Legal Ethics in the Era of Law Firm Mergers and Vereins: Navigating Fee-Splitting, Referral, Conflicts and Other Ethical Issues

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Peter R. Jarvis, Partner, Holland & Knight, Portland, Ore.

Janis M. Meyer, Partner, Hinshaw & Culbertson, New York

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AMERICAN BAR ASSOCIATION STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY

Formal Opinion 94-388 December 5, 1994 Relationships Among Law Firms Lawyers have an obligation not to mislead prospective clients as to what the lawyer is able to bring to bear on the client's matter in terms of the size of the firm, the resources available to the firm or the relationship between the firm and other law firms with which it is associated. Words like "affiliated," "associated," "correspondent," or "network," without further explanation, can be misleading and, therefore, use of these terms, without a meaningful description of the nature of the relationship, violates Model Rule 7.1. In certain instances, because of the nature of the relationship between law firms and without regard to whether the relationship has been disclosed, it may be necessary for a lawyer to decline a proffered representation because the representation would be materially limited by such a relationship; in addition, if the lawyer believes the representation will not be adversely affected, it may be necessary for the lawyer to disclose the relationship to prospective clients so that the clients can determine whether, despite the relationship, they wish to consent to the representation. If a law firm licenses its name to other firms, all firms so licensed must, in fact, operate as a single firm and be treated as part of a single firm for all purposes under the Model Rules. Law firm relationships that result in the sharing of fees must comply with the requirements of reasonableness of the fee, disclosure to the client of the sharing arrangement, and division of the fees in accordance with services performed or assumption of responsibility. Lawyers must also avoid running afoul of Model Rule 7.2(c)'s prohibition on giving something of value for referrals. The growth, development and diversity of the legal profession have spawned a proliferation of new ways of conducting the practice which have taken lawyers far beyond the sole practitioner and single office law firm mod- els of an earlier era. Today law firms operate in multiple cities, form networks of law firms under a common firm name or trade name, and join forces and pool resources in any number of business arrangements. The Committee has received a number of inquiries relating to the ethical propriety of these rela-

AMERICAN BAR ASSOCIATION STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY, 541 N. Fairbanks Court, Chicago, Illinois 60611 Telephone (312)988-5300 CHAIR: Margaret C. Love, Washington, DC J Richard L. Amster, Roseland, NJ J Deborah A. Coleman, Cleveland, OH J Ralph G. Elliott, Hartford, CT J Lawrence J. Fox, Philadelphia, PA J David B. Isbell, Washington, DC J George W. Jones, Jr., Washington, DC J Marvin L. Karp, Cleveland, OH J Arthur W. Leibold, Jr., Washington, DC J Kim Tayler-Thompson, Stanford, CA J CENTER FOR PROFESSIONAL RESPONSI- BILITY: George A. Kuhlman, Ethics Counsel; Joanne P. Pitulla, Assistant Ethics Counsel © 1994 by the American Bar Association. All rights reserved. 94-388 Formal Opinion 2 tionships and the ethical requirements associated with them. This opinion is intended to suggest some guidelines with respect to two fundamental ethical precepts which must be addressed in this context. The first is the obligation not to misstate what a law firm has to offer. The second is the obligation to assure that a client of one firm is aware of the relationship between that firm and any other firms with which it is involved insofar as the relationship may give rise to conflicts of interest, the sharing of fees, or certain other interactions that implicate the Model Rules of Professional Conduct. This opinion presumes that the actual formation of relationships between law firms will have occurred only where the law firms were able to comply with their obligations to existing clients with respect to all such matters. I. Full Disclosure A client should not be misled about the firm resources available to assist in the provision of services the client requires. For example, if the lawyer has given the client reason to believe that the firm has offices in multiple cities, that should in fact be the case. Similarly, if the lawyer has given the client reason to believe that in going to firm "A" the client will have available to work on its matter the resources of an affiliated firm "B," then firm "A" must, in fact, have access to the talent, expertise and experience of attorneys at firm "B". This obligation not to mislead clients, potential clients or the general public, whether about the basic law firm associations or otherwise, derives from Model Rule 7.1, which prohibits communications by a lawyer regarding legal services that are false or misleading.1 In addition, Model Rule 7.5(a) prohibits the use of a "firm name, letterhead or other professional designation that violates Rule 7.1,"2 and Model Rule 7.5(d) provides that "lawyers may state or imply that they practice in a partnership or other organization only when that is the fact."3 The problem confronting the Committee is that a vast array of different words and phrases have been used to describe the relationships among law firms: "strategic alliance," "network," "affiliation," "association," "correspondent" are but a few that have come to the Committee's attention. Moreover, despite the Committee's attempt in Formal Opinion 84-351 to define what is

1. Rule 7.1 states in pertinent part, "A lawyer shall not make a false or misleading communication about the lawyer or the lawyer's services." The Comment to Rule 7.1 states, in part, that "This Rule governs all communications about a lawyer's services, including advertising permitted by Rule 7.2." See also DR 2-101(A), which provided that "[a] lawyer shall not ... use or participate in the use of any form of public communication containing a false, fraudulent, misleading, deceptive, self-laundry or unfair statement or claim." 2. Similarly, DR 2-102(B) provides that "[a] lawyer in private practice shall not practice under ... a name that is misleading as to the identity of the lawyer or lawyers practicing under such name...." 3. D.R. 2-102(C) is substantially identical to Rule 7.5(d). 3 Committee on Ethics and Professional Responsibility 94-388 meant when two firms say that they are "associated" or "affiliated," various words, including those two, are being used to describe relationships ranging from something very close to an actual partnership to one involving occasion- al referrals. This state of affairs has led the Committee to conclude that its efforts in Formal Opinion 84-351 to bring some order and meaning to the use of several common terms describing relationships between firms have not been successful. Any similar attempt simply to define what relationships are meant by such terms as "network," "alliance" or "correspondent" is likely to be similarly unavailing. It is critical, no matter what words are used to describe the relationship between firms, for clients to receive information that will tell them the exact nature of the relationship and the extent to which resources of another firm will be available in connection with the client's retention of the firm that is claiming the relationship. The Committee concludes that the use of one or two word shorthand expressions is not sufficient to fulfill that requirement. Because the words mentioned above and others have been employed to describe so many different relationships, and because the modern era has generated so many imagi- native ways in which firms relate to one another (and with which they describe them), the Committee believes that the mandate of Model Rule 7.1 not to mislead or deceive can only be met if a full description of any relationships the firm may have used in marketing its services is provided to all prospective clients as to whom the lawyer reasonably believes the relationships may be relevant, and to all present clients to whom the lawyer reasonably believes the relationships may be relevant if at any time any of those relationships changes. Thus, for example, a firm that represents that it has a "special affiliation" with a Washington, D.C. firm that specializes in tax matters would probably conclude that complete disclosure of that relationship was required for most, if not all, of its tax and business clients, but not necessarily required for the firm's litigation clients, if the affiliation would be irrelevant for them. This conclusion contemplates that if the clients or prospects for whom the relationship is relevant are told the firm is a member of a "network," in an "association" or is a "correspondent" of another firm, they will be given the following information: a. whether any professional personnel from the other law firm(s) may be involved in providing the professional services. b. whether any part of the fee the client pays will be shared with any of the other firm(s). c. whether profits of the firm the client originally retained will be shared with the other firm(s). d. whether the law firms in the relationship conduct common training programs and/or share strategies and/or expertise. e. whether the firms in the relationship conduct any other common 94-388 Formal Opinion 4 operations, or, by contrast, the relationship is simply a common marketing device. The goal here would be to provide the client with sufficient meaningful information to avoid misleading the client about the nature of the relationship. Similar information would have to be provided for each of the other descrip- tive words mentioned in this opinion as well as the many other shorthand words and phrases that are used to describe interfirm relationships. In so concluding, the Committee does not mean to suggest that on letterhead and law lists like Martindale Hubbell the firm cannot simply state that it is "affiliated" with another or that it is a member of a particular "network." The full disclosure addressed here rather must be given to any prospective client to whom the lawyer reasonably believes the relationship may be relevant, preferably in writing, before the lawyer embarks on the work required by the engagement. Most firms will no doubt find it simplest to prepare an addendum to their standard retention letter that would include a description of the relevant relationship for this purpose. II. Disclosure for Conflict of Interest Purposes The dimensions of the second ethical precept implicated by law firm relationships are somewhat different. Rather than an issue of truth in representations regarding available resources, this issue concerns the need for full disclosure of potential conflicts of interest stemming from inter-firm relationships and, where appropriate, client waiver of objection to those conflicts. This obligation to address conflicts of interest, unlike the obligation outlined in Part I of this Opinion, exists without regard to whether the firm has disclosed that such a relationship exists. Just as clients are entitled to know that their law firm does work on a regular basis for the firm representing their adversary, so, too, may they be entitled to know that their law firm and their adversary's law firm have other types of relationships. This disclosure obligation derives from Model Rule 1.7(b), which states, in pertinent part: (b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation. The extent of the obligation to make disclosure in accordance with Rule 1.7 is peculiarly fact-dependent. No opinion can begin to identify all the possible situations where the obligation to disclose may arise. Similarly, for the reasons described above, no hard and fast rules can account for all situations in which a particular word or words are used to describe the relationship. Whether conflicts have to be cleared between law firms and whether relationships have to be disclosed to prospective clients of either turns on the substance of the relationship, not the 5 Committee on Ethics and Professional Responsibility 94-388 name the law firms choose to call it. But if a particular representation may be materially limited by an existing relationship, the lawyer must decline the representation unless the lawyer believes the representation will not be adversely affected and the client consents after consultation. 4 It may be instructive to evaluate several examples along the continuum from that which clearly would not materially limit a representation (no relationship) to that which clearly does (full partnership). Near one end of the spectrum are situations where firms from time to time informally refer matters to one another where practicable. Even in cases where such relationships have resulted in multiple referrals there is no reason that the relationship would, as a general proposition, materially limit the representation. These casual referrals, or even periodic mutual backscratching, should not constitute the kind of interest that would trigger the determination required by Model Rule 1.7(b). A more difficult question arises when both firms belong to a "network" (or otherwise characterized group) of firms which in fact share no clients, no confidences, no fees and no professional engagements but which do agree more or less formally to advertise their relationship and refer matters to each other on an ad hoc basis. Given the limited nature of such a relationship, it is the view of the Committee that this sort of limited network relationship without more, also would not call into play Model Rule 1.7(b). A more regular practice of referral may, however, give rise to a need to clear conflicts if the relationship involves sharing of client fees. A different series of questions is presented if there is a non-law related business relationship between law firms. For example, if one firm lends another significant working capital, or if two firms jointly buy a building they both will use, or if two firms enter into a joint venture to establish, for example, a title company, the resulting business relationship may give rise to a need to address the conflict question. In some instances the business relationship between the two firms will be so marginal or unimportant that Model Rule 1.7(b) will not come into play. On the other hand, there may be situations in which one firm's business connection with another will be so integral to its enterprise that it could materially limit its ability to oppose the other firm's clients. In this case, the firm's clients ought to have an opportunity to decide whether they wish to continue to be represented by a firm whose business partner is representing an adverse party against the client. At some point the lawyer's interest in the relationship with the other firm will be of suffi-

