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By Joan Rogers
Aug. 9 — A law firm shouldn't have unilaterally withdrawn from representing a longtime client in order to avoid a conflict that would be created by bringing in lateral hires, the U.S. District Court for the District of Rhode Island ruled July 22 ( Markham Concepts, Inc. v. Hasbro, Inc., 2016 BL 236699, D.R.I., No. 15-419 S, 7/22/16 ).
The court decided that the judicially created “hot potato” doctrine precluded Greenberg Traurig LLP from abruptly terminating its representation of Hasbro Inc. in patent matters so that two incoming lawyers could keep representing Hasbro's adversaries in litigation over intellectual property rights to the Game of Life.
The court's explicit embrace of the hot potato doctrine in the context of lateral moves is noteworthy in an era where it's commonplace for lawyers to change firms and take clients with them. The duty of loyalty would be gutted if firms could convert current clients to former clients when they refused to waive an imminent conflict, Chief Judge William E. Smith said.
Smith rejected the argument that a per se disqualification rule applies in this situation, and he suggested that law firm mergers warrant a more sympathetic analysis. But the facts here weigh in favor of ejecting Greenberg Traurig as counsel for Hasbro's litigation opponents, he concluded.
A Greenberg Traurig spokesperson provided this statement to Bloomberg BNA about the disqualification decision:
The Firm did not believe a clear conflict of interest existed in this case though we sought to have good faith communications with Hasbro beforehand. Once we were in fact challenged on conflict grounds, we believed that our withdrawal would have harmed our client in the case, while continuing would not harm Hasbro since the Firm’s prior work for Hasbro was completed and was completely unrelated to the case. We concluded that, although there was a conflict argument, our responsibility to attempt to prevent prejudice to our client in the case was clearly the stronger ethical obligation which prevented us from simply withdrawing, and instead let the Court decide this issue. While we respectfully disagree with the decision, we of course respect and will abide by it.
In an interview with Bloomberg BNA, Allison Martin Rhodes said that in her experience advising lawyers and firms about lateral hiring and law firm combinations, there's a lack of awareness about the existence of the hot potato doctrine.
Rhodes is a partner in Holland & Knight's Portland and Los Angeles offices. She's a contributor to Robert Hillman's treatise, Hillman on Lawyer Mobility: The Law and Ethics of Partner Withdrawals and Law Firm Breakups , which discusses the hot potato doctrine in a section on ethical issues in recruiting lateral hires.
Rhodes noted that the hot potato doctrine isn't in the conflicts rules but rather in the case law around the rules. The Markham opinion provides an especially clear and succinct description of the doctrine, she said.
Rhodes said that when the hot potato doctrine comes into play, the client can be offered options such as waiving the conflict, hiring replacement counsel, getting a partial refund of fees, or any other arrangement that will satisfy it.
Many clients don't really care, but a client that refuses has veto power, she said.
“The hot potato doctrine can torpedo moves and mergers,” Rhodes said. Many mergers are big group lateral hires, and the issues a firm faces when it hires laterals are the same as when it does a merger, she said.
She said that when a large law firm combination creates a conflict involving a relatively small matter, “it's a questionable balance of the equities” for the hot potato doctrine to prevent the combination. But if you view the situation entirely from the client's perspective, that's what should happen, she said.
On the other hand, there are bigger implications for clients if the combination doesn't take place and a law firm fails, she said.
In comments to Bloomberg BNA, Douglas S. Laird, Kansas City, Mo., said he doesn't think the result is surprising or a significant departure from case law. Laird is the general counsel of the Polsinelli law firm.
The court concluded, Laird said, that a five-day interval between the termination of an attorney-client representation and the beginning of a representation adverse to the terminated client was so insignificant that Hasbro should be viewed as GT's current client when the adverse representation started. Given that premise, and without any waiver from Hasbro, the result was inevitable, Laird said.
Laird said that because the representations were unrelated in subject matter, the disqualification request would likely have been denied if Hasbro were considered a former client.
But Laird said this raises an interesting question—what interval would have sufficed to make Hasbro a former client, if five days wasn't enough?
Most would agree, Laird said, that Hasbro could be fairly treated as a former client if GT had terminated the representation a year before the new lawyers arrived. The question is where between a year and five days is the line to make the terminated client a former client, he said.
“The ‘hot potato' doctrine seemingly relies on an evaluation of lawyer motivation for the termination and the efficacy of the ‘right' timing,” Laird said. “It is a formula for unclear guidance” and makes ethical questions more difficult than necessary, he said.
Laird said he also found it interesting that the court’s opinion contains no discussion of the rule addressing the termination of client relationships.
He pointed out that Model Rule 1.16 expressly allows lawyers to end a client relationship if the act won't cause a “material adverse effect on the interests of the client,” without regard to lawyer motivation or timing.
“I have always thought there is some tension between the ‘hot potato' doctrine and Rule 1.16,” Laird said.
The comment to Rule 1.16 says that lawyers “should” complete matters once started, Laird noted. However, “this is not a mandatory direction and the purpose of the rule could be served by a careful application of the no ‘material adverse effect' provision,” he said.
