March 11, 2015 Practice Points

A Note on the Celgard Decision

An important reminder to attorneys as to the scope of the analysis in which they need to engage, in deciding whether they can take on a new client or matter.

By Irwin Warren

A court of appeals decision that issued in early December 2014 provides an important reminder to attorneys as to the scope of the analysis in which they need to engage, in deciding whether they can take on a new client or matter—and in assessing whether they will thereby face disqualification from representing clients whose interests will be deemed “directly adverse” under ABA Model Rule 1.7(a). Specifically, in Celgard, LLC v. LG Chem, Ltd., No. 2014-1675 (Fed. Cir. Dec. 10, 2014), a law firm was disqualified from handling an appeal, on the ground that its representation of a party to that appeal was directly adverse to the interests of another firm client, which was not a party to the underlying litigation at all, but which had intervened at the appellate level to seek such disqualification.

Celgard is a manufacturer of lithium battery components. In the underlying litigation, Celgard brought suit against LG Chem, seeking damages and injunctive relief on the ground that LG’s manufacture and sale of its own lithium batteries violated a Celgard patent. Celgard then moved for preliminary injunctive relief, including to preclude the continued sale of LG batteries to customers such as Apple, although those customers (including Apple) were not parties to the litigation. Celgard thereafter sent a copy of its injunction motion to Apple; and it requested the opportunity to find a mutually beneficial business arrangement to resolve the infringement issues. The district court granted the preliminary injunction but stayed that injunction until disposition of LG’s appeal.

Jones Day was not counsel for Celgard in the district-court proceedings leading up to the injunction order. However, after the order issued, Jones Day entered an appearance on behalf of Celgard to represent it in the district court and on the appeal. Apple then moved to intervene for purposes of seeking leave to disqualify Jones Day. Apple contended that disqualification was required because [i] the preliminary injunction covers custom batteries that LG provides for Apple products and [ii] Jones Day represents Apple in several ongoing, albeit unrelated, commercial litigation matters. Jones Day opposed the motion and argued that it had agreed that it would not even counsel Celgard on any matter adverse to Apple, including licensing negotiations.

The Federal Circuit granted the motion to disqualify. Under the applicable choice-of-law analysis, the circuit looked to North Carolina Rule of Professional Conduct 1.7(a), which governs concurrent conflicts of interest—and prohibits representation of a client where such representation “will be directly adverse to another client”. The circuit first concluded that under that rule (and comment 6 to same), Jones Day’s representation of Celgard was “’directly adverse’ to the interests and legal obligations of Apple, and not merely in an ‘economic sense.’” The court concluded that there was “a clear and direct conflict of interest” because “[a]dvocacy by counsel for [plaintiff in support of] . . . the injunction will adversely affect [customer]’s interest in being free of the bar of the injunction.” (citation omitted). The court rejected Jones Day’s argument that it was permitted to represent Celgard because such representation reflected only “the sort of unrelated representation of competing enterprises allowed under Rule 1.7(a).” In that regard, the circuit court observed that Apple faced the possibility of having to find a new supplier, as well as Celgard having the leverage of the injunction in negotiating a possible business relationship with Apple.

The circuit further held that “[t]his conclusion is not altered by the fact that Apple was not named as a defendant.” Rather, the court held, “it is the total context, and not whether a party is named in a lawsuit, that controls whether the adversity is sufficient to warrant disqualification.” Of particular significance to attorneys conducting conflicts checks before taking on clients, the court noted Jones Day’s argument that if Rule 1.7(a) were held to cover conflicting representations of any clients up or down the supply chain, then “lawyers and clients would have no reliable way of determining whether conflicts of interest exist in deciding whether to commence engagements”—but the court then side-stepped that contention. “That, however, is not our holding. Nor is it the facts of this case”—for in the case at hand, both Jones Day and Celgard “clearly knew the potential for conflict [with Apple] here yet elected to continue with the representation.”

 

— Irwin Warren, committee cochair, Weil, Gotshal & Manges LLP, New York, NY


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