4. The term "consultation," used in Rule 1.7(b)(2), is defined in the Model Rules terminology to denote "communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question." It is important in this context to recall that the Comment to Rule 1.7(b)(1) states that "when a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client's consent." 94-388 Formal Opinion 6 cient moment that, even if the lawyer believes the representation will not be adversely affected, the lawyer must disclose the relationship to her client to enable the client to decide whether to agree to the representation. Difficult questions are also raised when the professional relationship between the firms becomes more substantial than the network arrangement described above. As the two firms become more inextricably linked, the need to consider the conflict potential becomes more pronounced. As a general proposition the Committee concludes that where two law firms have a relationship in which they share profits, it is highly unlikely that one could represent a client whose interests are adverse to clients of the other firm without following the procedure prescribed by Model Rule 1.7(b). In such a case the lawyer must make a good faith determination that the representation will not be adversely affected and, if that determination can be made, secure the informed consent of the client if the representation is to go forward. * * * There is one other question in the conflict area raised by relationships between law firms. At some point the client of law firm A is entitled to know whether law firm B, with whom law firm A has a relationship, represents interests adverse to the client of law firm A. This is certainly so if a client, in going to law firm A, will have law firm B working on its matter. In this situation the client is the client of both firms, and is entitled to the full protections of Model Rule 1.7 as to both firms. A client is also entitled to know of conflicting commitments where, as described in Formal Opinion 84- 351, the relationship between the two firms is "close and regular, continuing and semi-permanent, and not merely that of for- warder-receiver of legal business." In that relationship one firm was "available to the other firm and its clients for consultation and advice." Quite apart from the name that is applied to that relationship, the Opinion correctly concluded that lawyers of the "affiliated" or "associated" firm will not simultaneously represent persons whose interests conflict with the client's interests, just as would be true of lawyers who occupy an 'Of Counsel' relationship with the firm. The same expectation necessarily exists when two firms are "Of Counsel" to each other. Formal Opinion 90-357; Informal Opinion 1315 (1975). In each case, of course, if the lawyer believes the representation will not be adversely affected, the client can be asked to consent to the representation. But even in situations short of a "close and regular, continuing and semi- permanent relationship," if the relationship of the two firms is sufficiently close, the client of firm A may be entitled to know whether firm B represents interests adverse to the client. Of course, the client of firm A, having been informed of firm A's "strategic alliance" with firm B and what that alliance means, may not wish to have the fact and nature of its representation by firm A circulated among the lawyers at firm B. Given these competing interests, in the view of the Committee it is enough if firm A informs its client of the nature of its relationship with firm B and permits the client to decide whether conflict clearance at firm B should occur. 7 Committee on Ethics and Professional Responsibility 94-388

III. Licensing of a Firm Name The next question the Committee has been asked to address involves a law firm with a practice concentrated in a particular area which seeks to create a national network of firms, all of which will use the original firm's name under a licensing agreement by which the original firm will provide all marketing for the firms in the network. The Committee believes that, in contrast to the situation in which several firms are associated but retain their own identities, the use of the same name by all the firms in a network will effectively represent that they are all offices of one and the same firm. Such a representation is, quite clearly, a misrepresentation under both Rule 7.1 and Rule 7.5(a) if in fact all the firms bearing the same name are not part of the same firm. 5 If several entities are, or are held out as, a single firm, then their lawyers must meet not only the obligations regarding preservation of confidences and avoidance of conflicts, but also those arising under Rules that normally come into play only when lawyers are associated in the same firm. Principal among such provisions are Rules 5.1(a) and (c), which deal with one lawyer's responsibility for the conduct of other lawyers.6 These provisions provide: (a) A partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct. * * * (c) A lawyer shall be responsible for another lawyer's violation of the Rules of Professional Conduct if: (1) the lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or (2) the lawyer is a partner in the law firm in which the other lawyer practices, or has direct supervisory authority over the other lawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action. Also pertinent are Rules 5.3(a) and (c), which involve a lawyer's responsibility for the actions of persons acting under his supervision and direction and provide: With respect to a nonlawyer employed or retained by or associated with a lawyer: (a) a partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person's conduct is compatible with the professional obligations of the lawyer; and * * * (c) a lawyer shall be responsible for conduct of such a person that would be a violation of the Rules of Professional Conduct if engaged in by a lawyer if:

5. This opinion does not address the legal significance of identity as a single firm in terms of contract, tort, corporate or other law. 6. There are no direct counterparts to these provisions in the Model Code. 94-388 Formal Opinion 8

(1) the lawyer orders or, with the knowledge of the specific conduct, ratifies the conduct involved; or (2) the lawyer is a partner in the law firm in which the person is employed, or has direct supervisory authority over the person, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.7 If all of the lawyers in the participating firms in a "network" of licensed firms using the same name meet all of the ethical requirements that would be applicable to them if they were all lawyers in a single firm, then, at least from the ethical point of view, there would be no impropriety in such an arrangement. Absent such compliance, there would, at a minimum, be a violation of Rule 7.1 and Rule 7.5(a). IV. Financial Arrangements Between Related Firms The final issue that the Committee has been asked to address concerns fee sharing and other financial arrangements between related firms, however the relationship is denominated. A fundamental proposition, of course, is that all of the firms in the relationship must comply with ethical requirements regarding the sharing of fees. This is so even where, as described above, the firms must be treated for conflicts purposes as if they are a single firm. Under Model Rule 1.5(e)(1), fees may be shared only if they are divided in proportion to services performed or if, pursuant to written agreement by the client, each lawyer assumes joint responsibility for the representation.8 The Model Code differs in that it requires that fees be divided in proportion to the services performed and the responsibility assumed by each. See DR 2- 107(A). A client whose fee is shared must receive a complete explanation of the sharing arrangement, and the arrangement cannot be implemented under the Rules if the client objects. See Model Rule 1.5(e); Model Code DR 2- 107(A) (stating that the client must consent "to employment of the other lawyer"); see also Formal Opinion 84-351 at n. 8. Moreover, the total fee must be reasonable. See Model Rule 1.5(e)(3); Model Code DR 2-106, EC 2-17. Another ethical question raised in this context is whether one firm may finance another (e.g., by making loans) in a manner that is tied to referral business generated by the financed firm. In general, one firm may finance another and may receive referrals from the financed firm. Since, however, under Model Rule 7.2(c) a lawyer "shall not give anything of value to a person for recommending the lawyer's services," a firm that finances another

7. There are no direct counterparts to these provisions in the Model Code. Also of possible pertinence are Rule 5.4(a), prohibiting a "lawyer or law firm" from sharing legal fees with a nonlawyer, with certain exceptions, and Rule 5.4(b), which provides that "A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law." 8. The Committee does not address in this Opinion whether sharing of profits among lawyers is subject to the same requirements as the sharing of fees. 9 Committee on Ethics and Professional Responsibility 94-388 firm cannot either receive referrals of business as a purported return on its investment or make the referrals as a quid pro quo for a return on its investment. Indeed, in general firms may not contract to refer business to one another: the exchange of binding promises would in itself constitute "giving something of value" for referrals in violation of Rule 7.2(c). [FN9] This principle holds even if the firms are "associated," "affiliated" or part of a "network." However, as long as there is no fixed relationship between the referrals amounting to a quid pro quo, firms may agree to consider each other for appropriate referrals. Arrangements whereby financing from one firm is tied to referral business from another may also violate the ethical constraints on sharing fees with lawyers not in the same firm. In Informal Opinion 85-1514 (1985), the Committee explained that a professional corporation of tax law specialists could not ethically use preferred stock dividends or a limited partner distribution to pay an outside lawyer in an amount proportional to the corporation's earnings from clients referred to it by the outside lawyer. This arrangement would amount to a division of fees among lawyers not in the same firm, and therefore would have to comply with the requirements of Rule 1.5(e) outlined in part above. Other financial arrangements that tie a sum of money to the level of earnings from referrals are similarly impermissible. For example, one firm may not finance another firm in an amount proportional to earnings from referrals from the financed firm. Nor may a firm receive a return on an investment in another firm pegged to earnings that the financed firm derives from referrals from the financing firm. Finally, where one firm is providing financing to another firm, but the two firms are then asked to represent opposing parties in a matter, Rule 1.7(b) applies, as discussed in Part II above. Conclusion In conclusion, the Committee observes that neither the Model Rules nor the Model Code speaks directly to the ethical problems raised by relationships between law firms. Although such relationships may raise special concerns, particularly in the area of conflicts of interest, any relationship between firms

9. Cf., e.g., In re Weinroth, 495 A.2d 417, 420-21 (N.J.1985) (an arrangement whereby a law firm provided a referral client a credit for future legal expenses and the client gave the referrer a fee constituted a violation of ethical rules because the law firm indirectly gave "value" for a referral); Board of Commissioners on Grievances and Discipline of the Ohio Supreme Court. OP. 92-19 (Oct. 16, 1992) (one lawyer may not purchase client files and client lists from another attorney because, among other reasons, "any money paid by a purchaser for client files and lists would be in essence a reward to the seller for recommending the purchasing lawyer" under Ohio DR 2-130(B); Illinois State Bar Ass'n, Op. No. 92016 (Jan. 22, 1993) (a lawyer who practiced before the IRS could not ethically offer reduced rates to family members of an IRS agent in exchange for that agent's "doing what he could to further the career" of the lawyer because, among other reasons, the reduction in fees is something 'of value' " under Illinois Rule 7.2). is permissible as long as the attendant ethical obligations are met. These include the obligation to assure that any representations that have been made regarding the relationship are clear and not misleading, and the obligations to avoid conflicts and preserve confidences as may be entailed by the actual circumstances of the relationship. Related firms should also see to it their fee and referral arrangements do not conflict with applicable ethical rules. AMERICAN BAR ASSOCIATION STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY

Formal Opinion 464 August 19, 2013 Division of Legal Fees With Other Lawyers Who May Lawfully Share Fees With Nonlawyers

Lawyers subject to the Model Rules may work with other lawyers or law firms practicing in jurisdictions with rules that permit sharing legal fees with nonlawyers. Where there is a single billing to a client in such situations, a lawyer subject to the Model Rules may divide a legal fee with a lawyer or law firm in the other jurisdiction, even if the other lawyer or law firm might eventually distribute some portion of the fee to a nonlawyer, provided that there is no interference with the lawyer’s independent professional judgment.

This opinion considers whether a lawyer subject to the Model Rules may divide a legal fee with another lawyer or law firm practicing in a jurisdiction where the other lawyer or law firm might eventually distribute some portion of that fee to a nonlawyer.1 In contemporary practice, lawyers routinely work with lawyers from other law firms, including lawyers and law firms in other jurisdictions, to represent clients in particular matters. The August 2012 amendments to the Model Rules expressly recognize these common arrangements. New Comment [6] to Model Rule 1.1 explains that a lawyer may retain or contract with other lawyers outside the lawyer’s own firm to provide or assist in the provision of legal services to a client and describes how a lawyer should approach these relationships with both the client and the other lawyers.2 Sometimes the other lawyers with whom a lawyer may work are admitted and practice in other jurisdictions, both within and outside the United States, a situation that has become more common with the growth of national and international commerce. Those other jurisdictions may have professional conduct rules identical or similar to Model Rules 1.5(e) and 5.4(a), which deal with the allocation of legal fees among lawyers and nonlawyers. But some jurisdictions, like the District of Columbia and the United Kingdom, have rules that differ significantly from Model Rules 1.5(e) and 5.4(a). Model Rule 1.5(e) permits the division of a legal fee between lawyers who are not in the same firm, but only if: (1) the division is in proportion to the services performed by each lawyer

1 This opinion is based on the Model Rules of Professional Conduct as amended by the American Bar Association House of Delegates through February 2013. The laws, court rules, regulations, rules of professional conduct, and opinions promulgated in the individual jurisdiction are controlling. 2 Comment [6] to ABA MODEL RULES OF PROF’L CONDUCT R. 1.1 reads: Retaining or Contracting With Other Lawyers Before a lawyer retains or contracts with other lawyers outside the lawyer’s own firm to provide or assist in the provision of legal services to a client, the lawyer should ordinarily obtain informed consent from the client and must reasonably believe that the other lawyers’ services will contribute to the competent and ethical representation of the client. See also Rules 1.2 (allocation of authority), 1.4 (communication with client), 1.5(e) (fee sharing), 1.6 (confidentiality), and 5.5(a) (unauthorized practice of law). The reasonableness of the decision to retain or contract with other lawyers outside the lawyer’s own firm will depend upon the circumstances, including the education, experience and reputation of the nonfirm lawyers; the nature of the services assigned to the nonfirm lawyers; and the legal protections, professional conduct rules, and ethical environments of the jurisdictions in which the services will be performed, particularly relating to confidential information.

