Firm Is Ousted as Counsel Against Nonclient Whose Secrets It Learned Via Related Case

March 12 — A law firm may not represent an expert suing a company for consulting fees where the firm learned significant amounts of sensitive information about the company when it represented a law firm against the company in a fee dispute arising out of the same underlying litigation, the California Court of Appeal, Fourth District, decided Feb. 27.

While the firm never represented the company and did not acquire its secrets by wrongful means, the firm's “wide-ranging access to privileged information in the first representation and the substantial relationship between the two matters” require its disqualification, Justice Raymond J. Ikola said in his opinion for the court.

Patent Settlement

The decision stops the AlvaradoSmith law firm from representing Chitranjan N. Reddy in a suit seeking fees from Shared Memory Graphics LLC for consulting services in patent litigation.

In ordering disqualification, the court pointed out that AlvaradoSmith had received substantial amounts of confidential and privileged information from Shared Memory Graphics when it represented the company's prior counsel, Floyd & Buss, in a fee arbitration proceeding arising from that same patent litigation.

The earlier fee arbitration and the current suit for consulting fees are substantially related, the court found, because in the earlier matter Shared Memory Graphics was accused of manipulating settlement in the underlying patent litigation to unfairly reduce the amount owed to Floyd & Buss under a contingent fee contract, and in this case the consultant claims his contingent consulting fees in the patent litigation were minified in much the same way.

Implicit Obligation, Unfair Advantage

The trial court pointed out that the circumstances did not involve improper acquisition of confidences and that AlvaradoSmith was not accused of violating protective orders requiring the return of all confidential information at the end of the fee arbitration proceeding.

Without disputing those points, the court of appeal said that “conflicts can arise in California (and disqualification motions can be granted) based on the conjunction of (1) implicit obligations a lawyer takes on to maintain the confidences of a nonclient received in the course of representing a client, and (2) the unfair advantage that might accrue were such a lawyer to pursue substantially related litigation against the nonclient.”

Ikola drew these principles from Kennedy v. Eldridge, 2011 BL 316293, 135 Cal. Rptr. 3d 545, 28 Law. Man. Prof. Conduct 10 (Cal. Ct. App. 2011), and Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, 81 Cal. Rptr. 2d 425, 15 Law. Man. Prof. Conduct 62 (Cal. Ct. App. 1999).

From those two decisions and a 1991 Wisconsin case, the court gleaned that if a lawyer is deemed to have a duty of confidentiality to a nonclient arising out of a previous attorney-client relationship, “courts apply the substantial relationship test from successive representation doctrine to determine whether to disqualify counsel in a case against the nonclient.”

Conflict From Representing Law Firm

Reviewing additional cases from other states along with federal court decisions, the court found that as a general principle a disqualifying conflict can arise regarding an adverse nonclient by way of a law firm representing another law firm.

However, the court said, a law firm is not automatically disqualified from opposing the adverse nonclient in future litigation, even in future litigation that has some factual nexus with the prior litigation.

“Rather, a court must examine (1) whether the first representation resulted in a broad disclosure of the non-client's privileged information (i.e., something beyond the attorney-client retainer agreement and the number of hours worked), and (2) whether a substantial relationship exists between the two matters,” Ikola wrote.

Not every attorney fee dispute results in the law firm's counsel receiving broad access to privileged information from the underlying matter, nor will every fee dispute be substantially related to a subsequent action against the same nonclient, the court noted.

Limited Realm of Cases

While acknowledging that its decision has some downsides, the court said these concerns are subordinate to the more serious danger that a litigant's privileged information, which had been disclosed to its own counsel, would be used against it.

The court said its analysis does not mean an attorney owes a comprehensive duty to an opposing party to maintain that party's confidences in the absence of a prior attorney-client relationship.

But “[i]n the limited realm of cases featuring attorneys as parties opposed to their former clients, lawyers representing the attorney party must avoid participation in substantially related matters, whereby their access to privileged information in the former action would potentially serve as an advantage in the latter,” Ikola said.

Justice Richard M. Aronson and David A. Thompson concurred.

Corbett, Steelman & Specter and Stradling Yocca Carlson & Rauth represented Shared Memory Graphics and Acacia Patent Acquisition LLC. AlvaradoSmith and Dawn M. Ceizler, Walnut Creek, Cal., represented Reddy.

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