf of J.C. Penney will be asserted by J.C. Penney either as a conflict of interest with respect to, or as a basis to preclude, challenge or otherwise disqualify Jones Day from, any current or future representation of any client in any matter, including without limitation any representations in negotiations, transactions, counseling or litigation adverse to J.C. Penney, as long as that other matter is not substantially related to any of our engagements on behalf of J.C. Penney, (2) J.C. Penney hereby waives any conflict of interest that exists or might be asserted to exist and any other basis that might be asserted to preclude, challenge or otherwise disqualify Jones Day in any representation of any other client with respect to any such matter, (3) J.C. Penney has been advised by Jones Day, and has had the opportunity to consult with other counsel, with respect to the terms and conditions of these provisions and its prospective waiver, (4) J.C. Penney's consent to these provisions is both voluntary and fully informed, and (5) J.C. Penney intends for its consent to be effective and fully enforceable, and to be relied upon by Jones Day.  

***  

“Please sign and return to us the enclosed copy of this letter in order to confirm that it accurately reflects the scope, terms and conditions with respect to this engagement. However, please note that your instructing us or continuing to instruct us on this matter will constitute your full acceptance of the terms set out above and attached. If you would like to discuss any of these matters, please give me a call.”  

 

 


The letter explained that Jones Day might be retained by present or future clients in litigation against J.C. Penney, and that Jones Day's representation of J.C. Penney was conditioned on the firm's ability to undertake such representations so long as they were “not substantially related to any of [Jones Day's] engagements on behalf of J.C. Penney.”

The letter asked J.C. Penney to confirm that it would not seek to disqualify Jones Day based on any such representation, and that it had been advised about and waived any conflict arising out of such representations.

The letter stated that J.C. Penney's continued instruction of the firm on the trademark matter “will constitute … full acceptance of the terms set out” in the letter and attachments.

Jones Day cited New York City Formal Ethics Op. 2006-1 (2006), which advised that a law firm may ask a client to prospectively waive objection to a future adverse representation, even in the same matter.

J.C. Penney criticized what it called the “gotcha” language in the engagement letter and pointed out that, according to Comment [22] to New York Rule of Professional Conduct 1.7, future conflict waivers should advise the client of the types of possible future adverse representations that the lawyer envisions, as well as the types of clients and matters that may present such conflicts. The Jones Day waiver did not meet that standard, J.C. Penney contended.

Client Waived Right to Protest

Both the trial court and the appellate court relied on the conflict waiver in concluding that Jones Day is not disqualified from representing Macy's against J.C. Penney in the contract litigation.

Ruling from the bench Oct. 5, 2012, New York Supreme Court Judge Jeffrey K. Oing noted that the waiver in the 2008 engagement letter was “very broad”--broader than recommended by the New York City bar opinion, he said. Nevertheless, Oing concluded that under the terms of the agreement “J.C. Penney has, in fact, waived its argument that Jones Day cannot represent Macy's in an action that's not related to the trademark case.”

In a per curiam opinion the appellate court upheld that decision “because Jones Day informed defendant about potential conflicts, and defendant waived its right to protest thereto.”

The court emphasized that the engagement letter expressly informed J.C. Penney about the possibility that present or future clients of Jones Day “may be direct competitors of [J.C. Penney] or otherwise may have business interests that are contrary to [J.C. Penney]'s interests,” and that such a client “may seek to engage [Jones Day] in connection with an actual or potential transaction or pending or potential litigation or other dispute resolution proceeding in which such client's interests are or potentially may become adverse to [J.C. Penney]'s interests.”

Moreover, the court said, the agreement explained unambiguously that Jones Day could not represent J.C. Penney unless it confirmed this arrangement was amenable to the company, thereby “waiv[ing] any conflict of interest that exists or might be asserted to exist and any other basis that might be asserted to preclude, challenge or otherwise disqualify Jones Day in any representation of any other client with respect to any such matter.”

The court also zeroed in on this language in the retainer letter: “[P]lease note that your instructing us or continuing to instruct us on this matter will constitute your full acceptance of the terms set out above and attached.”

It was undisputed, the court said, that Jones Day continued to represent J.C. Penney with respect to the company's Asian trademark portfolio after Jones Day sent the letter. Thus, it concluded, J.C. Penney “accepted the terms of the agreement, including waiver of the alleged conflict at issue.”

Frank H. Penski of Nixon Peabody, New York, represented J.C. Penney. Theodore M. Grossman, Jones Day, Cleveland, represented Macy's.


Full text at http://www.bloomberglaw.com/public/document/Macys_Inc_v_JC_Penny_Corp_Inc_2013_NY_Slip_Op_04891_2013_BL_17068.

The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and Bloomberg BNA.

Copyright 2013, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.