Formal Opinion 464 2 or each lawyer assumes joint responsibility for the representation; (2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and (3) the total fee is reasonable. Comment [7] to Model Rule 1.5 explains that a “division of fee” is a single billing to a client covering the fee of two or more lawyers who are not in the same firm; and the comment also notes that this kind of fee arrangement “… facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well….” Inter-firm division of legal fees is clearly contemplated by the Model Rules. Model Rule 5.4(a) provides generally that “a lawyer or law firm shall not share legal fees with a nonlawyer” but recognizes four distinct exceptions: payments to the survivors or estates of deceased lawyers; payments made under Model Rule 1.17 to purchase the practice of a deceased, disabled or disappeared lawyer; firm compensation and retirement plans; and sharing court- awarded fees with nonprofit organizations. The exception for firm compensation and retirement plans depends on whether the profits being shared are “tied to particular clients or particular matters.”3 In contrast to the Model Rule, District of Columbia Rule 5.4(b) permits “an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients” to hold an ownership interest in a law firm; and District of Columbia Rule 5.4(a) permits the sharing of legal fees with such persons.4 ABA Formal Opinion 91-360 (July 11, 1991) addressed the question of what rule should govern a lawyer’s conduct when the lawyer is admitted in the District of Columbia and a partner in a District of Columbia firm that includes nonlawyer partners, but is also admitted in another jurisdiction that follows Model Rule 5.4(b),

3 Ellen J. Bennett, Elizabeth J. Cohen & Martin Whittaker, Annotated Model Rules of Professional Conduct 461 (7th ed. 2011). See Ill. State Bar Ass’n, Advisory Op. 89-05 (1989) (firm profit-sharing plan may include nonlawyer employees provided shares based on overall firm profit and not specific matters); N.Y. State Bar Ass’n Comm. on Prof’l Ethics, Advisory Op. 917 (2012) (firm may pay bonus to nonlawyer marketer based on number of clients obtained through advertising provided amount paid not calculated with respect to fees paid by clients). 4 DC RULES OF PROF’L CONDUCT R. 5.4, Professional Independence of a Lawyer, states that: (a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that: (1) An agreement by a lawyer with the lawyer’s firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer’s death, to the lawyer’s estate or to one or more specified persons; (2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer. A lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of Rule 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price. (3) A lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; (4) Sharing of fees is permitted in a partnership or other form of organization which meets the requirements of paragraph (b); and (5) A lawyer may share legal fees, whether awarded by a tribunal or received in settlement of a matter, with a nonprofit organization that employed, retained, or recommended employment of the lawyer in the matter and that qualifies under Section 501(c)(3) of the Internal Revenue Code. (b) A lawyer may practice law in a partnership or other form of organization in which a financial interest is held or managerial authority is exercised by an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients, but only if: (1) The partnership or organization has as its sole purpose providing legal services to clients; (2) All persons having such managerial authority or holding a financial interest undertake to abide by these Rules of Professional Conduct; (3) The lawyers who have a financial interest or managerial authority in the partnership or organization undertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1; (4) The foregoing conditions are set forth in writing.

Formal Opinion 464 3

which forbids such partnerships. The opinion concluded that the lawyer “should not be subject to the prohibition of the jurisdiction where the lawyer does not practice” and should follow the rules where the lawyer is engaged in practice. Formal Opinion 91-360 did not directly address fee sharing. A fee-sharing issue may arise when a lawyer undertakes the representation of a client in a matter that involves the services of another lawyer or law firm governed by different rules. For example, a lawyer in a Model Rules jurisdiction may reasonably conclude that the client requires the assistance of a specific lawyer in a District of Columbia firm, in which a nonlawyer happens to hold an ownership interest, on a matter involving federal government contracts because that lawyer is uniquely qualified in such matters. With informed client consent, the two lawyers may work together on the matter. If the requirements of Model Rule 1.5(e) are met, a typical fee arrangement in such matters is for the client to receive a single billing for the work of both lawyers. In this situation, there may be a question whether the lawyer from the Model Rules jurisdiction, by participating in this common inter-firm fee arrangement, shares a legal fee in violation of Model Rule 5.4(a) because the District of Columbia firm’s portion of the fee will presumably become part of that firm’s overall revenues, revenues from which distributions may ultimately be made to the nonlawyer who holds an ownership interest. In the situation assumed above, however, the lawyer from the Model Rules jurisdiction does not violate Model Rule 5.4(a). That lawyer divided a legal fee only with “another lawyer,” and a lawyer may divide legal fees with a lawyer admitted in another jurisdiction.5 Any concerns of the lawyer subject to the Model Rules regarding inter-firm division of legal fees should end at that point. The possibility that the District of Columbia firm may, or may not, eventually “share” some fraction of that firm’s portion of the fee with a nonlawyer should not expose the lawyer in the Model Rules jurisdiction to discipline. The lawyer subject to the Model Rules has complied with those rules. The compensation system of the District of Columbia firm does not threaten the application of Model Rule 5.4(a) within the Model Rules jurisdiction, and there is no reason to attempt to enforce Model Rule 5.4(a) in the District of Columbia.6 This situation is different from that considered in Formal Opinion 91-360, noted above, which dealt with the prohibition of partnerships with nonlawyers expressed in Model Rule 5.4(b) rather than the fee-sharing provision of Model Rule 5.4(a). However, the conclusions are consistent. Formal Opinion 91-360 decided that a lawyer licensed both in a Model Rules jurisdiction and the District of Columbia should adhere to the restrictions of the jurisdiction where the lawyer actually practiced. The conduct of each lawyer and law firm involved in the current hypothetical situation took place in only one jurisdiction and was permitted there. The lawyer subject to the Model Rules divided a fee only with another lawyer in conformance with the Model Rules; and the District of Columbia firm could choose to allocate its portion of the fee

5 ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 316 (1967) (not necessary that both lawyers be admitted in same jurisdiction to divide legal fees; lawyer admitted in one jurisdiction is lawyer everywhere for purposes of ethics rules). See also O’Brien, P.C. v. Snyder, 601 A.2d 1056, 1058 (Del. 1990) (members of New Jersey bar were “lawyers” for purposes of Delaware Rule 5.4(a)); ABA Comm. on Ethics & Prof’l Responsibility, Formal Opinion 423 (2001) (members of recognized legal profession in foreign jurisdictions are “lawyers” for purposes of Model Rule 5.4.). 6 See Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155, 165 (2004) (jurisdiction should not apply its law to judge conduct that occurs only in another jurisdiction when conduct creates no serious risk of interference with first jurisdiction’s ability to regulate its own affairs).

Formal Opinion 464 4

to a compensation plan that included distribution to the nonlawyer holding an ownership interest as authorized by the District of Columbia rules. In summary, a division of a legal fee by a lawyer or law firm in a Model Rules jurisdiction with a lawyer or law firm in another jurisdiction that permits the sharing of legal fees with nonlawyers does not violate Model Rule 5.4(a) simply because a nonlawyer could ultimately receive some portion of the fee under the applicable law of the other jurisdiction. This conclusion is consistent with the purposes of the Model Rules because the concerns underlying the prohibition in Model Rule 5.4 are not implicated. As explained in Comment [1] to Model Rule 5.4: “These limitations are to protect the lawyer’s independence of professional judgment.” The rule protects a lawyer’s independent professional judgment by limiting the influence of nonlawyers on the client-lawyer relationship.7 In the typical situation discussed above, there is no reason to believe that the nonlawyer in the District of Columbia might actually influence the independent professional judgment of the lawyer in the Model Rules jurisdiction, who practices in a different firm, in a different jurisdiction. And that lawyer remains subject to the Model Rules, so this conclusion does not compromise any prohibitions on nonlawyer ownership and fee sharing in the Model Rules jurisdiction.8 A contrary conclusion, as noted above, would place the lawyer in the Model Rules jurisdiction at the mercy of the organization and compensation practices of the District of Columbia firm. For example, as discussed above, if the District of Columbia firm’s compensation plan that included nonlawyers were not “tied to particular clients or particular matters,” then there would be no violation of Model Rule 5.4(a) in any event. And even if the District of Columbia firm’s compensation plan permitted it to pay a nonlawyer a portion of fees received that were in fact “tied to particular clients or particular matters,” but the firm decided for any reason not to do so in a given year, then there could be no concern for allegedly improper fee sharing for that year. Thus, the exposure of the lawyer in the Model Rules jurisdiction to discipline for improper fee sharing would essentially depend on the organization, bookkeeping practices, and annual compensation decisions of the District of Columbia firm. Presumably, lawyers in Model Rules jurisdictions could always avoid any potentially improper fee sharing by refusing to work with firms in the District of Columbia or other countries unless the clients themselves separately retained and paid the District of Columbia or foreign law firms. But this tactic would likely annoy clients and add unnecessary complexity to a common arrangement with no constructive purpose. A contrary conclusion would also unreasonably impair the ability of lawyers to work alongside lawyers in firms that may be best suited to serve a particular client or resolve a particular matter. If a lawyer in a Model Rules jurisdiction cannot work with other lawyers from the District of Columbia or the other jurisdictions where law firms are permitted to share fees with nonlawyers, clients would be deprived of the services of those lawyers with no real benefit to those clients or the legal system. Finally, this conclusion carries an important limitation. Lawyers must continue to comply with the requirement of Model Rule 5.4(c) to maintain professional independence. Even

7 Bennett et al., supra note 3, at 456. 8 This conclusion is also in accord with the only other opinion that has directly addressed the question. See Philadelphia Bar Assn. Prof’l Guidance Comm., Advisory Op. 2010-7 (2010) (Pennsylvania law firm may divide legal fee from joint representation of a client with District of Columbia firm which has nonlawyer partner).

Formal Opinion 464 5 if the other law firm may be governed by different rules regarding relationships with nonlawyers, a lawyer must not permit a nonlawyer in the other firm to interfere with the lawyer’s own independent professional judgment. As noted above, the actual risk of improper influence is minimal. But the prohibition against improper nonlawyer influence continues regardless of the fee arrangement.

_ AMERICAN BAR ASSOCIATION STANDING COMMITTEE ON ETHICS AND PROFESSIONAL RESPONSIBILITY 321 N. Clark Street, Chicago, Illinois 60654-4714 Telephone (312) 988-5328 CHAIR: Paula J. Frederick, Atlanta, GA ■ James J. Alfini, Houston, TX ■ T. Maxfield Bahner, Chattanooga, TN ■ Nathaniel Cade, Jr., Milwaukee, WI ■ Lisa E. Chang, Atlanta, GA ■ Donald R. Lundberg, Indianapolis, IN ■ J. Charles Mokriski, Boston, MA ■ Ellen A. Pansky, South Pasadena, CA ■ Jennifer A. Paradise, New York, NY■ Richard H. Underwood, Lexington, KY

UNITED STATES INTERNATIONAL TRADE COMMISSION

Washington, D.C.

