Dentons DQ Order Vacated, but Verein Conflicts Issues Remain

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By Joan C. Rogers

April 17 — An order disqualifying Dentons US LLP as counsel for an Ohio corporation prosecuting patent infringement claims is no longer on the books—but the firm is now facing a malpractice suit from the company over the firm's alleged conflict of interest.

The U.S. International Trade Commission April 12 vacated as moot an administrative law judge's disqualification order after the parties settled and the commission terminated its investigation into whether retailers were violating the company's patents by importing laser-abraded jeans (In re Certain Laser Abraded Denim Garments, USITC, Inv. No. 337-TA-930, notice issued 4/12/16).

Observers had hoped the ITC's decision would clarify whether law firms operating under a “Swiss verein” affiliation model will be treated as a single firm for conflict of interest purposes.

Matthew J. O'Hara, a partner in Hinshaw & Culbertson LLP's Chicago office, told Bloomberg BNA the issue of whether vereins must apply U.S. conflicts rules across their entire structure remains unresolved now that the ITC withdrew the ALJ's opinion disqualifying Dentons US.

Nevertheless, Dentons US still has to deal with a malpractice suit filed by the client it stopped representing after the ALJ's decision.

Just a week before the ITC vacated the disqualification order, RevoLaze LLC sued Dentons US in Ohio state court (RevoLaze LLP v. Dentons US LLP, Ohio Ct. Common Pleas, Cuyahoga Cnty., No. CV 16 861410, filed 4/4/16).

RevoLaze accuses Dentons of also representing one of the company's litigation opponents, and doing nothing about the alleged conflict when it came to light.

Swiss Verein = ‘Law Firm.'

Dentons US got booted from representing RevoLaze in May 2015 when Chief Administrative Law Judge Charles E. Bullock found that the firm had a disqualifying conflict of interest because Dentons Canada LLP was concurrently representing one of the respondents—The Gap Inc.—in unrelated matters.

Bullock rejected the firm's argument that Dentons US and Dentons Canada are separate firms that aren't tainted by each other's conflicts of interest. As a Swiss verein, Dentons is a “firm” or “law firm” as those terms are used in ABA Model Rule of Professional Conduct 1.0(c), he ruled.

Bullock said “Dentons holds itself out to the public as a single law firm, but says that it is divided into ‘Legal Practices.'”

Either way, he said, the verein is an “other association authorized to practice law” or is made up of lawyers “employed in a legal services organization or the legal department of a corporation or other organization” within the meaning of those phrases in Rule 1.0(c).

The ALJ decided that disqualification was warranted even though several factors weighed against it.

“Dentons holds itself out to the public as a unified global law firm in order to attract business … and Dentons' continued representation in the face of a direct conflict would both contradict this public image and impact negatively on the law profession as a whole,” Bullock said.

ITC Vacates Order

The ITC decided against reviewing Bullock's disqualification order without determining whether it was appropriate to eject the firm. The issue is moot now that the investigation has been closed due to settlement, it said.

The commission said the disqualification question turns on whether Dentons US and Dentons Canada, as members of the Dentons verein, should be treated as a single law firm under the Model Rules.

Answering that question would require further proceedings and possibly additional factfinding, the commission said.

The commission said Comment [2] to ABA Model Rule 1.10 lists several factors to consider in determining whether a group of lawyers constitute a law firm, including:

  •  how the lawyers present themselves to the public;
  •  whether they conduct themselves as a law firm;
  •  the terms of any formal agreement among the lawyers; and
  •  whether they have mutual access to client information.

The record here lacks sufficient evidence on these factors, especially on the third factor, because the Dentons verein organizational agreements haven't been made part of the record of the investigation, the commission said.

The added delay, burden and expense of resolving these issues aren't justified now that the investigation is over, it said.

The commission said a forthcoming opinion will flesh out its reasoning for the decision.

‘You Can't Have It Both Ways.'

The ALJ's now-vacated opinion essentially said to Dentons “you can't have it both ways,”Mark A. Cohen told Bloomberg BNA. He's the founder of Legal Mosaic, a legal business consulting practice.

The judge basically said that if Dentons brands itself as a global firm and leads the consumer to have that expectation, it can't use the verein structure to make an end run around conflicts rules, Cohen said.

“That's a pretty compelling argument that probably will be taken up by other tribunals,” Cohen said.

Cohen said each member of a Swiss verein has its own profit and loss statement and operates as a juridically independent entity even though the verein itself is branded in a unified way. All of the Big Four accounting firms are Swiss vereins, he said.

Cohen characterized most of the world's largest law firms as Swiss vereins, but he said they have different internal structures determined by the enabling document from which all the relationships spring.

Cohen contrasted the single-branded Dentons network with Lex Mundi, which has 170 members around the world that are independent firms. Lex Mundi member firms check for conflicts when they want to collaborate, he said.

“I have my doubts whether the Dentons model is going to be able to continue under the assumption that by creating the verein they're immune to conflicts” among member firms, Cohen said.

“I think they're a little like the legal equivalent of a roll-up,” Cohen said, referring to the process of acquiring companies and combining them into something that might be bigger and better.

Mitigating Risk

Matthew O'Hara of Hinshaw said the ALJ appeared to believe it was unseemly for Dentons to market itself to the public as being able to resolve problems around the globe, but then seemingly disavow its marketing when faced with a conflict allegation.

