In a lawsuit filed by Mylan, Inc. and Mylan N.V. to enjoin Kirkland & Ellis (K&E) from representing Teva Pharmaceuticals in an attempted hostile takeover of Mylan, Magistrate Judge Lisa Pupo Lenihan, on June 9, 2015, recommended enjoining K&E from representing Teva in its takeover bid of Mylan N.V., the corporate parent of two of K&E’s other clients.Mylan, Inc. v. Kirkland & Ellis LLP, No. 2:15-cv-00581-JFC-LPL (WD Pa. June 9, 2015). The magistrate judge found that K&E was conflicted and did not have an effective waiver or consent in advance. The decision serves as a cautionary reminder for drafting engagement letters: (1) the “entity theory” can be a trap for the unwary; (2) foreseeable forms of adverse representations merit specific identification in engagement letters that provide for “advance consents” or waivers; and (3) precluding “related” rather than only “substantially related” future adverse representations may cause problems.
K&E argued that counseling Teva in a takeover of Mylan was permitted under two theories—both of which the Magistrate Judge rejected: first, that the takeover—although hostile to the corporate parent, Mylan—was not directly adverse to K&E’s clients (two wholly owned Mylan subsidiaries); and second, that K&E’s engagement letter permitted the representation.
The magistrate judge rejected K&E’s claim that any adversity to its Mylan clients was indirect. She found that the corporate parent resisted acquisition—and through their parent, K&E’s clients did, too. She further emphasized that Rule 1.7 would have prohibited K&E from representing a client in a hostile takeover of its Mylan clients. She thus rejected as “disquieting” K&E’s notion that Rule 1.7’s prohibition would have been rendered inapplicable by an internal reorganization of Mylan that created K&E’s clients’ corporate parent as a separate entity just prior to K&E being asked to handle for Teva’s takeover bid. Finding K&E’s clients to be the corporate parent’s main asset, the magistrate judge concluded that the clients were the real target of the hostile takeover and thus the representation was directly adverse.
As an alternative basis for disqualification, the magistrate judge rejected K&E’s assertions that its work in advising and handling litigation for the Mylan clients was unrelated to the takeover. She found the information garnered by representing the Mylan clients relevant to counseling Teva in its takeover bid. The magistrate judge concluded that the relatedness of the representations—and the potential advantage the information garnered in the related representation could provide to a competitor—alternatively created direct adversity.
Having found that direct adversity existed based on either hostility to the Mylan clients or the relatedness of K&E’s representations, the magistrate judge dismissed K&E’s arguments and evidence regarding ethical screens that it had put into place as irrelevant because: Under the ethics rules (other than, at times, in conjunction with an attorney’s change in firms), screens were inadequate to resolve conflicts; a screen would be unnecessary if K&E’s Mylan work were unrelated to K&E’s Teva work; and a screen could not transform “related” matters into “unrelated” ones. The magistrate judge therefore concluded that grounds existed to disqualify K&E from its representation of Teva unless K&E had obtained an effective waiver from Mylan.
The magistrate judge addressed K&E’s engagement letter-based “consent in advance” and “waiver of conflicts” arguments by scrutinizing the precise language of the letter’s conflicts of interest provision. K&E and the Mylan clients, she noted, had negotiated a ban not only of “substantially related” adverse representations, but also of any “related” adverse representations. Thus, the provision permitted a narrower set of future adverse representations (i.e., those that were totally unrelated to K&E’s work for Mylan) than language that would allow for K&E representations against Mylan as long as those future matters were not substantially related to K&E’s work for Mylan. She then referred back to her earlier finding that the legal services were related.
Significantly, the magistrate judge found that, even if the takeover representation had been unrelated, it was a type of representation for which K&E had failed to obtain informed consent. The conflict of interest clause specified conflict waivers for unrelated adverse “litigation, arbitration or other dispute resolution” representations. Transactional representations, however, were not specified. Given K&E’s high-profile transactional services, the magistrate judge found this omission significant. She also concluded that K&E had not raised the hostile takeover representation with Mylan (when seeking the advance waiver) and failed to show that the Mylan clients did anticipate, should have anticipated, or would have authorized the representation.
Having found the Mylan clients substantially likely to prevail on the merits for disqualification, the magistrate judge found the balance of harms and public interest also favored recommending that the district court disqualify K&E.