Tuesday, February 3, 2015

Economic Harm – An Emerging Class of Conflict?

Coming off our recent note about subject matter and other types of conflicts making news, the Legal Ethics Forum calls out a fascinating decision: "Economic Harm as Direct Adversity Under 1.7(a)" [Celgard, LLC v. LG Chem, Ltd., Case Nos. 14-1675, -1733, -1806 (Fed. Cir., Dec. 10, 2014) (Dyk, J.).] --
  • "Jones Day represented the plaintiff in a matter where success would be economically harmful to non-client Apple, which was a customer of defendant. Apple was a Jones Day client on unrelated matters. It intervened to disqualify Jones Day on the ground that the representation was directly adverse to Apple because success against defendant would cause Apple to lose defendant as its lithium battery supplier."
  • "The court disqualified. Jones Day argued that it would not be possible for a law firm to anticipate the economic consequences to a non-party client who happened to be in an opponent's supply chain. But the court held that here the retainer agreement with plaintiff expressly said that the firm would not be adverse to Apple, so Jones Day did in fact recognize Apple's interest."
  • "However, the implications can be disturbing if read even a bit broadly. Many litigations can have economic consequences for a non-party client, even foreseeable ones and here Apple was a client on unrelated matters. The case holds that as a client even on unrelated matters Apple had a right not to see Jones Day appear for another client in a matter in which Apple was not a party because of foreseeable economic harm to Apple."
See some interesting commentary in the comments, as well as additional detail via the National Law Review: "Intellectual Property: Firm Disqualified Because Preliminary Injunction Is “Directly Adverse” to Another Client" --
  • "In determining whether the representation of Celgard amounted to a conflict of interest requiring disqualification, the Federal Circuit applied the professional conduct rules of the forum state. These rules prohibit any representation which is 'directly adverse to another client.'  The Federal Circuit found that the representation of Celgard was 'directly adverse' to the interests of Apple, and [was] not merely adverse in an ‘economic sense.'"
  • "Specifically, the Federal Circuit focused on the effect that Celgard’s preliminary injunction would have on Apple. It noted that the injunction would not only force Apple to find a new battery supplier, but also expose Apple to 'additional targeting by Celgard in an attempt to use the injunction issue as leverage in negotiating a business relationship.'"
  • "Even though Apple was not a named defendant in the litigation, the Federal Circuit found that a conflict existed based on the 'total context' of the case. Furthermore, the Federal Circuit rejected Celgard’s argument that finding a conflict in this case would give lawyers and clients 'no reliable way of determining whether conflicts of interest exist in deciding whether to commence engagements.' Instead, the Federal Circuit held that 'the duty of loyalty protect[ed] Apple from further representation of Celgard.'"

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