“Clients for verein-type law firms may wonder whether they would be better servedsimply using a law firm that will not hide behind its verein structure to insulatethe law firm from potential conflicts of interest.”

But comments to the Model Rules indicate that how lawyers hold themselves out to the public is only one factor in determining whether they are associated in a firm for conflicts purposes, O'Hara said.

The ALJ's opinion doesn't say much about the Dentons verein's governing structure or other factors bearing on that issue, O'Hara said.

Until a court adjudicates the issue on a developed record, law firms in a verein structure can take steps to mitigate risk in their engagement letters, he said.

For example, a law firm operating as a verein might say that while it provides services on a global platform, each entity is separate, doesn't share profits and doesn't share information unless there's an express agreement. The firm also can ask clients for an advance waiver allowing it to represent the client whose interests are or may be adverse to one or more clients represented by other verein members in unrelated matters, O'Hara said.

Sued for Malpractice

RevoLaze's malpractice complaint alleges that Dentons US breached the standard of care and its fiduciary duties to the company by simultaneously representing one of its litigation opponents, and deliberately decided as a business strategy to disregard the conflict of interest.

The complaint also charges that Dentons US deviated from the standard of care in numerous other ways, such as not conducting adequate discovery and not engaging necessary experts in the ITC matter.

The firm's breaches made it necessary for RevoLaze to renegotiate a funding deal on unfavorable terms and forced it to settle its patent claims for a fraction of their true value, the company asserts.

The complaint alleges serious misconduct, but alleging a law firm's misconduct and proving it are two separate things, Michael E. McCabe Jr. of Funk & Bolton P.A. in Baltimore told Bloomberg BNA. McCabe blogs as an “intellectual property ethics and disciplinary defense attorney.”

Even assuming Dentons had a conflict of interest, that alone isn't enough to prove the firm committed malpractice, he said.

Must Prove Causation, Damages

RevoLaze must prove that the firm's alleged breach of the standard of care caused the damages the company alleges, McCabe said. The company will need to prove Dentons caused it harm to a reasonable degree of certainty, and not mere speculation—which is easier said than done, he said.

RevoLaze will probably need considerable expert testimony to prove not only that it could have done better with conflict-free counsel but also that it likely would have done better, McCabe said.

Both causation and damages require real proof, not speculation, as a recent Texas appellate decision concerning alleged malpractice by Baker Botts LLP in representing intellectual property clients shows, McCabe said. (See 32 Law. Man. Prof. Conduct 204.)

But separate from the litigation risk, this type of negative publicity can really hurt a firm, McCabe said.

“Clients for verein-type law firms may wonder whether they would be better served simply using a law firm that will not hide behind its verein structure to insulate the law firm from potential conflicts of interest,” he said.

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

For More Information

The ITC notice vacating the Dentons US disqualification order is at http://www.bloomberglaw.com/public/document/In_the_Matter_of_Laser_Abraded_Denim_Garments_Docket_No_3027_Intl/3.

For the now-vacated disqualification order, see http://src.bna.com/ecV.

The RevoLaze malpractice complaint against Dentons US is available at http://src.bna.com/d72.

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 2016, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.

 

 


 

 

Law Review Article Explores Ethics, Liability Issues for Law Firm Members of Vereins

A verein is a Swiss corporate holding structure that has no equivalent organizational form under U.S. law, according to Douglas R. Richmond and Matthew K. Corbin, authors of Professional Responsibility and Liability Aspects of Vereins, the Swiss Army Knife of Global Law Firm Combinations, 88 St. John's L. Rev. 917 (2014).

Vereins are a relatively new form of law firm organization, the authors said. Law firms that have organized themselves as Swiss vereins include Baker & McKenzie, Dentons, DLA Piper, Hogan Lovells, King & Wood Mallesons, Littler Mendelson, Norton Rose and Squire Patton Boggs.

“Basically, organizing as a Swiss verein allows globally-oriented firms to combine and promote a unified brand across borders, while still affording the individual firms within the verein separate corporate or partnership status with discrete legal liability and financial independence,” the authors said.

The article—which predates the Dentons/RevoLaze dispute—provides an overview of vereins and examines professional responsibility issues for lawyers in verein member firms who are subject to the ABA Model Rules and state equivalents.

Those issues include the duty to inform clients of the relationships between the verein and its member firms, the imputation of conflicts between member firms and fee-splitting among member firms.

The article also addresses the issue of potential vicarious liability among verein member firms.

The authors discussed two cases on the issue of imputing conflicts of interest: In re Project Orange Assocs., LLC, 431 B.R. 363 (Bankr. S.D.N.Y. 2010), which denied a company's request to employ verein member firm DLA Piper LLP as its general bankruptcy counsel, and Mustang Enters., Inc. v. Plug-In Storage Sys., Inc., 874 F. Supp. 881 (N.D. Ill. 1995), which held that two law firms identifying themselves as “affiliated” should be treated as the equivalent of a two-office law firm for conflict of interest purposes.

The authors said it's debatable whether other courts will accord persuasive value to In re Project Orange. However, the case signals a very real possibility that verein member firms practicing under a global brand will be considered a single firm for conflicts purposes, despite their status as separate legal entities, they said.

“At a minimum, the decision in In re Project Orange, when coupled with the holding in Mustang Enterprises, calls into doubt the ability of a verein member firm subject to Rule 1.10(a) [on imputation of conflicts of interest] to represent a client adverse to another verein member firm's client,” the authors wrote.