©2015. Published in Landslide, Vol. 7, No. 6, July/August 2015, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
As a general rule, absent informed consent a firm may not be directly adverse to a current client. Determining whether representation of a potential client will be “directly adverse” to another is critical to conflicts checking. Fortunately, in many types of civil litigation, conflicts checking can be done by looking at who’s across the “v” from the potential client, and if their names clear the firm’s conflict system, chances are that the representation is proper.
Unfortunately, that simple approach is often not enough in patent litigation. Instead, practitioners must be vigilant in recognizing when representation of one potential client, though not directly across the “v” from another, nonetheless will cause substantial, practical harm to a client. Failure to check properly for conflicts can cause loss of business, disqualification, fee disgorgement, and even civil liability.
This article views “adversity” as a spectrum that moves from red to green. After discussing choice of law, it first begins by describing the ends of the spectrum, the easy cases. Then it addresses the intermediate middle, where the issues are often fact- and law-dependent, and where a second pair of eyes can always help. It concludes with providing some practical steps that may help lawyers identify the less obvious issues.
Choice of Law
Each state has attorney disciplinary rules. With respect to the issue here, most are identical to Rule 1.7 of the ABA Model Rules of Professional Conduct (two notable exceptions being California and Texas). Further, many if not all federal district courts adopt as their disciplinary rules the forum state’s disciplinary rules. Because this means that in almost every federal court the same disciplinary rules apply, it would seem that choice of law would hardly matter.
However, it does, and sometimes choice of law can be outcome determinative. It does matter because, first, state disciplinary rules invariably provide that they should not be used as a basis for determining disqualification motions or civil liability. While state courts routinely use them for those precise purposes, they almost just as invariably emphasize that disciplinary rules are merely guidelines in deciding civil ethical issues.
If that were not enough, federal courts are deeply divided—sometimes even within the same circuit—on what weight, if any, state law plays in deciding federal court ethical issues. One common federal approach is to disqualify counsel if it is appropriate under either “federal common law” or the forum state’s rules adopted by the court’s local rules for discipline.1 Other federal courts require that lawyers weigh the various approaches to determine the “national standard” of ethics.2 Still others use the forum state’s rules but interpret and apply them as federal law. As an example of the latter, a Virginia federal court explained: “While this court utilizes the [Virginia] Rules of Professional Conduct . . . it must nevertheless ‘look to federal law in order to interpret and apply those rules’ and should not ‘abdicate to the state’s view of what constitutes professional conduct even in diversity cases.’”3
Consequently, even if the forum state’s supreme court has already defined “adversity” or applied that definition to a set of facts identical to those the lawyer is addressing, that definition or that application of law may not control in federal court. Here, this means that lawyers should be careful not to believe that any state definition or cases defining “adversity” will control, let alone guide, a federal judge.
The “Easy” Cases in the Red and Green Ends of the Spectrum (But Not Far from the Gray)
Some adversity can be identified by looking at who is across the “v” from the client. Suing a client is adverse, as is defending a client against another client’s claim.4 This same principle applies to third-party impleader: representing a plaintiff against a nonclient defendant who impleads a client as a third party defendant is adverse. If the nonclient defendant is liable to the plaintiff, then the impleaded client is liable to the defendant.5 The lawyer knows he or she is seeking a judgment that will directly cause damage to the impleaded client. These are the easy cases.6 As explained below, however, in the not-too-distant gray middle, slightly different facts have led courts to reach different conclusions.