In the Matter of

CERTAIN LASER ABRADED DENIM 1"“ N°- 337-TA-93° GARMENTS

ORDER N0. 43: GRANTING MOTION TO DISQUALIFY COUNSEL

(May 7, 2015)

On March 11, 2015, Respondent The Gap, Inc. (“Gap”) ﬁled a motion seeking to disqualify Dentons US LLP (“Dentons US”) as counsel for Complainants. (Motion Docket No.

930-034.) Gap says that Dentons US cannot continue to pursue a complaint against Gap at the

ITC because it is a “portal” of the Swiss verein Dentons (“Demons”), which represents Gap on fourteen open matters elsewhere. (Mot. at 1; Mot. Mem. at 1, 3, 5.) According to Gap, for more than two decades, Dentons and its predecessor firml have represented Gap in multiple matters around the world, including a recent engagement involving a Canadian Border Services Agency customs audit. (Mot. Mem. at 1, 4-10.) Gap explains that not only does Dentons US have an ethical conflict, but Dentons’ relationship with Gap means that Dentons has had ongoing and unfettered access to Gap’s confidential and privileged infonnation relevant to the claims and defenses in this Investigation, including Gap’s “U.S. importation, exportation, financial, and taxation structure, records, and information” and accused products. (Mot. at 1; Mot. Mem. at 1

3, 5-6, 8-10, 18; Jedrzejek Decl.; Johnson Decl.) Thus, Gap says, any continued representation of Complainants by a Dentons “portal” prejudices Gap’s ability to defend against Complainants’ claims and to negotiate a settlement. (Id.)

1 Salans LLP. (Mot. Mem. at 3-4; Mertens Decl. at ﬁl3.) Salans LLP and SNR Denton merged with a third ﬁrm into the Swiss verein “Dentons.” (Id.; Mot., Ex. H.)

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Gap further points out that Dentons did not inform Gap of the conﬂict prior to ﬁling suit on behalf of Complainants in the Northern District of Ohio or at the ITC. (Mot. Mem. at 11.)

Instead, it was Gap who discovered the conﬂict at the end of January, 2015. (Id.; Scarr Decl.;

Jedrzejek Decl.) In addition, Gap says that Dentons never sought to obtain a conﬂict waiver from Gap. (Id.; Jedrzejek Decl.) Gap argues that under Dentons’ contract with Gap, California law should be applied to this situation and that “Califomia law mandates Dentons’ automatic disqualiﬁcation from this proceeding.” (Mot. Mem. at 3, 7-8, 12-13, 16-19.) Even if California law does not apply, the Gap alternatively argues that the ABA Model Rules of Professional

Conduct, which Gap says the ITC has adopted, still require disqualiﬁcation. (Id.) Gap says that it engaged in several weeks of negotiation with Dentons in an unsuccessful attempt to get

Dentons US to withdraw as counsel. (Mot. Mem. at 11.)

On March 17, 2015, Complainants ﬁled a motion seeking an extension of time for them to respond to the motion. (Motion Docket No. 930-036.) The undersigned provided

Complainants with an extension. (Order No. 35.) Responses by the remaining parties, if any, were due March 23. None were received.

On March 30, 2015, the Cormnission Investigative Staff (“Staff”) ﬁled a motion seeking leave to ﬁle its response out of time. (Motion Docket No. 930-044.) Said motion is granted.2

Staff relies on Commission precedent and the ABA Model Rules to argue that Gap has demonstrated that Dentons’ representation of Complainants presents “a serious risk of taint to this investigation.” (Staff Mot. at 4.) Staff also argues that Dentons Canada and Dentons US are both part of the Dentons verein structure, which Staff says is an “association” within the meaning of the Model Rules. (Id. at 5.) Staff concludes that unless there effectively was a pre-existing

2 The undersigned notes that Staff believes its prior request was overlooked in Order N0. 35. (Staff Mm. at 1.) Any material perceived deﬁciencies in an Order should be promptly brought to the attention of the undersigned, i.e., prior to the pertinent deadline so that they may be timely addressed.

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ethical screen, “the potential prejudice to Gap outweighs the prejudice to Complainants in not having their choice of counsel.” (Id.) C

On March 30, Complainants opposed the motion, arguing that Dentons US is separate

ﬁom Dentons Canada LLP (“Dentons Canada”). (Opp. at 2, 5, 16-17.) As evidence of this separation, Complainants say that Dentons’ US and Canada “Legal Practices”3

0 do not have access to each other’s client files; 0 do not share client confidential information unless acting “as co-counsel”; 0 do not share profits and losses; and 1 are financially and operationally separate.

(Id. at 2, 8, 17; Reich Decl.) As a result, Complainants argue, Dentons US is not counsel for Gap and does not have an ethical conflict. (Opp. at 2, 15.) Furthermore, Complainants say that all of the Dentons US attorneys and paralegals who have worked for Complainants confirmed that they have not “accessed any files, or received any documents or infonnation from any lawyer, at

Dentons Canada LLP or Dentons Europe LLP relating to Gap.” (Id. at 8; Reich Decl.) Thus,

Complainants say that there is effectively an ethical screen in place between Dentons US and

Dentons Canada and that Gap cannot be prejudiced. (Id. at 22-23.) In contrast, Complainants argue, they will be greatly prejudiced if Dentons is disqualiﬁed and the public interest will be affected. (Id. at 25-30.)

In addition to their separate entity arguments, Complainants argue that the Dentons

Canada retainer agreement that Gap signed contains a provision waiving potential future conﬂicts. (Opp. at 1, 15, 18.) Thus, they reason, if there had been a conﬂict, Gap consented in advance. (Id. at 8-9, 18.) Complainants also say that they would be prejudiced if they were deprived of counsel mid-way through the Investigation. (Id. at 2.) According to Complainants,

Gap only identiﬁed the conﬂict alter it was “unsuccessful in obtaining a settlement[,]” “unable to

3 Hereinafter, the undersigned will refer to Dentons’ “Legal Practices[,]” not portals.

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meaningfully contradict [Complainants’] allegations of infringement,” and had “acknowledged that it had failed to properly identify suppliers of the infringing accused products.” (Id. at 4.)

Complainants argue that under Commission precedent, the ABA Model Rules govern here and not the California Rules of Professional Conduct. (Id. at 10-12.)

On April 3, 2015, Gap filed a motion seeking leave, which is hereby granted, to file a supporting reply. (Motion Docket No. 930-040.) Gap disputes Complainants’ account of the facts relating to the timing of Gap’s motion and Gap’s conduct both during discovery and in settlement talks. (Reply at 12, 16 n.1; Holland Decl.; Olesek Decl.) In addition, Gap raises further bases for disqualification which it said it could not raise prior to issuance of Order No.

36.

First, Gap says the Funding Agreement between Longford Capital Fund I, LP and

RevoLaze and its attachments (collectively, the “Funding Agreement”) demonstrate that Dentons

US disclosed to Complainants (at least as of February 2014) that it has a current conﬂict with

Gap, as well as with Respondents Guess and Diesel. (Reply at 1, 3-4, 7, 14; z'd.,Holland Decl.,

Ex. F at Schedule 1 (Dentons US engagement agreement with Complainant Revolaze LLC disclosing current conﬂict with Gap4).) Second, Gap says that Dentons has a partial contingency fee arrangement giving it a heightened interest in the outcome of the Investigation, which Gap says increases the need to disqualify Dentons because Dentons “stands to directly beneﬁt from its own unethical conduct.” (Id., Holland Decl., Ex. F at §§ 4.2(c) (identifying Dentons’ share of

“Proceeds”), 6.1(d) (reduced fees for portion of “Proceeds”).) In addition, Gap questions the probity of Complainants’ opposition in light of the speciﬁc admission made by Dentons US in

(Reply, Holland Decl., Ex. F at Schedule 1 (excerpt).)

4 PUBLIC VERSION

the Funding Agreement. (Id. at 4-6, 8.) Gap also questions WhyDentons disclosed the conflict to Complainants but not to Gap. (See, e.g., id. at 5, 8, 11-12.) With respect to Complainants’ arguments regarding the separation between Dentons US and Dentons Canada, Gap responds that there are deficiencies and inconsistencies in the number and substance of the declarations provided by Dentons. (Id. at 15-16.) Finally, Gap argues that Complainants’ argument regarding prejudice is belied by their awareness and Waiverof the conflict prior to bringing their

Complaint to the lTC. (Id. at 5, 8-9.)

On April 8, 2015, Complainants sought an extension of time to respond to Gap’s reply motion. (Motion Docket No. 930-041.) The undersigned granted this request. (Order No. 38.)

On April 17, 2015, Complainants’ opposed Gap’s motion for leave to ﬁle a reply, arguing that Gap did not raise new matters for consideration and that “Gap’s motion for leave to ﬁle a reply is nothing more than a strategic maneuver to get the last word in.” (Reply Opp. at 3-4, 9

10.) Complainants also say that “Gap’s proposed reply identiﬁes no speciﬁc prejudice, or even any prejudice at all.” (Id. at 5.) Complainants also dispute Gap’s criticism of the declarations their counsel submitted and dispute the issue regarding disclosure of suppliers. (See, e.g., id. at

7.) With respect to the disclosure of the conflict in the Funding Agreement, Complainants say that counsel later “received confirmation that no legal conflict existed.” (Id. at 9; Hogge5 Decl.)

Based on a review of the motion papers and responses thereto, the undersigned ﬁnds as follows.

The authority to disqualify counsel derives from presiding ofﬁcers’ inherent power to control their proceedings. Certain Network Interface Cards and AccessPoints for Use in Direct

Sequence Spread Spectrum WirelessLocal Area Networks and Products Containing Same, Inv.

No. 337-TA-455, Order No. 26 at 3 (U.S.I.T.C., August 2, 2001) (reviewed and aft‘d) (“Network

5 Mark L. Hogge is a partner at Dentons US. I F

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Interface”) (citing 5 U.S.C. § 556(c)(5) and (7); 19 C.F.R. § 201.15(a)). However, this authority has rarely been exercised, as disqualiﬁcation of counsel is drastic and disfavored. Id; Certain

Basebantl Processor Chips and Chipsets, Transmitter and Receiver (Radio) Chips, Power

Control Chips, and Products Containing Same, Including Cellular TelephoneHandsets, Inv. No.

337-TA-543, Order No. 29 at 19 (U.S.I.T.C., March 9, 2006) (“Baseband”).

The American Bar Association’s Model Rules of Professional Conduct (“Model Rules”) provide guidance in resolving motions to disqualify counsel, as reﬂected in Commission precedent. Network Interface, Order No. 26 at 4; Baseband, at 20; Certain Ground Fault Circuit

Interrupters and Products Containing Same, IHV.No. 337-TA-615, Order No. l7 at 4

(U.S.I.T.C., February 29, 2008). The current Model Rules, which “reﬂect a national consensus,”6 are instructive here:

Client-Lawyer Relationship, Rule 1.0 Terminology (c) "Finn" or "law ﬁrm" denotes a lawyer or lawyers in a law partnership, professional corporation, sole proprietorship or other association authorized to practice law; or lawyers employed in a legal services organization or the legal department of a corporation or other organization. >l= * * (e) "Informed consent" denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated "adequate infonnation and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct. * >l< *

6 NetworkInterface, Order No. 26 at n.l (quoting Certain Salinomycin Biomass and Preparations Containing Same, Inv. No. 337-TA-1570,Order No. 13 at 3-5 (U.S.I.T.C., May 25, 1995) (“Biomass”)). Gap’s argument that the California choice of law clause in its agreement with Dentons should govern was rejected in Biomass: The Commission . . . has nation-wide jurisdiction. Choice of law principles have not figured prominently in prior decisions at the Commission concerning disqualification of counsel. Therefore, the Commission is not placed in the classic situation of having to choose between the rules of its own jurisdiction and the rules of another jurisdiction. The Commission’s reviewing court, the Court of Appeals for the Federal Circuit, also has nation-Wide jurisdiction In this case, the disqualification question does not arise from Mr. Kelber’s desire to represent his client in a particular jurisdiction or before a particular district court. Rather it arises because of his representation before the Commission. . . . Biomass, at n.4.