The comment also says that the lawyer has “the option” to withdraw if it can be accomplished without a material adverse effect on the client’s interests, Laird said.
Laird said it could be the case that Rule 1.16 only addresses whether a lawyer may terminate a relationship and creates no protection from the conflict provisions.
“However, the language of the rule is not so limited and it does expressly create a power (the ‘option') for the lawyer to terminate in certain circumstances,” Laird said. “At a minimum, I think the rule should be part of the analysis in cases like this one,” he said.Filings
Louis M. Solomon and Michael S. Lazaroff were representing Markham Concepts Inc. and Lorraine Markham in litigation against Hasbro when the two attorneys moved to Greenberg Traurig in March 2016.
GT disclosed the planned hire to Hasbro, which it had represented in patent matters since 2008, but Hasbro didn't want the firm to represent its litigation opponents while advising Hasbro in patent matters.
The firm withdrew from representing Hasbro on March 11, a few days after Hasbro declined to waive the conflict. Solomon and Lazaroff officially joined GT five days later on March 16.
The court held that Hasbro was GT's current client, not a former client, for purposes of analyzing the conflict of interest.
Accordingly, the conflict came under the strict current-client conflict standard in Rhode Island Rule of Professional Conduct 1.7, which forbids adverse representation of current clients even in unrelated matters, rather than the less stringent former-client standard in Rule 1.9, which prohibits adverse representation in the same or substantially related matters.
Smith embraced the principle that firms can't drop a client like a hot potato to avoid a conflict that would be created by taking on another client.
The Rhode Island Supreme Court hasn't expressly adopted the hot potato doctrine, but a number of other jurisdictions recognize the rule, he said.
More importantly, the hot potato doctrine comports with Rhode Island's professional conduct rules, Smith said. The comments to Rule 1.7 indicate that as a general rule lawyers should remain loyal to their current clients and decline to take on a new, conflicting representation, he said.
The court found that GT's conduct fell squarely within the scope of the hot potato doctrine. The firm had represented Hasbro for eight years and was actively seeking to expand this relationship when it abruptly ended the representation after Hasbro refused to waive the Markham conflict, Smith said.
If GT could convert Hasbro to its former client by quickly dropping it in the face of an imminent conflict, then any firm could avoid Rule 1.7 by simply converting a present client into a former one, the court said. That would render a lawyer's duty of loyalty meaningless, Smith said.
Smith decided, however, that the hot potato doctrine doesn't automatically require GT's disqualification.
Case law doesn't support that per se approach, and the preamble to the professional conduct rules states that a violation doesn't automatically warrant disqualification in pending litigation, he said.
On the contrary, a First Circuit opinion indicates that courts should consider all of the facts before disqualifying a lawyer for appearing adverse to a client in litigation, Smith said.
Smith said the “particularly egregious” circumstances surrounding this conflict weighed in favor of GT's disqualification.
GT identified the conflict before Solomon and Lazaroff joined the firm, and all attorneys involved had the ability to remain loyal to their clients, he said. GT could have either declined to take on the Markham matter or refrained from hiring the two lawyers, at least until the matter was concluded, Smith said.
As for Solomon and Lazaroff, Smith said they could have remained with their prior firm until the action ended, found another firm to join that didn't have a conflict with the Markham matter or made arrangements for the Markham matter to remain at their former firm.
Smith said GT's arguments against disqualification understated the harm that Hasbro suffered by losing GT as its lawyer, ignored the intangible damage that comes with disloyalty to clients and overstated the burden that disqualification would place on Markham.
Moreover, Smith didn't buy GT's argument that Hasbro unreasonably refused to waive the conflict contrary to a conflicts clause in its engagement agreement with GT.
He pointed out that Markham was accusing Hasbro of unlawfully using its intellectual property rights and seeking significant damages. It's reasonable that Hasbro wouldn't want its own lawyers to assist Markham in the case even if the conditions in the conflict clause were met, Smith found.
Smith distinguished this case from situations where the partners of two firms vote to merge, or where one existing firm client decides to sue another.
“In those situations, conflicts are inevitable, often beyond the control of the individual attorneys who represent the clients, and warrant a more sympathetic analysis,” he said.
Smith also said “a firm's clients do not hold all the cards in situations like this.” He quoted this statement from a leading treatise: “A definition of ‘disloyalty' broad enough to encompass the mere act of dropping a client would convert the client-lawyer relationship into one of continuing servitude.” Geoffrey C. Hazard, W. William Hodes & Peter R. Jarvis, The Law of Lawyering § 21.15 (4th ed. 2016).
Other facts could have justified GT in breaching its duty of loyalty to Hasbro, but GT didn't not point to any that carry the day, Smith said.
Adler Pollock & Sheehan P.C. and lawyers from Holland & Knight's Boston office represented Hasbro in its motion to disqualify Greenberg Traurig. Donoghue Barrett & Singal P.C. represented Greenberg Traurig, Louis Solomon and Michael Lazaroff in objecting to the disqualification motion.
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