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February 13, 2015

Western Sugar Coop v Archer-Daniels-Midland Co., 98 F.Supp.3d 1074 (C.D. Cal., 2015)

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The Central District disqualifies a merged law firm due to concurrent and consecutive representation of clients with adverse interests

Sugar industry companies (“Sugar Plaintiffs”) sued corn-refining companies over false advertising. The Sugar Plaintiffs commenced the lawsuit with Squire Sanders & Dempsey, LLP (“Squire Sanders”) as their counsel.  After the lawsuit was underway, Squire Sanders merged with Patton Boggs LLP (“Patton Boggs”) to form Squire Patton Boggs (“SPB”), which continued to represent the Sugar Plaintiffs.  Two Defendants, Tate & Lyle and Ingredion, filed motions to disqualify SPB since each were long-standing clients of the legacy firm Patton Boggs.

Tate & Lyle’s engagement letter was signed over a decade prior, and included an advance waiver, allowing Patton Boggs to “represent other clients on matters adverse to Tate & Lyle so long as those matters were unrelated to [the firm’s] work for Tate & Lyle.” Patton Boggs represented Tate & Lyle before international regulatory bodies and federal agencies, which required a thorough understanding of its business and manufacturing operations.

SPB had failed to identify the Tate & Lyle conflict, although it was a current Patton Boggs’ client. When the conflict was discovered, SPB asked Tate & Lyle for a waiver, assuring Tate & Lyle that a de facto ethical wall was in place because the two firms’ computer systems had not been integrated, and documents were in different offices.  Given the magnitude of the Sugar Plaintiffs’ claims, Tate & Lyle declined to waive the conflict, and asked SPB to withdraw from its representation of the Sugar Plaintiffs. SPB countered with a proposal to continue the simultaneous representation of the Sugar Plaintiffs and Tate & Lyle on other matters with two distinct teams of lawyers and an ethical wall. When Tate & Lyle still did not consent, SPB terminated its relationship with it; SPB lawyers were active on Tate & Lyle matters until the termination.

Ingredion was not a current client, but Patton Boggs had provided legal services to it on at least fifty-six occasions. When SPB learned of the Tate & Lyle conflict, it advised Ingredion of the merger and that it would require a conflict waiver to allow SPB to continue representation of the Sugar Plaintiffs if Ingredion wanted to retain SPB to perform new work.

Disqualification involves a client’s right to chosen counsel, an attorney’s interest in representing a client, financial burdens on a party who must replace disqualified counsel, and the possibility that tactical abuse underlies the disqualification motion. Although disqualification is within the trial court’s discretion, it is subject to strict judicial scrutiny because of the potential for abuse.

Under California Rule of Professional Conduct 3–310(C), disqualification of attorneys representing current clients with adverse interests follows automatically, regardless of whether the simultaneous representations have anything in common, or present any risk that confidences obtained in one matter would be used in the other. This protects an attorney’s duty of undivided loyalty to current clients, and avoids undermining public confidence in the legal profession and the judicial process.  A client cannot be expected to sustain trust and confidence in counsel also representing the client’s adversary in litigation.   The conflict is imputed to the entire law firm.

Although Tate & Lyle signed an advanced waiver, it was not sufficient to cover the simultaneous representation of the Sugar Plaintiffs and Tate & Lyle.   An effective waiver requires full reasonable disclosure, and both clients’ written consent.  Even with an advance waiver, a second waiver may be required to ensure consent is informed.   Although  California law does not require every possible consequence of a conflict be disclosed for consent to be valid, the court will consider: (1) the breadth of the waiver; (2) the temporal scope of the waiver (whether it waived a current conflict or whether it was intended to waive all conflicts in the future); (3) the quality of the conflicts discussion between the attorney and the client; (4) the specificity of the waiver; (5) the nature of the actual conflict (whether the attorney sought to represent both sides in the same dispute or in unrelated disputes); (6) the sophistication of the client; and (7) the interests of justice.

Patton Boggs’ advanced waiver was open-ended, and lacked specificity.  Tate & Lyle’s sophistication and review by its independent counsel did not render the waiver effective.  Tate & Lyle’s independent counsel maintained that no one from Patton Boggs discussed the advanced waiver with him, and that if he had understood he was waiving future conflicts, he would not have agreed to the waiver.  Advance waivers that pass muster  identify the adverse client by name, fully disclose the nature of potential conflicts that could arise between the parties, and specifically contemplate the firm’s representation of one client against the other.