On the other end of the spectrum, in the green, is the principle that simply because a victory by a lawyer for a client will allow a current client to compete economically against another client does not mean the lawyer is representing an adverse interest. As a general matter, most states recognize that “adversity” cannot be stretched so far as to include mere economic competition among clients.7
A patent case from the International Trade Commission (ITC) denied a Google motion to disqualify the Pepper Hamilton firm, and is a rare case actually litigating the “economic adversity” notion.8 In that case, Pepper Hamilton was prosecuting a few patent applications for Google. It undertook to represent a patentee, Digitude, in an ITC proceeding in which Digitude sought to exclude importation of certain cell phones and other devices. Google was not a defendant, and its products and services were not accused of infringing the Digitude patent. However, Google intervened, contending that Pepper Hamilton was adverse to it because the accused products used Google’s Android software—which Google asserted was a “Google product”—and that software allegedly satisfied one element of an asserted claim. Pepper Hamilton pointed out that in fact Google was only a member of a consortium (the “Open Handset Alliance”) that provided the Android software as an open source product to the device makers, and did so for free and by disclaiming any warranty of noninfringement. The administrative law judge (ALJ) found no adversity:
Google offers no evidence regarding how Google’s business interests will be harmed through this litigation. Instead, Google offers a declaration from its in-house Litigation Counsel that makes conclusory assertions such as “Google has a strong interest in preserving the Respondents’ continued importation of devices that incorporate Google’s Android technology,” and, to the extent that Digitude’s infringement claims are directed to Android, “Google’s legal and business interests are harmed.” Such unsupported assertions do not demonstrate that Google’s business interests will be harmed if Digitude obtains relief against the respondents’ Android-based products.9
Facing somewhat distinct facts, the Federal Circuit reached a different conclusion in an equally rare case where the movant sought to disqualify a lawyer from representing a party on appeal.10 Conflict-free firms were representing a patentee in a suit against a lithium battery supplier. That supplier was the only source of specialized batteries that Apple used. The patentee obtained a preliminary injunction against the battery supplier. Apple was not a party to the suit against the battery supplier. At that point, Jones Day appeared in the trial court to handle the appeal. Jones Day had realized that it could be adverse to Apple, and so structured its relationship with the patentee to avoid counseling the patentee in any matter against Apple, including licensing negotiations. On appeal, Jones Day refused to withdraw and Apple moved to intervene to disqualify Jones Day. The Federal Circuit granted the motion in an unpublished disposition. The court held that this was not merely permitted economic adversity but was adverse because “Apple faces not only the possibility of finding a new battery supplier, but also additional targeting by [Jones Day’s client, the patentee] in an attempt to use the injunction as leverage in negotiating a business relationship.”11 To the court, this meant Jones Day was adverse “in every relevant sense.”12
The differing results in the Pepper Hamilton case and the Jones Day appeal illustrate the difficult issues that arise, and careful vision needed, in patent litigation. Confirming this, a Massachusetts court recently examined this principle in some detail, in a nonpatent case, writing:
On one side of the spectrum we have examples of competing economic enterprises which fear unfair competition as a result of attorney conflict. On the other side of the spectrum are situations of closely held businesses or estates, where the clients have close financial or personal relationships but find themselves as direct adversaries, and counsel literally appears on both sides of an issue closely related in both time and subject matter. Neither of these two extremes is true here.13
The court went on to hold that there was no adversity even though the firm, if successful, would have reduced the value of stock owned by its other clients by $1 million. The court denied the injunction, stating, “economic loss alone does not usually rise to the level of irreparable harm.”14
The Cloudy, Sometimes Stormy, Gray Middle
In the middle, there are circumstances “in which a lawyer’s pursuit of a client’s lawsuit or defense may be at odds with or detrimental to the interests of a person or entity that has not been joined in the litigation but is being represented by the lawyer in a different litigation or transactional matter.”15 Identifying precisely when this sort of indirect adverse representation becomes an ethical violation is “difficult.”16 The Texas Supreme Court in a similar context described the type of “analysis” that a lawyer must make:
Even if Baker & Botts is correct that resolution of the pending case will leave Cronen [a former client who was not a party to this case] unscathed, Cronen’s anxiety that his former law firm is now vigorously advancing the same allegations that have swirled around him for so long is certainly understandable. The chances of being struck by lightning are slight, but not slight enough, given the consequences, to risk standing under a tree in a thunderstorm. Cronen is not likely to be struck by lightning in the pending case, even though he is in the midst of a severe thunderstorm, but he is entitled to object to being forced by his former lawyer to stand under a tree while the storm rages on.17
The clearest form of “thunderstorm” adversity are cases involving parallel patent litigation, where a firm represents a patent owner against nonclients while, at the same time, another firm is representing that same patent holder on that same patent against a client of the first firm. The firm is advancing Markman and other arguments against a nonclient knowing that it can hurt the client in the other, pending case. Three district courts have addressed this fact pattern, splitting on the answer but focusing primarily on whether there was adversity because the Markman construction in the case against the nonclient could be used against the client in the co-pending case. In Enzo Biochem, Inc. v. Applera Corp.,18 the court found no adversity; a month later, the second court in Rembrandt Technologies, LP v. Comcast Corp.19 did. The third punted, but noted the split.20
The results of the cases largely turned on practical impact that a Markman ruling in the case against the nonclient would have against the client. In the case finding disqualification, the parallel patent cases were pending before the judge—who, though not required by issue preclusion to apply his interpretation of the patent made in the case against the nonclient in the case against the client, would obviously do so as a practical matter—and the patents covered a standard. Thus, the “practical significance of Rembrandt’s infringement theory is to indict for patent infringement all major cable companies who follow the industry standards. A finding of infringement and an injunction issued by this court against a cable company for compliance with industry standards would have a significant practical effect on” the firm’s client in the other case.21
There are significant issues left unaddressed. For example, what if a patentee must assert broad interpretations in the first of a series of cases in order, and success may increase the likelihood of adversity with another client in parallel litigation?22 In addition, there is a question as to whether the same analysis ought to apply where the lawyer’s client will be sued later, rather than concurrently.23 A related but distinct question is whether a firm can competently represent a patentee in parallel litigation without coordinating with counsel in the co-pending case, thus violating the prohibition against working against a client “behind the scenes”?