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Client-Lawyer Relationship, Rule J. 7 Conflict OfInterest: Current Clients (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; []

>l< >l= * (b) Notwithstanding the existence of a concurrent conﬂict of interest under paragraph (a), a lawyer may represent a client if: (l) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribimall; and (4) each affected client gives informed consent, conﬁnned in writing.

Model Rules l.0(c), (e), 1.7 (2013).

In addition, there are other considerations, as “[a] violation of the ethical rules does not result in pg g disqualification of the attomey involved. Rather, the crucial issue is whether continued representation will cause prejudice to or adversely impact the rights of another party in the matter and whether such prejudice outweighs the prejudice caused by disqualification of another party’s choice of counsel. Thus to warrant the severe sanction of disqualification, there must be a showing that the unethical conduct has somehow ‘tainted’ the investigation.” Certain

Uniﬁed Communications Systems, Products Used with Such Systems, and Components Thereoj’, lnv. No. 337-TA-598, Order No. l4 at 9-10 (U.S.I.T.C., September 25, 2007) (quotations and citations omitted) (“Unified Communics”).

Factors considered in making such a determination include the nature of the ethical violation, the prejudice to the parties, the effectiveness of counsel in light of the violation, the public’s perception of the profession, and whether a disqualiﬁcation motion was used as a means

7 A tribunal is deﬁned to include an administrative agency or other body acting in an adjudicative capacity. Model Rule l.0(m).

7 PUBLIC VERSION of harassment. See Certain NetworkInterface Cards and Access Points for Use in Direct

Sequence Spread Spectrum WirelessLocal Area Networks and Products Containing Same, Inv.

No. 337-TA-455, Order No. 26 at 11 (U.S.I.T.C., Aug. 2, 2001) (“Network Interface Cards”).

The first issue presented here is whether the Swiss verein “Demons” is a “ﬁnn” or “law

firm” as defined by the Model Rules. Staff argues that it is. (Staff Mot. at 4.) Complainants argue that Dentons US is sufficiently separate from the other Dentons Legal Practices that its representation of Complainants is tantamount to representation by a separately named law firm.

(Opp. at 2, 5, 16-17.) Gap argues that the Swiss verein Dentons is “an incorporated membership association” that does not have an equivalent form in the United States, but should be treated as an association. (Mot. Mem. at 4, 1 (quoting In re Project Orange Associates, LLC, 431 B.R.

363, 368 (Bankr. S.D.N.Y., 2010) (“Project Orange”)).)

Gap also argues that in one of the few instances where a U.S. court has looked at the issue of conflicts with respect to a Swiss verein law firm, the court found that it would not be possible for a law finn that “holds itself out to the world as one firm” to represent, via its two component entities, both a debtor and creditor “without violating ethical standards.” (Mot. Mem. at 15 (quoting Project Orange, 431 B.R. at 371, n.3)).) Gap says that like the law finn in Project

Orange, Dentons holds itself out as a single law ﬁrm with a “seamless delivery of services[.]”

(Mot. Mem. at 4 (quoting Dentons’ Website at Mot. Exs. I, J), 14-15.) Thus, Gap argues, all of

Dentons’ worldwide Legal Practices owe it an undivided duty of loyalty. (Mot. Mem. at 4, 16,

19, n. 8; Reply at 19-20.) Gap says that Dentons has breached that duty by taking on representation adverse to Gap, and that this is true “under the rules of professional conduct of

@ jurisdiction.” (Id. at 19-20 (emphasis in origina1).)

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The parties dispute the signiﬁcance of the Dentons US retainer agreement attached to the

Funding Agreement, which identiﬁes Gap as a conﬂict. The undersigned camiot fully credit Mr.

Hogge’s representations that he only intended to identify Gap “as a potential business conflict” for two reasons. (Reply Opp., Hogge Decl.) First, Dentons US specifically identified the conflict with Gap in its retainer agreement with Complainant Revolaze as an “existing conflict.”

(See Holland Decl., Ex. F at Schedule 1.) It is textbook contract law that the words in the final written agreement trump Mr. Hogge’s subjective intent. The identification of Gap as an existing conflict serves as an admission that Dentons US did not, at the time when it took on representation of Complainants and entered into the Funding Agreement, believe that it was sufficiently separate from the other Legal Practices to be able to represent Complainants against

Gap. (See id., Schedule I at 2 (discussing tenns for handling conﬂicts).) Second, Complainants’ opposition papers show a lack of understanding of the nuances of the ABA Model Rules between current and former clients and when ethical screens may be implemented. This unfamiliarity with the rules undennines the persuasiveness of Mr. Hogge’s later determination that Dentons

US could proceed without conﬂict.

The undersigned finds that the definitions of “firm” or “law firm” are broad enough to include a Swiss verein structure. Model Rule 1.0. Dentons holds itself out to the public as a single law finn, but says that it is divided into “Legal Practices.” Either way, the verein is an

“other association authorized to practice law” or is made up of lawyers “employed in a legal services organization or the legal department of a corporation or other organization.” Model

Rule l.0(c); id., Comment 2. The undersigned ﬁnds that the ABA guidance here is particularly instructive, as it says that a factual scenario involving a direct conﬂict may be weighed differently than lesser situations:

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[2] Whether two or more lawyers constitute a finn within paragraph (c) can depend on the specific facts. For example, two practitioners who share office space and occasionally consult or assist each other ordinarily would not be regarded as constituting a firm. However, if they present themselves to the public in a way that suggests that they are a finn or conduct themselves as a finn, they should be regarded as a firm for purposes of the Rules. The tenns of any formal agreement between associated lawyers are relevant in determining whether they are a finn, as is the fact that they have mutual access to information concerning the clients they serve. Furthermore, it is relevant in doubtful cases to consider the underlying purpose of the Rule that is involved. A group of lawyers could be ~ regarded as a firm for purposes of the Rule that the same lawyer should not represent opposing parties in litigation, while it might not be so regarded for purposes of the Rule that infonnation acquired by one lawyer is attributed to another.

(ld.) Thus, in the event of a direct conflict such as the one presented here, the ABA would rather regard a group of lawyers as a firm——evenifthe case is “doubtful.” (Id.) The undersigned concludes that the Swiss verein Dentons is a “finn” or “law firm” within the meaning of Model

Rule l.O(c).

Because this definition is met, the two Model Rules regarding conflicts with a current client and imputed conflicts among members of a firm apply here, since no party denies that, at a minimum, Dentons Canada has been representing Gap while Dentons US has been concurrently representing Complainants. See Model Rules 1.7, 1.10. Dentons Canada’s representation of Gap is imputed to Dentons US. Model Rule 1.10. Dentons US is therefore barmed under the Model

Rules from helping Complainants bring claims against Gap in this Investigation. Although the

Model Rules pennit such representation if the law firm obtains infonned consent from both clients, Dentons US did not do so here. Indeed, Dentons US asserts that it does not rely on an advance waiver for establishing that a conflict does not exist. (Opp. at 21.) Thus, it is the undersigned’s detennination that Dentons US has committed an ethical violation in the fonn of a concurrent conflict of interest.

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The second issue presented here is whether ethical violation discussed above has tainted the Investigation. Unified C0mmunics., at 9-10. The undersigned has considered the factors set forth in Network Interface Cards and concludes, for the reasons discussed below, that disqualification is warranted. The first factor —the nature of the ethical violation —Weighsin favor of disqualification. Dentons owes Gap a duty of loyalty, yet it stands to benefit both in terms of legal fees and a share in certain proceeds by representing other clients who are seeking to bar Gap’s imports into the U.S. Additionally, although Dentons apparently realized that there was a conflict, it did not attempt to obtain Gap’s informed consent. This inaction shows disregard for the rules of professional conduct.

The undersigned must also consider potential remedies in assessing whether the nature of the conﬂict Weighsin favor of disqualiﬁcation. Complainants cite cases in which the

Cormnission denied motions for disqualiﬁcation and instead recommended that an ethical screen be put in place to safeguard against improper disclosure of client information. (Opp. at 23.)

Notably, these cases all involved prior representations of clients —not current ones. Ethical walls, pre-existing or otherwise,.are not considered by the ABA to be a viable remedy in this situation. The Model Rules do not provide for the implementation of an ethical wall unless the situation involves a prohibition based on a disqualiﬁed lawyer’s association with a prior ﬁrm.

Model Rule l.lO(2). Thus, even if the undersigned were to recommend that an ethical screen be put in place, Dentons would still be in violation of its ethical rules. Moreover, the ABA commentary repeatedly states that a law should withdraw from representation in the event of a direct conﬂict. See, e.g., Model Rule l.7, Cormnent 4.

Next, the undersigned must consider prejudice to both Complainants and Gap. In its briefmg, Gap submits that its conﬁdential and attomey-client information are at risk and that

ll PUBLIC VERSION

Dentons is violating the most basic duties it owes to Gap. (Mem. at 20.) Dentons has submitted that its attorneys in this Investigation have not had access to any of Gap’s conﬁdential or privileged information. Because there has not been a disclosure of information, the undersigned

ﬁnds that the prejudice to Gap weighs against disqualiﬁcation.

The undersigned further ﬁnds that the prejudice to Complainants also weighs against disqualiﬁcation. It is important that parties be able to choose and maintain counsel.

Additionally, as Complainants note, they have been working with Dentons US for more than 15 months. (Opp. at 26.) During this time, Dentons US “has acquired knowledge about

[Complainants’] business, intellectual property, and [litigation] strategies” and has “developed expertise regarding the factual and legal issues present in the current investigation.” (1d.)

Complainants also assert that retaining new counsel would impose “signiﬁcant and unnecessary costs.” (Id. at 27.) Accordingly, the prejudice to Dentons at this point in the Investigation would be severe. This prejudice, however, is somewhat mitigated by the fact that the ethical conﬂict was disclosed to Complainant Revolaze, who nevertheless proceeded against Gap as a named

Respondent.

The next factor, the public’s perception of the profession is also significant. Dentons holds itself out to the public as a unified global law firm in order to attract business (Mot., Exs.

