By Joan C. Rogers
Feb. 20 — Squire Sanders' merger with Patton Boggs created conflicts of interest that require the firm's removal as plaintiffs' counsel in high-stakes commercial litigation against a current client and former client of Patton Boggs, the U.S. District Court for the Central District of California decided Feb. 13.
Although the opinion applies California law and stakes out positions stricter than what courts elsewhere might share, it qualifies as essential reading for professional responsibility lawyers and any attorneys who are planning a law firm merger.
Judge Consuelo B. Marshall's wide-ranging opinion covers several important conflicts issues of interest to law firms, including:
• advance conflicts waivers;
• the “hot potato rule”;
• using retainer agreements to ensure attorney-client relationships end when matters are concluded;
• circumstances that make an ethics screen more or less likely to prevent a firm's removal; and
• potential alternatives to disqualification.
The case before the court involves false advertising claims relating to the marketing of high-fructose corn syrup, pitting companies and groups in the sugar industry against entities in the corn-refining business.
Squire Sanders & Dempsey LLP filed suit for the plaintiffs before it merged with Patton Boggs LLP to become Squire Patton Boggs (SPB).
The conflicts surfaced when one of the defendants, Tate & Lyle Ingredients Americas Inc., realized that the plaintiffs' lawyers were in the same firm as lawyers representing T&L in unrelated regulatory matters. SPB said it failed to spot the conflict because Tate & Lyle was inadvertently omitted from a list of Patton Boggs clients that a paralegal prepared as part of the pre-merger diligence.
The court decided that SPB's representation of Tate & Lyle's litigation adversaries without the company's informed consent made it subject to a rule of automatic disqualification.
The conflict was not cured, Marshall ruled, by an advance waiver of future conflicts in the 1998 engagement agreement that launched the attorney-client relationship between Patton Boggs and Tate & Lyle. That waiver was too broad and nonspecific to be viewed as an informed waiver of the present conflict, Marshall found.
The clause purported to waive conflicts indefinitely in any matter not substantially related, and it did not identify a potentially adverse client, the types of potential conflicts or the nature of the representative matters, she said, contrasting it with prospective waivers that were upheld in VISA U.S.A. Inc. v. First Data Corp., 241 F. Supp. 2d 1100 (N.D. Cal. 2003), and Zador Corp. v. Kwan, 37 Cal. Rptr. 2d 754 (Cal. Ct. App. 1995).
Marshall pointed out that according to the lawyer who was Tate & Lyle's general counsel in 1998 when the engagement letter was signed, the waiver was never brought to his attention and he would not have agreed to a waiver that would allow Patton Boggs to represent a litigation adversary while actively representing Tate & Lyle in a separate matter.
The firm should have sought a second, targeted conflicts waiver to represent the plaintiffs against Tate & Lyle, Marshall said.
The court also held that the conflict was not cured by SPB's withdrawal from representing Tate & Lyle when the company refused to waive the conflict.
Marshall cited the “hot potato rule,” which bars a law firm from curing a concurrent-clients conflict by severing the relationship with one of them in an attempt to convert that present client into a former client so that representation in an unrelated matter is permissible.
SPB failed to convince Marshall that the firm's withdrawal was permitted by the language of the 1998 retainer letter and applicable ethics rules. And even though the firm did not withdraw to take on new business, “the ‘hot potato rule' applies regardless of the attorney’s reasons for terminating the relationship,” she said.
The court decided that SPB also is subject to disqualification due to its former representation of Ingredion Inc., another defendant that was also a longtime Patton Boggs client.
The court didn't buy Ingredion's contention that it too was a current client. Ingredion's retainer agreement with Patton Boggs said there would be no continuing attorney-client relationship after each matter was concluded, Marshall pointed out.
However, Marshall ruled that SPB had a disqualifying conflict anyway because the prior representation of Ingredion involved matters substantially related to the present litigation, and thus lawyers at Patton Boggs, now SPB, are presumed to possess confidential information about the company.
Work that Patton Boggs performed for Ingredion related to the propriety of characterizing high-fructose corn syrup as “natural” under FDA policy, and that advice is germane to issues in the current litigation, Marshall said.
The court was not persuaded by declarations from SPB attorneys who denied any exchange of Ingredion's confidences. There was a real risk that confidential information was compromised, Marshall said, when the Patton Boggs lawyer who signed the engagement letters for both Ingredion and Tate & Lyle met with the sugar plaintiffs' counsel and expert witness following the merger.
In any event, the court said, whether SPB attorneys actually possessed or conveyed confidential information is not the test. Rather, because former client Ingredion met its burden of showing a substantial relationship between past representations and the current lawsuit, SPB is conclusively presumed to possess confidential information material to the present action.
The court concluded that the firm's belated screening measures after it was facing disqualification motions did not enable SPB to remain as counsel. Erecting an ethics wall after the fact cannot rebut the presumption of shared confidences, particularly where a conflicted SPB lawyer consulted with another SPB attorney representing the adverse parties about the case before the implementation of the formal screen, Marshall said.
Moreover, the court said, implementing a screen and removing the affected clients' records to the safekeeping of a third party cannot cure a conflict arising from the concurrent representation of adversaries because those steps do not address a current client's legitimate expectation of loyalty.
The court also said SPB's offer to reimburse Ingredion and Tate & Lyle for their fees and to foot Tate & Lyle's reasonable expenses in shifting to new counsel “do not cure SPB's breach of its ethical duties.”
SPB fared no better in proposing other remedial measures to avoid disqualification, such as obtaining other counsel to cross-examine witnesses testifying for Tate & Lyle and Ingredion, and stipulating to certain facts connected with the firm's earlier work for Ingredion.
Marshall acknowledged that disqualification at this late stage will impose hardship on the plaintiffs, who she said have incurred more than $12 million in fees from SPB for 20,000 hours of professional time. But nothing short of disqualification would mitigate “the conflicts and resulting ethical violations,” she concluded.
Squire Patton Boggs LLP was represented by Edith R. Matthai and T. John Fitzgibbons Jr. of Robie & Matthai, Los Angeles. Tate & Lyle and Ingredion were represented by attorneys from Winston & Strawn's Los Angeles and Chicago offices. Tate & Lyle was also represented by Caldwell Leslie & Proctor P.C.
Copyright 2015, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.
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