Finally, there are other issues besides Markman that could cause adversity, and not just with the defendant-client but even third-party clients. What if, for example, the lawyer must attack a client’s patents being used in a suit as invalidating prior art? The ITC considered this argument in the Pepper Hamilton case, rejecting it on the facts presented:
Google argues that respondents in this investigation who make products that do not run the Android operating system may assert Google’s patents or technology as prior art that invalidates Digitude’s patents, thereby requiring Pepper Hamilton to attack Google’s prior art patents or technology. Google offers no evidence that any Google patent or technology is being asserted as prior art in this investigation, making Google’s argument pure speculation. The mere possibility that Google prior art will be relied upon in this investigation does not give rise to a Rule 1.7 violation.24
What to Do?
Obviously, lawyers should do more than run a name-based conflicts check based on the named parties. Instead, before taking on a case and while it is being litigated, lawyers should watch for practical indicia of adversity, including:
- Is a client an existing defendant in a co-pending case? Is it being targeted now for suit later?
- Does a client owe an indemnity obligation to the defendant that the lawyer’s success for the patentee will trigger?
- Will the lawyer be forced to attack another client’s patents in a way that could actually and practically affect their value?
- Is the lawyer seeking injunctive relief that will harm another client?
Finally, lawyers should protect their clients by examining whether opposing counsel face any of these same disabilities. Seeing conflicts in patent litigation requires looking intensely at remarkably gray areas, and sometimes during a thunderstorm.
1. See, e.g., Cole v. Ruidoso Mun. Sch., 43 F.3d 1373 (10th Cir. 1994).
2. See, e.g., In re Am. Airlines, Inc., 972 F.2d 605 (5th Cir. 1992).
3. Lewis v. CSX Transp., Inc., 202 F.R.D. 464, 466 (W.D. Va. 2001).
4. Oxford Sys., Inc. v. CellPro Inc., 45 F. Supp. 2d 1055 (W.D. Wash. 1999).
5. See Snapping Shoals Elec. Membership Corp. v. RLI Ins. Corp., No. 1:05CV1714-GET, 2006 WL 1877078 (N.D. Ga. July 5, 2006) (disqualifying firm from asserting claim against nonclient that would result in a client owing the nonclient indemnity); Pressman-Gutman Co. v. First Union Nat’l Bank, No. 02-8442, 2004 U.S. Dist. LEXIS 17720 (E.D. Pa. Aug. 30, 2004), vacated on reconsideration, 2004 U.S. Dist. LEXIS 23991 (E.D. Pa. Nov. 30, 2004), mandamus denied, 459 F.3d 383 (3d Cir. 2006); Richmond Am. Homes of N. Cal., Inc. v. Air Design, Inc., No. C038779, 2002 Cal. App. Unpub. LEXIS 6948 (July 25, 2002) (finding adversity because procedural rules allow third-party defendants to defend against a third-party complaint by alleging that the defendant had no liability to the plaintiff); N.H. Bar Ass’n Ethics Comm., Formal Op. 1989-90/17 (Aug. 25, 1990) (concluding that a firm could not represent a general contractor in pursuing a claim against a lender where doing so would expose its other client, a developer, to a claim by the lender; although the opinion is couched in terms of material limitations, the issue could also be viewed as one of adversity).