SPB’s termination of its relationship with Tate & Lyle invoked the “hot potato rule,” which bars an attorney and law firm from curing the dual representation of current clients by expediently severing the relationship with one of them. The terms of the engagement letter provided Patton  & Boggs would protect Tate & Lyle’s interests in providing a smooth transition to new counsel” and, contrary to SPB’s position, did not authorize SPB to cure a conflict of interest by its withdrawal.   At the time of SPB’s withdrawal, it was representing Tate & Lyle in a project involving a 90–day response deadline, forcing it to scramble for new counsel.  The court also rejected SPB argument it was justified in terminating the relationship to serve another existing, as opposed to a new, client.  The “hot potato rule” applies regardless of the attorney’s reasons for terminating the relationship, because it is grounded in an attorney’s undivided duty of loyalty.

Under California Rule of Professional Responsibility 3–310(E), an attorney may be disqualified if there is a “substantial relationship” between the subjects of the prior and current representations. This protects the enduring duty to preserve client confidences. A substantial relationship between the representations results in automatic disqualification.

The court must analyze whether there was a direct relationship with the former client, and whether the relationship touched on issues related to the present litigation. The test requires evidence supporting a rational conclusion that information material to the evaluation, prosecution, settlement or accomplishment of the former representation is material to the evaluation, prosecution, settlement or accomplishment of the current representation. The former client need not prove the attorney possesses actual confidential information; it is presumed.  Disqualification extends vicariously to the entire firm.

If the attorney’s contact with the prior client was not direct, the court examines both the attorney’s relationship to the prior client, and the relationship between the prior and the present representation.

The substantial relationship test does not require an exact match between the facts and issues involved in the two representations. Patton Boggs advised Ingredion regarding FDA statements and enforcement actions over whether high fructose corn syrup products could be considered “natural,” a key issue in the Sugar Plaintiffs’ false advertising claims against Ingredion.

Thus, Patton Boggs’ prior representation of Ingredion exposed it to material confidential information.

Patton Boggs attorneys who had represented Ingredion no longer worked at SPB. This did not change the analysis, particularly since one of them left after the merger. Although the SPB attorneys working on the Sugar litigation received no information from any former Patton Boggs lawyer about either Ingredion or Tate & Lyle, or performed work for either client after the merger, disqualification was automatic.

The substantial relationship between the representations rendered it unnecessary to consider whether any actual breach of confidence occurred. SPB was conclusively presumed to possess confidential information material to the present action; clients need not reveal the confidences the rule should protect.

Further, there was evidence that confidentiality was breached. Shortly after the merger the Patton Boggs attorney who signed the engagement letters for both Ingredion and Tate & Lyle consulted with the Sugar Plaintiffs’ expert witness, and an SPB attorney for the Sugar Plaintiffs. There were no formal ethical walls in place, and an actual risk that confidential information was compromised.

The court rejected SPB’s proposed alternatives to disqualification. SPB offered to reimburse Ingredion and Tate & Lyle for their motion fees and transition expenses. Although this would mitigate a financial burden, it would not cure SPB’s breach of its ethical duties.

Formal ethical walls and the removal of Patton Boggs’ records to a third party could not overcome the presumption that SPB possessed confidential information based on the prior matter. The imposition of a timely, effective ethical wall can rebut the presumption that the lawyer and new law firm obtained confidential information.  SPB established no formal ethical wall, and the post-merger meeting between the Patton Boggs attorney with the SBP co-lead counsel demonstrated that lines had been crossed.   A belated ethical wall and separation of documents could not restore Tate & Lyle’s legitimate expectation of loyalty.

The Sugar Plaintiffs agreed to stipulate that the Defendants manufactured their product consistent with a description in a letter from the FDA in the prior Ingredion matter. This could not mitigate the problem that Patton Boggs advised Ingredion regarding that letter, and SPB is presumed to have confidential information that could be used against Ingredion.  It could not mitigate SPB’s breach of its duty of loyalty to Tate & Lyle.

SPB offered to forego examination of any Tate & Lyle or Ingredion witness, or make arguments or address documents that came from either Tate & Lyle or Ingredion. Although this could help mitigate the impact of SPB’s breached duty of loyalty to Tate & Lyle, its adversaries are still represented by the same law firm that dropped it after it raised the conflict.  It would not mitigate SPB’s duty of confidentiality to Tate & Lyle.

The court rejected the argument that Ingredion and Tate & Lyle filed their motions to obtain an improper tactical advantage. The motions were filed days after Tate & Lyle’s counsel met and conferred with SPB’s counsel and after Tate & Lyle would not consent to the existing conflict.

Comment: This was a high price to pay for a careless conflict check pre-merger. The Sugar Plaintiffs have lost a large financial investment in their SPB attorneys; the attorneys have lost numerous clients, and long-standing relationships have been ruined.  As the opinion makes clear, if the conflict check had revealed the problem, ethical walls and negotiations could have ameliorated the problems, and this drastic result.

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