November 2012 Vol. 9, No. 3

9.3.1

Rule 3-310:  Avoiding Representation of Adverse Interests

Case:

Transperfect Global, Inc. v. MotionPoint Corporation (N.D.Cal. 2012) 2012 WL 2343908

Issue:

In a patent infringement action, was disqualification of defense counsel warranted six months before trial based on defense counsel’s current representation of plaintiff-closed corporation’s two 99% co-owners where:  (1) an estate planning partner at the firm prepared prenuptial and postnuptial agreements on behalf of one co-owner; (2) the partner represented both co-owners with respect to a draft buy-sell shareholder agreement the partner had first prepared at her former firm; (3) neither co-owner signed an engagement agreement that included an advance waiver of conflicts in matters not related to services provided to them; (4,  and all of the co-owners’ legal bills were paid by plaintiff-corporation?

Holding:

Yes.  As a threshold matter, the Court concluded that plaintiff-corporation had standing to bring the motion to disqualify because defense counsel’s representation of the company’s co-owners was “inextricably intertwined” with the business of the company.  (2012 WL 2343908 at *7-8.)  The company was an S corporation whose net income was passed to the co-owners; the two co-owners were co-CEOs of the company and its only two shareholders; and the drafting of one co-owner’s prenuptial and postnuptial agreements was critical to ensuring the company’s survival.  In addition, the buy-sell agreement allowed for the possibility of continuity of ownership upon the death of either co-owner.  (Id. at *8.)

Relying on among other cases People v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, the Court observed that under California law, a firm may generally avoid automatic disqualification for simultaneous representation only “if full disclosure of the situation is made to both clients and both agree in writing to waive the conflict.”  (2012 WL 2343908 at *9, citation and footnote omitted.)  The parties agreed that there was no document that the co-owners signed that explicitly disclosed the conflict.  The Court rejected defendant’s contention that the conflict could be waived by the co-owners’ receipt of their engagement letter for estate planning services, which did not mention the defendant or the instant litigation, because the co-owners conducted themselves in accordance with the engagement letter.  The rule and applicable law plainly require that otherwise conflicted counsel obtain the clients’ written consent and defense counsel failed to do this.  “The requirement of informed written consent is clear and excusing the need to confirm consent in writing would undermine the rule’s purpose and rationale.”  (Ibid., footnote omitted.)

The Court also rejected defendant’s contention that application of the per se rule of automatic disqualification for simultaneous representation in this case would be an unwarranted inversion of the duty of loyalty since plaintiff’s co-owners became clients of defense counsel only after defendant had been a client of the firm.  The Court acknowledged that there was support for that view in Friskit, Inc. v. RealNetworks, Inc. (N.D.Cal. 2007) 2007 WL 1994204, *2:  “[T]he duty of loyalty runs to the existing client, and is not subordinate to any duty owed to a later-acquired client.”  The Court accepted the conclusion in a later Northern District ruling, however, that Friskit does not represent the prevailing view in California courts.  (2012 WL 2343908 at *9-10, discussing Fujitsu Ltd. v. BelkiNLt’l In. (N.D.Cal. 2010) 2010 WL 5387920.)

The Court agreed with defendant that a court may consider delay in bringing a motion to disqualify as one of many factors in deciding a motion to disqualify, even where disqualification is based on concurrent rather than successive representation.  (2012 WL 2343908 at *11.)  The Court went on to conclude, however, that delay in bringing a motion to disqualify and prejudice to the resisting party without a suggestion of tactical abuse are insufficient without more to deny a disqualification motion based on concurrent representation.  “Limiting the delay exception to only the successive representation context is supported by the different interests involved with both conflicts – the duty of confidentiality for successive conflicts, and the duty of loyalty for concurrent conflicts. . . .  The delay exception’s limitation is consistent with the higher level of difficulty associated with disqualifying counsel due to successive conflict as opposed to concurrent conflict.”  (Id. at *12.)

The Court found that any delay in bringing the motion to disqualify was understandable.  The co-owners were legitimately surprised when they realized for the first time six months before trial that the firm representing their company’s adversary was the same firm that was representing the co-owners individually in certain matters.  The surprise was legitimate even though the co-owners each performed the “ministerial” act of signing a form transferring their file from the estate lawyer’s former law firm to her current law firm, the same firm representing the defendant in this action.  (Id. at *12-13.)

The Court recognized that disqualification is a drastic measure, but concluded that it was necessary here.  Defense counsel owed the same duty of loyalty to the co-owners of plaintiff as the firm owed to defendant and breached that duty of loyalty by representing the defendant against the plaintiff-corporation.  Allowing defense counsel to drop co-owners as clients and continue to represent defendant in the patent infringement action against a company in which the co-owners held a 99% stake “is not the best way to restore confidence in the legal profession.”  (Id at *14, citation omitted.)

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