June 28, 2017 Top Story

Insight into Opposing Party’s Business Is a Disqualifier

Past representation will bar involvement in "substantially related" case

Lauren M. Gregory

A federal disqualification order highlights the risks of open-ended "general representation" engagement agreements.

iStockphoto by Getty Images

In Leapfrog Enterprises, Inc. v. Epik Learning, LLC, the court held that an attorney's exposure to a client's confidential information and participation in business decisions bars involvement in new matters where that knowledge could be used against the client. ABA Section of Litigation leaders stress the importance of carefully delineating desired boundaries for each client relationship through engagement agreements, termination letters, and layered conflicts analyses.

Long-Term "Go-To" Relationship Sets the Stage for Conflict

In Leapfrog, the U.S. District Court for the Northern District of California evaluated whether defense counsel, which had served as plaintiff's "go-to" law firm, was adverse to the plaintiff in a trademark infringement case. Epik Learning retained the firm at issue in October 2016, unaware that it had represented Leapfrog between 1995 and March 2016.

Leapfrog moved to disqualify, arguing that (1) the firm was representing both parties simultaneously because the attorney-client relationship with Leapfrog had not ended, and (2) there existed a substantial relationship between the current matter and the firm's previous representation.

The firm began representing Leapfrog on trademark prosecution matters in 1995. In 1998, Leapfrog signed an engagement agreement with the firm for "general representation." From 2000 to March 2016, the firm collected more than $10 million in fees from Leapfrog for a wide range of work, of which $2.3 million related to trademark matters. Further, for nearly a decade, a firm partner participated in for Leapfrog's board meetings.

The firm ended its trademark work for plaintiff in 2013. In 2015, it billed fewer than 18 hours, and in 2016, fewer than two hours, none of which related to trademarks. Neither party explicitly terminated the engagement agreement.

Firm Disqualified to Prevent Use of Inside Information Against Former Client

The district court disqualified defense counsel, concluding that the firm's intimate knowledge of plaintiff's matters rendered it adverse. California Rule of Professional Conduct 3-310(E), like ABA Model Rule of Professional Responsibility 1.9, precludes acceptance of employment adverse to a client or former client without written consent "where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment."

In so holding, the court first determined the attorney-client relationship had ended, and there was no concurrent representation. It noted the agreement set terms for "general representation", but found no express termination of the attorney-client. The court did find implied termination based upon the parties' course of dealing, including a dramatic drop in billings in recent years, and Leapfrog's failure to state it believed the representation was ongoing.

The court further held that the nature and scope of the firm's prior representation of Leapfrog justified disqualification under Rule 3-310(E), because the "substantial similarity" between prior and current matters provided an unfair advantage to Epik. Defense counsel had confidential information regarding Leapfrog's financials, intellectual property portfolio, and litigation and settlement strategy that could be used against Leapfrog.

Based on this situation, the court explained, "there is no requirement that the relationship between the current litigation and the prior representations be identical. Rather, courts look not only at the similarities between the two factual situations, but also the nature of the legal questions posed, and the nature and extent of the attorneys' involvement in the cases."

The Importance of Engagement and Termination Letters

"This opinion serves as a great reminder of the importance of really looking at your engagement letter to make sure it articulates exactly what you anticipate the engagement will entail," says Roberta K. Flowers, Gulfport, FL, cochair of the Professionalism Subcommittee of the Section of Litigation's Ethics & Professionalism Committee. "A lot of lawyers have used the same standard letter for some time and may not take the time to go back and review it each time they are taking on a new matter," adds Flowers.

Engagement letters should clearly convey "that this is a very discrete representation for you, and when that discrete project is over, you no longer represent this client," advises Flowers. For an ongoing relationship, "you could provide a time period, and then leave the option to extend that time period based on some action by the client and the attorney," she says.

To avoid ambiguity, attorneys should also consider sending a termination letter at the conclusion of each matter. "Termination letters—letters you send a client thanking them for the business and stating that you as a lawyer believe you have completed the representation—are a best practice," she recommends.

Avoiding "Playbook" Conflicts

"What the court found here was a so-called 'playbook conflict,'" explains Nicholas Reuhs, Indianapolis, IN, cochair of the Conflict of Interest Subcommittee of the Section's Ethics & Professionalism Committee. Such conflicts "are not dealt with squarely within the rules of professional conduct," Reuhs explains, straddling "substantial relationship" and "confidential information" tests that may differ by jurisdiction.

Courts tend to look for "the existence of insight into litigation or transaction strategy or philosophy," says Reuhs. "The scrutiny increases if the prior relationship is particularly substantial, lengthy, or wide-reaching." To reduce the risk of disqualification, firms should do "another layer of conflict analysis" to "objectively evaluate the possibility of prejudice," recommends Reuhs. In closer cases, it may be advisable to seek a waiver, he adds. Although the Leapfrog court did not assess attorney fees, "both sides expended a lot of money on an issue that right upfront should have raised a red flag and been addressed," observes Flowers.


Lauren M. Gregory is an associate editor for Litigation News.



Keywords: conflict, prior representation, engagement agreement

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