H, I, J), and Dentons’ continued representation in the face of a direct conflict would both contradict this public image and impact negatively on the law profession as a whole. With respect to the last factor, the undersigned finds that the consideration of whether a disqualification motion was used as a means of harassment Weighsin favor of Complainants but does not overcome the other factors. There is an undeniable tactical advantage to a respondent in disqualifying lead counsel. However, as with the issue of prejudice, Complainants were fully

12 informed of and assumed this risk when they named Gap as a respondent. Although the undersigned concludes that several of the factors weigh against disqualiﬁcation, thisdrastic remedy is appropriate in this case. The undersigned cannot condone the continued violationvof an ethical rule and therefore disqualiﬁcation is necessary. The undersigned concludes, under the circumstances presented here, that Dentons US may not continue to represent Complainants while Gap is a respondent in this Investigation. _ ' _ _

Accordingly, Gap’s motion to disqualify Dentons as counsel for Complainants (Motion

Docket No. 930-034) is granted. __ _ »

' Within seven (7) business days of the date of this document, each party shall submit to the Ofiice of the Administrative Law Judges a statement as to whether or nots it seeks to have any confidential portion of this document deleted from the public version. Any party seeking redactions to the public version must submit to this office two (2) copies of a proposed public version of this document pursuant to Ground Rule 1.11 withred brackets clearly indicating any portion asserted to contain confidential business information. - ~

The parties’ submissions may be made by facsimile and/or hard copy by the aforementioned date. In addition, an electronic courtesy copy is required pursuant to Ground

Rule 1.3.2. The parties’ submissions concerning the public version of this document need not be

ﬁled with the Commission Secretary. ' I - - so ORDERED; - “ ? r ,

Charles E. Bullock » Chief Administrative Law Judge

8 This means that parties that do not seek to have any portion redacted are still required to submit a statement to this effect ' '

13' CERTAIN LASER ABRADED 337-TA-930 DENIM GARMENTS

PUBLIC CERTIFICATE OF SERVICE

I, Lisa R. Barton, hereby certify that the attached ORDER has been served by hand upon the Commission Investigative Attorney, Peter J. Sawert, Esq., and upon the following parties as indicated, on June 30, 2015. Y Lisa R. Barton 4 Secretary to the Commission U.S. Intemational Trade Commission 500 E Street, SW, Room 112A Washington, D.C. 20436

ON BEHALF OF COMPLAINANTS REVOLAZE. LLC AND TECHNOLINES. LLC:

Steven F. M010,Esq. E Via Hand Delivery MOLOLAMKEN LLP Cl Via Express Delivery 540 Madison Ave‘ Via First Class Mail New(212)607-8170 York, NY 10022El Other. _ i

ON BEHALF or RESPONDENTABERCROMBIE& FITCH co.:

AI1(1fCWF.Pratt, ESQ. El Via Hand Delivery VENABLE LLP E] Via Express Delivery , 575 Tfh Street’ NW Via First Class Mail Washington,DC 20004-1604 U other (202) 344-4389

1 CERTAIN LASER ABRADED 337-TA-930 DENIM GARMENTS

ON BEHALF OF RESPONDENT AMERICAN EAGLE OUTFITTERS INC.:

Stephen J. Rosenrnan, Esq. U Via Hand Delivery ROPES & GRAY LLP U Via Express Delivery One Metro Center Via First Class Mail 700 12* Street NW, Suite 900 El Other: Washington, DC 20005 (202) 508-4773

ON BEHALF OF RESPONDENTS THE BUCKLE. INC.; LUCKY BRAND DUNGAREES, INC.; AND DENIMATRIX S.A.:

D. Sean Trainor, Esq. III Via Hand Delivery KIRKLAND & ELLIS LLP Cl Via Express Delivery 655 15* Street,NW Via First Class Mail Washington, DC 20005 Cl Other: (202) 879-5000

ON BEHALF OF RESPONDENTS BUFFALO INTERNATIONAL ULC AND 1724982 ALBERTA ULC:

Gregory F. Ahrens, Esq. U Via Hand Delivery WOOD, HERRON & EVANS, L.L.P El Via Express Delivery 441 Vine Street E Via First Class Mail Cincinnati, OH 45202 III Other: (513)241-2324

ON BEHALF OF RESPONDENTS DIESEL S.p.A. AND DENIM SERVICE S.p.A.:

Anthony W. Shaw, Esq. U Via Hand Delivery ARENT FOX LLP E] Via Express Delivery 1717 K Street, NW E Via First Class Mail Washington, DC 20006-5344 U Other: (202) 857-6000 CERTAIN LASER ABRADED 337-TA-930 DENIM GARMENTS

ON BEHALF OF RESPONDENT THE GAP. lNC.:

Megan Whyman Olesek, Esq. El Via Hand Delivery KENYON & KENYON LLP |:l Via Express Delivery 1801 Page Mill Road, Suite 210 El Via First Class Mail Palo Alto, CA 94304 |:l Other: (650) 384-4700

ON BEHALF OF RESPONDENT GUESS?. INC.:

Stephen R. Smith, Esq. Cl Via Hand Delivery COOLEY LLP El Via Express Delivery 1299 Pennsylvania Avenue, NW, Suite 700 Kl Via First Class Mail Washington, DC 20004 1:] Other: . (202) 842-7800

ON BEHALF OF RESPONDENTS H&M HENNES & MAURITZ AB AND H&M HENNES & MAURITZ L.P.:

Staci Jennifer Riordan, Esq. U Via Hand Delivery NIXON PEABODY LLP El Via Express Delivery 555 West SmStreet, 46"‘ Fl. E Via First Class Mail Los Angeles, CA 90013-1010 El Other: (213) 629-6041

ON BEHALF OF RESPONDENT ROBERTO CAVALLI S.p.A.:

Adam R. Hess, Esq. III Via Hand Delivery VENABLE LLP 1:1Via Express Delivery 575 7"‘ Street, NW kl Via First Class Mail Washington, DC 20004-1604 III Other: (202) 344-4481 CERTAIN LASER ABRADED 337-TA-930 DENIM GARMENTS

ON BEHALF OF RESPONDENT KOOS MANUFACTURING. INC.:

Brian K. Brookey, Esq. [:1Via Hand Delivery TUCKER ELLIS LLP El Via Express Delivery _ 515 South Flower Street, 42“d Fl. Via First Class Mail Los Angeles, CA 90071-2223 El Other: (213) 430-3400

RESPONDENT MARTELLI LAVORAZIONI TESSILI S.p.A.:

Maitelli Lavorazioni Tessili S.p.A. El Via Hand Delivery 181, via Emilia Ponente E] Via Express Delivery 40060 Toscanella [E Via First Class Mail Italy [1 Other:

ON BEHALF OF RESPONDENTS ROPA SIETE LEGUAS. ]NC.: ROPA SIETE LEGUAS, S.A. DE C.V.; PRIVATE LABEL TEHUACAN S. DE R.L. DE C.V.: AND EROGLU GIYIM SANAYI TICARET A.S.:

Janjne A. Carlan, Esq. l:l Via Hand Delivery ARENT FOX LLP II! Via Express Delivery 1717 K Street, NW Via First Class Mail Washington, DC 20006-5344 El Other: (202) 857-6000 FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

ARTICLES PROFESSIONAL RESPONSIBILITY AND LIABILITY ASPECTS OF VEREINS, THE SWISS ARMY KNIFE OF GLOBAL LAW FIRM COMBINATIONS

DOUGLAS R. RICHMOND† & MATTHEW K. CORBIN‡

INTRODUCTION In an age of increasing globalization, law firms such as Baker & McKenzie, Dentons, DLA Piper, Hogan Lovells, King & Wood Mallesons, Littler Mendelson, Norton Rose, and Squire Patton Boggs have ambitiously expanded on the world stage.1 To achieve the growth and global reach they desired, these firms organized themselves as vereins—a verein being a Swiss

† Managing Director, Aon Professional Services Group, Overland Park, Kansas. J.D., University of Kansas; M.Ed., University of Nebraska; B.S., Fort Hays State University. The views expressed here are solely those of the authors and do not necessarily reflect the views of the Aon Professional Services Group or its clients. ‡ Vice President, Aon Professional Services Group, Overland Park, Kansas. J.D., University of Kansas; B.A., University of Kansas. 1 Erin Coe, Squire Sanders, Patton Boggs Vote To Join Forces, LAW360 (May 23, 2014, 6:59 PM), http://www.law360.com/articles/541171/squire-sanders-pattonboggs-vote-to-join-forces; Debra Cassens Weiss, Littler Mendelson Combines with Law Firms in Colombia and Costa Rica, ABA J. (Oct. 1, 2013, 2:20 PM), http://www.abajournal.com/news/article/littler_mendelson_combines_with_law_firms _in_colombia_and_costa_rica; The Innovators: A Tool for Growth, AM. LAW. (July 29, 2013), http://www.americanlawyer.com/PubArticleALD.jsp?id=1202611685356 (on file with authors); Chris Johnson, Inside the Machine, AM. LAW., Mar. 2013, at 72, 74; Nick Jarrett-Kerr & Ed Wesemann, Enter the Swiss Verein: 21st-Century Global Platform or Just the Latest Fad?, EDGE INT’L REV., 2012, at 26, 27–28; Diana Bentley, Strategic Manoeuvres, IBA GLOBAL INSIGHT (June 2011), available at http://www.ibanet.org/Article/Detail.aspx?ArticleUid=CE80EAE1-8815-49EF-85E1-3 808932CABDB.

917 FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

918 ST. JOHN’S LAW REVIEW [Vol. 88:917 corporate holding structure.2 There is no organizational form equivalent to the Swiss verein under U.S. law.3 The law firm movement toward organizing as a verein as a means of expanding globally, rather than growing through traditional mergers, is thought to be largely attributable to the verein’s flexible structure.4 Basically, organizing as a Swiss verein allows globally-oriented firms to combine and promote a unified brand across borders, while still affording the individual firms within the verein separate corporate or partnership status with discrete legal liability and financial independence.5 The verein itself does not practice law; rather, the law firms within the verein deliver all legal services.6 Because the individual firms within the verein remain separate partnerships or professional corporations, and can retain their own partner or shareholder compensation systems,7 as well as their own

2 Johnson, supra note 1, at 72; see also Nate Raymond, “Verein” Model Allows Cross-Border Unions To Limit Liability and Keep Partnerships, Profits Separate, N.Y.L.J., May 28, 2010, at 1 (discussing the recent trend of global law firm expansion under the Swiss verein in contrast to traditional mergers). 3 In re Project Orange Assocs., LLC, 431 B.R. 363, 368 n.2 (Bankr. S.D.N.Y. 2010). 4 Jarrett-Kerr & Wesemann, supra note 1, at 26. Law firm mergers certainly are not dead, nor can they in any way be characterized as a thing of the past. Many large law firms still opt to merge. See, e.g., Brian Baxter, November Flurry Propels 2013 to Law Firm Merger Record, AM. LAW. (Nov. 22, 2013), http://www.americanlawyer.com/id=1202629365924/November-Flurry-Propels-2013- to-Law-Firm-Merger-Record (on file with authors) (stating that 2013 was a record year for the total number of announced mergers involving U.S. law firms, topping the previous high set in 2008). In addition, law firms may expand their global reach through affiliations or associations rather than through combinations. See, e.g., Zack Needles, Schnader Forms Association with Indonesian Firm, LEGAL INTELLIGENCER (Oct. 25, 2013), http://www.thelegalintelligencer.com/id=1202625100971/Schnader- Forms-Association-With-Indonesian-Firm (on file with authors) (reporting that a Philadelphia law firm had “formed an association” with an Indonesian law firm to which it refers business and from which it receives referrals; the “announcement of an association” between the firms was said to “represent an express commitment to each other”). 5 Jarrett-Kerr & Wesemann, supra note 1, at 27; Edwin B. Reeser, Swiss Verein—the Cassoulet Pot for Global Law Practice, S.F. DAILY J. (Aug. 18, 2011), http://www.jdsupra.com/legalnews/swiss-verein-the-cassoulet-pot-of-global-83240; see also In re GSC Grp., Inc., 502 B.R. 673, 735 n.227 (Bankr. S.D.N.Y. 2013) (observing that “[l]arge multinational firms also employ the Swiss verein structure in which many offices of the ‘firm’ are linked via an association but are separate legal entities with separate revenue pools”). 6 Peter Kalis, Grand Illusion, AM. LAW., May 2011, at 49. 7 Law firms in a verein could adopt a single, firm-wide compensation system for partners or shareholders if they chose to do so. See, e.g., Johnson, supra note 1, at 75 (reporting on the Hogan Lovells partner compensation system). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 919 accounting practices and tax regimes, serious impediments to traditional mergers are avoided entirely.8 Organizing as a verein also affords the member law firms flexibility for future expansion, with the ready ability to add new members to the group.9 For these reasons, observers have described the verein as “the embodiment of simplicity, yet with infinite variability.”10 The verein model has not, however, achieved uniform acceptance or acclaim in the legal profession.11 Critics contend that a collection of law firms presenting themselves as a single global firm by forming a verein is an illusion.12 To detractors, law firm vereins are no more than a referral network, trade association, or other affinity group.13 Skeptics call vereins “kaleidoscopic,” dismissively asserting that “[w]ith spin and mirrors, two or more [law firms] can be perceived as one.”14 Lawyers who dislike the verein structure view it as a mere marketing tool that deprives affiliated law firms of “the common culture, shared knowledge and standardi[z]ed practices that single partnerships enjoy.”15 At best, critics might allow, law firms in a verein are akin to sister subsidiaries in a traditional corporate holding structure. There is no one right approach to global expansion by law firms; both vereins and traditional mergers have advantages and drawbacks. For some growth-oriented law firms, mergers and other accretions will be preferable. Other law firms will choose to organize as vereins. Law firms seeking to increase their global reach must weigh the administrative, cultural, economic, and professional virtues of practicing within a verein as opposed to