6. It is not the act of showing up in court that causes the problem. Two non-IP cases are often cited for the proposition that a firm that cannot openly act adversely to a current client cannot help some other firm do the same thing. Fund of Funds, Ltd. v. Arthur Andersen & Co., 567 F.2d 225 (2d Cir. 1977) (disqualifying trial counsel for receiving assistance from law firm that breached its duty of undivided loyalty); E.F. Hutton & Co. v. Brown, 305 F. Supp. 371, 378–79 (S.D. Tex. 1969) (disqualifying New York firm that had represented employee from assisting Houston firm from litigating against him in substantially related matter).
7. See generally Charles W. Wolfram, Competitor and Other “Finite-Pie” Conflicts, 36 Hofstra L. Rev. 539 (2007); ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 05-435 (2004) (finding that representing insurer in one case and party suing carrier’s insured in another case involves only economic adversity).
8. Certain Portable Commc’n Devices, Inv. No. 337-TA-827 (USITC Feb. 13, 2012) (Order No. 7). In the interests of full disclosure, I served as an expert retained by Pepper Hamilton in this matter.
9. Id. (citations omitted). The ALJ in Certain Baseband Processor Chips and Chipsets, Transmitter and Receiver (Radio) Chips, Power Control Chips, and Products Containing Same, Including Cellular Telephone Handsets, Inv. No. 337-TA-543, USITC Pub. 4258 (Mar. 9, 2006) (Order No. 29), reached a similar conclusion.
10. Celgard, LLC v. LG Chem Ltd., 594 F. App’x 669 (Fed. Cir. 2014).
11. Id. at 672.
13. Micromet, Inc. v. Curis, Inc., No. 093996G, 2009 WL 6067025, at *3 (Mass. Super. Ct. Oct. 26, 2009) (citations omitted).
14. Id. at *4. The case involved a preliminary injunction, not a typical motion to disqualify.
15. ABA/BNA Lawyer’s Manual on Professional Conduct 51:111 (2001).
17. Nat’l Med. Enters., Inc. v. Godbey, 924 S.W.2d 123, 133 (Tex. 1996).
18. 468 F. Supp. 2d 359 (D. Conn. 2007).
19. No. 2:05CV443, 2007 WL 470631 (E.D. Tex. Feb. 8, 2007).
20. Multimedia Patent Trust v. Apple Inc., 98 U.S.P.Q.2d 1655 (S.D. Cal. 2011).
21. Rembrandt, 2007 WL 470631, at *4.
22. See Flir Sys., Inc. v. Motionless Keyboard Co., No. 10-CV-231-BR, 2011 WL 1466394 (D. Or. Apr. 18, 2011) (relying on traditional principles of offensive issue preclusion to bind nonparty who had participated in the proceeding); Eolas Techs. Inc. v. Adobe Sys., Inc., No. 6:09-cv-446, 2010 WL 3835762 (E.D. Tex. Sept. 28, 2010) (finding that because the Federal Circuit had ruled on claim interpretation, the construction was preclusive even as to nonparties because it was a question of law).
24. Certain Portable Commc’n Devices, Inv. No. 337-TA-827 (USITC Feb. 13, 2012) (Order No. 7) (citations omitted); see also Certain Baseband Processor Chips and Chipsets, Transmitter and Receiver (Radio) Chips, Power Control Chips, and Products Containing Same, Including Cellular Telephone Handsets, Inv. No. 337-TA-543, USITC Pub. 4258 (Mar. 9, 2006) (Order No. 29); Flying J Inc. v. TA Operating Corp., No. 1:06-CV-30, 2008 WL 648545 (D. Utah Mar. 10, 2008) (denying motion to disqualify, though finding a conflict of interest, where firm could be creating arguments, facts, and positions in litigation against a nonclient that “could be applied” by “third parties” to the client in litigation in which the firm would not be involved); GATX/Airlog Co. v. Evergreen Int’l Airlines, Inc., 8 F. Supp. 2d 1182 (N.D. Cal. 1998), vacated as moot, 192 F.3d 1304 (9th Cir. 1999).