Advance Conflict Waiver Won't Let Kirkland Advise Clients' Competitor in Takeover Fight

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By Joan C. Rogers

June 11 — Kirkland & Ellis should be barred from representing its clients' competitor that is attempting a hostile takeover of the clients' parent company, a federal magistrate judge in Pennsylvania said June 9.

An advance conflicts waiver in K&E's engagement agreement with companies that are now subsidiaries of Mylan NV does not permit the firm to represent Teva Pharmaceutical Industries in its unwelcome effort to acquire their parent company, Magistrate Judge Lisa Pupo Lenihan of the U.S. District Court for the Western District of Pennsylvania said in recommending a preliminary injunction to stop the law firm's participation in the matter.

Waiver Doesn't Cover This

K&E's engagement letter with Mylan Inc. and other Mylan subsidiaries includes a provision allowing the law firm to represent other entities in matters not related to the firm's representation of the Mylan clients. (See box.) The term “substantially related” was negotiated out of the provision before the engagement letter was accepted, Lenihan noted.

Lenihan found that K&E's representation of Teva is not permitted by that clause because the firm's adverse role in advising Teva in the hostile takeover effort is in fact related to legal services that K&E provided to the Mylan clients.

K&E represented the Mylan clients regarding pharmaceutical products that are the target of Teva's hostile takeover attempt, and the firm received confidential and proprietary information about those products, Lenihan said.

Didn't Get Informed Consent

Lenihan also ruled that the conflict agreement is ineffective due to lack of informed consent from the Mylan clients.

K&E didn't establish that its disclosure to the Mylan clients about possible upcoming conflicts was adequate to make clear that an adverse representation might extend to a hostile acquisition attempt targeting the very entities that K&E represented and the very products about which it received confidential information, Lenihan said.

The plain language of the conflict provision says it includes “litigation, arbitration or other dispute resolution” without any reference to acquisitions, she noted.

“If K&E intended to retain a right to act as an advocate against the Mylan Clients in such a fundamental way, it was incumbent upon it to make certain that the clients knew and agreed to such an arrangement,” Lenihan stated.

K&E got nowhere by citing Galderma Labs., LP v. Actavis Mid Atl. LLC, 2013 BL 311744, 927 F. Supp. 2d 390 (N.D. Tex. 2013), which enforced a future conflicts waiver.

Lenihan said she agreed with the analysis in Galderma but found it “patently distinguishable” from this case. There, she said, the specific types of future conflicts were reviewed with the client.

Protecting the Corporate Family

Lenihan also found that K&E's conflict provision effectively requires the firm not to represent others adversely to Mylan affiliates—including parent company Mylan NV—on matters related to its legal services for the Mylan clients.

By specifying the circumstances under which K&E may be adverse to a Mylan affiliate, the conflict provision demonstrates a shared expectation that K&E's adversity to an affiliate outside those circumstances is prohibited, Lenihan said.

Although Mylan NV is not a K&E client and thus may not enforce any right against the firm, it is an affiliate of the Mylan clients and its interests may be invoked by them, she said.

Hostile Bid Is Inherently Adverse

Lenihan didn't buy K&E's argument that its role as Teva's adviser in the takeover effort is not really adverse to Mylan NV because Teva was offering a premium to acquire it.

A hostile takeover attempt is inherently adverse for purposes of the prohibition in Pennsylvania Rule of Professional Conduct 1.7 against representation directly adverse to a current client, Lenihan found.

Nor does it make any difference, she said, that the target of the hostile takeover is the newly formed holding company Mylan NV rather than the Mylan clients. Advancing the interests of a competitor in a hostile takeover attempt is adverse to the entire corporate affiliate group, she said.

“The Court does not accept Defendant’s attempt to cabin the ethical rule’s prohibition of a ‘representation … directly adverse' to a client’s showing of detrimental outcome,” Lenihan wrote. “The plain language of Rule 1.7 looks to the lawyer’s representation—his advocacy against his client—not merely the potential detrimental effect on the client.”

“[I]t would be hard to imagine a representation more opposed to a current client’s interests, more in breach of a fiduciary duty toward those interests, than one in which the client’s counsel sells his professional services to advance the interests of a competitor in a hostile takeover attempt of the clients’ entire corporate affiliate group,” Lenihan said.

In the alternative, Lenihan found that K&E's adverse representation of Teva in the takeover attempt is prohibited by Rule 1.7 because that representation is related to the firm's representation of the Mylan clients and would cause derivative harm to them.

The confidential and proprietary information that K&E received as counsel for the Mylan clients in various matters would offer a competitor a broad array of potential advantages in seeking to acquire Mylan NV, she said.

The screening measures that K&E put in place to shield the Mylan clients' information from inappropriate disclosure “are immaterial to this Court's analysis,” Lenihan added.

Firm Should Be Enjoined

Lenihan recommended that the district court issue a preliminary injunction that bars K&E from continuing to represent Teva in its hostile takeover bid.

The judiciary's power to enjoin violation of an attorney's duty to avoid conflicting representation was expressly recognized in Maritrans GP Inc. v. Pepper, Hamilton & Scheetz, 602 A.2d 1277 (Pa. 1992), Lenihan noted.

K&E is seeking review of the order from the court's chief judge, and Sullivan & Cromwell is now advising Teva, according to a Bloomberg BNA Big Law Business report.

The Mylan clients are represented by Wilson Sonsini Goodrich & Rosati P.C., Peacock, Keller & Ecker LLP and Pietragallo Gordon Alfano Bosick & Raspanti LLP.

Kirkland & Ellis is represented by Gibson Dunn & Crutcher LLP and K&L Gates LLP.

To contact the reporter on this story: Joan C. Rogers in Washington at jrogers@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

Full text at http://www.bloomberglaw.com/public/document/Mylan_Inc_v_Kirkland__Ellis_LLP_No_15__581_2015_BL_186120_WD_Pa_J.

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 2015, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.


K&E's Future Conflicts Provision

“Accordingly, as an integral part of the Engagement, you agree that K&E LLP may, now or in the future, represent other entities or persons, including in litigation, arbitration or other dispute resolution procedure, adversely to you or any of your affiliates on matters that are not related to (i) the legal services that K&E LLP has rendered, is rendering or in the future will render to you under the Engagement and (ii) other legal services that K&E LLP has rendered, is rendering or in the future will render to you or any of your affiliates under a separate engagement (an ‘Allowed Adverse Representation').”