8 See generally Leigh Jones, Plunging into a Global Practice, NAT’L L.J., Oct. 11, 2004, at 1 (asserting that “transcontinental mergers can have super-sized portions of the problems found in domestic mergers”). 9 Johnson, supra note 1, at 74. And, while perhaps unsaid, law firms organized as vereins presumably can disassociate member firms that are ultimately judged to be poor fits far more easily than they could unwind mergers or other combinations. 10 Reeser, supra note 5. 11 Raymond, supra note 2. 12 Kalis, supra note 6, at 51. 13 Id. at 50–51. 14 Id. at 51. 15 Jarrett-Kerr & Wesemann, supra note 1, at 29; see also Johnson, supra note 1, at 74 (elaborating on this criticism and the bases for it); Kalis, supra note 6, at 51 (arguing that “[a]ll law firms are defined by shared values, goals, and standards,” and asserting that a verein promotes none of these attributes). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

920 ST. JOHN’S LAW REVIEW [Vol. 88:917 other organizational forms.16 But organizing as a verein raises issues for law firms beyond those that might be broadly characterized as strategic. Here, we address two additional—and unquestionably significant—aspects of Swiss vereins: the professional responsibility and liability issues facing lawyers in firms so organized. This is something of an imperfect exercise. Law firms form vereins for different reasons and thereafter manage and structure their operations and practices differently, and those differences may have profound effects on the professional responsibility and liability aspects of their affairs. For example, a law firm may organize as a verein because the firm’s leaders believe that the verein structure limits the firm’s potential liabilities in ways that other organizational forms do not.17 A firm that organizes as a verein primarily to limit its potential liability will presumably manage its practice in ways intended to support that goal. Another firm, however, may organize as a verein because assembling an alliance between different law firms and, in the process, reconciling the different tax regimes, compensation structures, and so on would be too difficult and time-consuming under a traditional merger.18 The second firm might be willing to reasonably subordinate concerns about potential liability arising out of detours from verein protocols to business development or client service ambitions. In addition, there is much about the verein structure in the law firm environment that is unknown. Unlike partnerships and professional corporations, vereins are a relatively new form of law firm organization.19 Looking ahead, Part II of this Article provides a general overview of the verein model and its governing charter. Part III highlights a variety of ethical considerations for lawyers in verein member firms that are subject to ethics rules based on the

16 See Reeser, supra note 5 (analyzing the various social, professional, and economic components of practicing within a verein); see also Sean Larkan, Lead the Way: Leadership, Guiding Principles and Brand Strategy in a Swiss Verein, EDGE INT’L REV., Fall 2012, at 48 (addressing unique challenges for users of the Swiss verein structure). 17 See, e.g., Steve Hoare & Joanne Harris, B&M Opts for Swiss Verein Partner Setup, LAW. (July 5, 2004), http://www.thelawyer.com/bm-opts-for-swiss-verein- partner-setup/110758.article (reporting that in choosing to organize as a verein, Baker & McKenzie “was purely driven by a desire to protect the firm’s potential liability”). 18 Robin Sparkman, In House, AM. LAW., Feb. 2011, at 9. 19 Johnson, supra note 1, at 79. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 921

Model Rules of Professional Conduct.20 These include lawyers’ obligation to communicate to clients the relationships between the verein and its member firms, the imputation of conflicts of interest between member firms, and fee-splitting among member firms. Part IV discusses previous efforts to hold vereins and their member firms vicariously liable for the misconduct of another member firm. These cases have involved global accounting firms structured as vereins; vicarious liability among verein member law firms has yet to be tested. Part IV also examines whether the reported push by law firms organized as vereins toward full global integration among their members may perhaps lay the groundwork for collective liability.

I. VEREIN FUNDAMENTALS Initially intended for the international affiliation of nonprofit organizations,21 a verein formed under Swiss law22 allows a collection of different entities to associate while retaining their separate legal status and financial independence.23 Swiss vereins are formed through articles of association.24 Although the structure and administration of any given verein depends on the particulars of its articles of association,25 most articles feature the following standard provisions establishing, controlling, or specifying: (1) the name, domicile, and term of the verein, with the verein typically being established for an indefinite term absent

20 See generally MODEL RULES OF PROF’L CONDUCT (2014). 21 Megan E. Vetula, From the Big Four to Big Law: The Swiss Verein and the Global Law Firm, 22 GEO. J. LEGAL ETHICS 1177, 1181 (2009). 22 In Switzerland, Articles 52 through 59 of the Swiss Civil Code generally deal with legal entities, while Articles 60 through 79 of the Swiss Civil Code specifically govern the establishment and functioning of associations. Id. Articles 60 through 79 are essentially default rules and apply in the absence of provisions in a verein’s articles of association covering the particular issue. Id. 23 Jarrett-Kerr & Wesemann, supra note 1, at 27; Reeser, supra note 5; Kalis, supra note 6, at 49, 51; Edwin B. Reeser & Martin J. Foley, Are Verein-Style Law Firms Ignoring Fee-Splitting Ethics Rules?, ABA J. (Oct. 1, 2013, 1:30 PM CDT), http://www.abajournal.com/legalrebels/article/are_verein-style_law_firms_ignoring_ fee-splitting_ethics_rules. 24 Kalis, supra note 6, at 49; Vetula, supra note 21, at 1181. 25 See, e.g., Julius Melnitzer, Swiss Vereins and Jellyfish, FIN. POST (Dec. 3, 2012, 10:58 AM), http://business.financialpost.com/2012/12/03/swiss-vereins-and- jellyfish/ (“Unfortunately, trying to delve into the vagaries of the arrangements that constitute an individual Swiss Verein, which appears to be an all-encompassing beast, is nothing less than trying to negotiate a labyrinth.”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

922 ST. JOHN’S LAW REVIEW [Vol. 88:917

dissolution in accordance with the relevant provisions in the articles; (2) the identification of the verein’s members; (3) the objectives or purposes of the verein, such as adherence to professional standards, compliance with the laws of their respective jurisdictions, cohesion and cooperation among member firms, the advancement of the member firms’ interests, respect for the independence and integrity of other member firms, and the performance of all other functions incidental to all specifically-stated objectives or purposes; (4) organization of the verein’s governing body, which may consist of an executive committee or board of directors to manage its daily affairs, and an assembly of members who meet at least once a year, or whenever necessary, to vote on important issues, such as budget decisions and the admission and expulsion of members; (5) sources of financing for the verein’s operations, such as membership fees or dues; (6) the verein’s membership conditions, including individual members’ rights and obligations; (7) the admission and withdrawal of members; (8) processes and procedures for the adoption of by-laws and supplemental regulations to control the internal affairs of the verein and its members; (9) an express limitation of liability, whereby the verein’s liabilities and obligations may only be enforced against its assets and members have no individual responsibility; and (10) terms of dissolution.26 The articles of association are not the sole document governing a verein. A verein may also adopt supplemental regulations governing its operations.27 These regulations may vary substantially between firms. While vereins organized as for-profit entities must file their articles of association with Switzerland’s Federal Commercial Registry Office, such that the

26 For articles of association standard templates, see Adrian W. Kammerer & Thomas Sprecher, Swiss Association, in 17 NFK SERIES (Niederer Kraft & Frey 2011), available at http://www.nkf.ch/wAssets-nkf2/docs/publikationen/adrian_w_ kammerer/038715_NKF_Publikation_17.pdf; Model Statutes (Law of Association, Example), CAGI, http://www.cagi.ch/en/service-ong/modele-de-statuts.php (last visited Apr. 18, 2015). 27 See, e.g., Statutes, SWISS SOC. FOR MOLECULAR AND CELLULAR BIOSCIENCES, http://www.naturalsciences.ch/organisations/swissbiochem/about_ssmcb/statutes (last visited Apr. 18, 2015) (stating in the Articles of Association that Supplemental Regulations also govern the verein). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 923 articles become publicly available, that is not the case with firms’ supplemental regulations. Firms’ supplemental regulations remain private documents. As conceived, the verein itself is a holding entity, or a central administrative vehicle, that does not itself provide legal services to clients.28 The constituent firms within the verein deliver all legal services.29 Lawyers working at a verein member firm are subject only to the regulations and tax codes in their particular jurisdictions, rather than those in all countries in which the constituent verein firms operate.30 The individual law firms within the verein remain separate partnerships, professional corporations, or other legal entities.31 They retain their own tax, accounting, and compensation systems.32 Unlike a traditional merger or consolidation, in which the successor entity assumes its predecessors’ liabilities,33 by design, firms in a verein do not assume the liabilities of their constituent firms.34 In short, the verein structure allows two or more law firms to present

28 Reeser, supra note 5; Kalis, supra note 6, at 49; Vetula, supra note 21, at 1181; see also Drew Hasselback, More on the Swiss Verein System, FIN. POST (Nov. 16, 2010, 2:53 AM), http://business.financialpost.com/2010/11/16/more-on-the-swiss- verein-system/ (“Basically, the Swiss Verein structure enables people to create a legal person for the global partnership or association without transferring legal responsibility to that new entity.”). 29 Kalis, supra note 6, at 49. 30 Jarrett-Kerr & Wesemann, supra note 1, at 28; Johnson, supra note 1, at 74; Kit Chellel, Norton Rose Apes KPMG Again with Swiss Verein, LAW. (Aug. 3, 2009), http://www.thelawyer.com/norton-rose-apes-kpmg-again-with-swiss-verein/1001584 .article. 31 See Johnson, supra note 1, at 72–74 (stating that “a verein allows participating members to join forces yet retain their existing forms”). 32 Id. at 74–75. 33 Altman v. Cent. of Ga. Ry. Co., 580 F.2d 659, 662 (D.C. Cir. 1978) (reciting “the general rule of law” that a “successor corporation becomes obligated to pay the debts and liabilities of the constituent companies”); Foster v. Cone-Blanchard Mach. Co., 597 N.W.2d 506, 509 (Mich. 1999) (stating that in a merger, “the successor generally assumes all its predecessor’s liabilities”). 34 See Mark Brandon, Verein Today, Gone Tomorrow?, MOTIVE LEGAL (July 13, 2010), http://www.motivelegal.com/index.php/2010/07/verein-today-gone-tomorrow (“The verein is useful because it effectively parks the issue of the major profits-gaps between US and UK firms, and also facilitates a degree of autonomous local management, which is helpful in maintaining post-merger integrity. It also— crucially—insulates the stronger partner against aberrant profit dips on the part of the weaker partner.”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

924 ST. JOHN’S LAW REVIEW [Vol. 88:917 themselves to clients and prospective clients as a unified global law firm without having to work through typical complications or complexities of international mergers or other accretions.35 Swiss vereins are subject to few structural limitations.36 One notable exception is the existence of a single profit center among the verein and its members.37 In short, verein member firms must maintain separate profit pools, and cannot share profits, if they are to retain their status as distinct individual entities and avoid exposing themselves to additional tax liabilities.38 Verein member law firms that share profits might also risk treatment as a single entity for some liability purposes.39 To avoid these conceivable consequences of profit-sharing, some vereins reportedly share law firm costs instead.40 The concept in doing so is that because profits are influenced by costs, allocating costs allows firms to mimic the sharing of profits.41 This approach is best illustrated by way of a simple example. Assume that in 2014, Law Firm A, which is part of Verein V, has $100 million in revenue, with costs of $60 million and profits of $40 million. In 2014, Law Firm A refers $5 million in work to Law Firm B, which is also a member of Verein V. Law Firm B also has $100 million in revenue, with costs of $60 million and profits of $40 million. As opposed to sharing profits between Firm A and Firm B to account for Firm A’s referrals to Firm B, Firm A shifts $5 million of its costs to Firm B.42 As a result, Firm A effectively increases its profits from $40 million to $45 million. In summary, vereins may range between a loose affiliation of independently-run law firms sharing a common brand to a tight- knit organization utilizing a unified brand name with integrated

35 Jarrett-Kerr & Wesemann, supra note 1, at 28; Johnson, supra note 1, at 74; Reeser & Foley, supra note 23; Sparkman, supra note 18, at 9. 36 See Johnson, supra note 1, at 74 (observing that, other than maintaining separate profit pools and establishing a governing body, “[e]very other aspect of how a verein firm is organized is defined by its own strategic and management decisions—not by any restrictions inherent to the structure”). 37 Jarrett-Kerr & Wesemann, supra note 1, at 28; Johnson, supra note 1, at 75. 38 Johnson, supra note 1, at 75. 39 See infra Part IV. 40 Johnson, supra note 1, at 75; Reeser & Foley, supra note 23. 41 Johnson, supra note 1, at 75 (quoting a law firm consultant). 42 See id. (offering a similar example). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 925 standards and procedures.43 Where law firms organized as vereins fall on this continuum depends almost entirely on the particular verein’s articles of association and related governance or management documents.

II. PROFESSIONAL RESPONSIBILITY ISSUES AFFECTING VEREINS The Model Rules of Professional Conduct44 and state analogs do not directly address lawyers’ conduct while practicing under the umbrella of a verein, but law firm leaders must nonetheless recognize the professional responsibility concerns that practice within a verein may implicate. These include: (1) communications with clients and others concerning the relationships between the verein and its member firms, with a particular concern being the potential for such communications to be false or misleading;45 (2) the imputation of conflicts of interest between member firms46; and (3) fee-splitting or fee- sharing among member firms, including firms practicing in jurisdictions that permit fee-sharing with non-lawyers.47

A. Full Disclosure of the Verein and Its Member Firms’ Relationships Lawyers cannot mislead current clients, prospective clients, or the public about their firms’ associations with other law firms.48 This prohibition derives from Model Rule 7.1,49 which

43 Id. at 79 (explaining that “[a] verein could be anything from a very loosely affiliated group of firms to a tightly run business that is virtually indistinguishable from a traditional partnership”). 44 MODEL RULES OF PROF’L CONDUCT (2014). 45 See RONALD D. ROTUNDA & JOHN S. DZIENKOWSKI, LEGAL ETHICS: THE LAWYER’S DESKBOOK ON PROFESSIONAL RESPONSIBILITY § 7.1-3, at 1181 (2012-2013) (“If several law firms, by using the same name, hold themselves out to the public as one law firm, but they are not the same firm, that certainly does appear to be misleading . . . .”). 46 See id. (“When law firms tout their special relationships with other law firms, those relationships may serve . . . to impute conflicts of interest from one firm to another.” (footnotes omitted)). 47 See id. n.38 (“These relationships may include financial relationships. Different law firms should be aware of the requirement in Rule 1.5(e) regarding the division of fees among lawyers in different law firms.”). 48 See, e.g., Pa. Bar Ass’n Comm. on Legal Ethics & Prof’l Responsibility, PA Eth. Op. 2004-06, 2004 WL 765235, at *1–2 (2004) (reasoning that two law firms sharing an office suite could not describe themselves as an “association of professional corporations” because that misleadingly implied the existence of a partnership); Utah State Bar Ethics Advisory Opinion Comm., UT Eth. Op. 95-04, FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

926 ST. JOHN’S LAW REVIEW [Vol. 88:917 flatly prohibits “false or misleading communication[s] about the lawyer or the lawyer’s services.”50 As Model Rule 7.1 further explains, “[a] communication is false or misleading if it contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading.”51 Accordingly, lawyers’ communications about their law firms’ affiliations or associations with other law firms “must be consistent with the actual relationship[s]” and otherwise describe the relationships in ways that recipients of the communications reasonably can be expected to understand.52 Clients’ and prospective clients’ need for accurate descriptions of law firms’ affiliations or associations, and for information sufficient to gauge the effect or influence of those relationships, if any, on their representations, should be apparent. After all, clients have a right to know who is representing them, whether the lawyers representing them are competent, whether the lawyers have conflicts of interest, whether their confidences will be protected, and how the lawyers will be compensated for their services. Indeed, depending on the circumstances, these factors may influence clients’ or prospective clients’ decisions to engage a firm in connection with a matter or to select another firm for the representation. In 1994, the ABA’s Standing Committee on Ethics and Professional Responsibility analyzed lawyers’ ethical responsibilities arising out of the formation of law firm networks operating under common firm or trade names and other

1995 WL 283827, at *3 (1995) (concluding that “a franchise arrangement in which a lawyer or firm is provided with a trade name, marketing and related services . . . is inherently misleading because it implies to potential clients a partnership or professional corporation”). 49 ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 94-388, at 2 (1994) [hereinafter ABA Formal Op. 94-388]. 50 MODEL RULES OF PROF’L CONDUCT R. 7.1 (2014); see also ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 84-351, at 4–5 (1984) [hereinafter ABA Formal Op. 84-351] (concluding that a law firm may designate another law firm as “affiliated” or “associated” provided that “the relationship between the firms is such that the communication is not false or misleading and the law firms adhere to the applicable rules regulating disclosure of confidential information”). 51 MODEL RULES OF PROF’L CONDUCT R. 7.1 (2014). 52 See ABA Formal Op. 84-351, supra note 50, at 7 (“Communication that another law firm is ‘affiliated’ or ‘associated’ is not misleading if the relationship comports with the plain meaning which persons receiving the communication would normally ascribe to those words or is used only with other information necessary adequately to describe the relationship and avoid confusion.”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 927 relationships in which law firms joined forces or pooled resources.53 That effort resulted in Formal Opinion 94-388, in which the Committee affirmed lawyers’ obligation to provide potential clients to whom a law firm’s relationships with other law firms are relevant a meaningful description of those ties: Lawyers have an obligation not to mislead prospective clients as to what the lawyer is able to bring to bear on the client’s matter in terms of the size of the firm, the resources available to the firm or the relationship between the firm and other law firms with which it is associated. Words like “affiliated,” [or] “associated,” . . . without further explanation, can be misleading and, therefore, use of these terms, without a meaningful description of the nature of the relationship, violates Model Rule 7.1.54 Although Formal Opinion 94-388 does not bind courts,55 many courts consider ABA ethics opinions to be persuasive, and it is therefore fair to assume that courts may interpret Rule 7.1 to require lawyers practicing in vereins to inform clients and prospective clients about the nature of the relationship between the member firms, including the availability of lawyers and other professionals in another firm in the verein to assist them.56 The omission of any reference to vereins in the Model Rule 7.1 discussion in Formal Opinion 94-388 is no reason to discount the opinion because the scope of relationships considered there certainly encompasses vereins.57 Besides, Model Rule 7.1 applies to lawyers’ communications about their services in all contexts.58

53 ABA Formal Op. 94-388, supra note 49, at 1–2. 54 Id. at 1. 55 See In re Katrina Canal Breaches Consol. Litig., No. 05-4182 “K” (2), 2008 WL 2066999, at *2 (E.D. La. May 14, 2008) (explaining that ABA ethics opinions provide guidance to courts but are not binding precedent). 56 See ABA Formal Op. 94-388, supra note 49, at 2–3; see also Ass’n of the Bar of the City of N.Y. Comm. on Prof’l & Judicial Ethics, NYC Eth. Op. 1995-8, 1995 WL 875457, at *6 (1995) [hereinafter NYC Eth. Op. 1995-8] (finding Formal Opinion 94- 388 persuasive, and concluding that lawyers advertising themselves as “associated” must “provide clients with disclosure as to the nature of their association when individual client circumstances make that information relevant”). 57 See ABA Formal Op. 94-388, supra note 49, at 1 (referring to “a proliferation of new ways of conducting [law] practice,” and observing that law firms were “operat[ing] in multiple cities, form[ing] networks of law firms under a common firm name or trade name, and join[ing] forces and pool[ing] resources in any number of business arrangements”). 58 2 GEOFFREY C. HAZARD, JR. & W. WILLIAM HODES, THE LAW OF LAWYERING § 55.3, at 55-4 (3d ed. 2001 & Supp. 2008) [hereinafter HAZARD & HODES]. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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Considering the broad prohibition on false or misleading communications in Model Rule 7.1 and the guidance provided in Formal Opinion 94-388, the originating firm should provide affected clients and prospective clients the following information about the structure and relationship of the verein and its member firms: (1) whether any lawyers or other professionals from other member law firm(s) may provide professional services to the client; (2) whether any legal fees the client pays will be shared with other member firm(s); (3) whether member firms share strategies or expertise; and (4) whether the member firms conduct common operations, or, in contrast, whether their relationship is merely a marketing device.59 Of course, in many instances a firm’s membership in a verein will be irrelevant to a client or prospective client beyond potential conflicts of interest. If, for example, a client retains the U.S. law firm in a verein that includes British and Canadian firms to handle a matter that will not require the involvement of lawyers from either the British or Canadian firms, it probably is immaterial to the client whether the firms share fees, generally share strategies or expertise, or have common operations. In fact, many clients may not care or even consider how their law firms are organized. It is therefore reasonable for verein member law firms to assume that disclaimers and notices on their websites will generally suffice to inform clients and prospective

59 See ABA Formal Op. 94-388, supra note 49, at 3–4 (discussing the nature of the information a law firm must provide to clients and prospective clients regarding the ways in which law firms relate to one another). In Formal Opinion 94-388, the Standing Committee listed a fifth item of information to be provided to prospective clients: “whether profits of the firm the client originally retained will be shared with the other firm(s).” Id. But providing information on profits seems redundant if the originating law firm tells the client about any fee-sharing between firms in the verein. Furthermore, because it is impractical and inappropriate to determine the reasonableness of a lawyer’s fee based on profit margin, see Shaffer v. Superior Court, 39 Cal. Rptr. 2d 506, 513 (Ct. App. 1995), lawyers should have no duty to disclose their profits to clients. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 929 clients about the verein’s structure.60 Appropriate website disclaimers and notices should also satisfy any disclosure duties firms may be held to owe the public.61 All that said, the conservative course for law firms within a verein to fulfill their obligations to meaningfully describe for clients their relationships with their sister law firms is to include the information in items (1) through (4) above in their engagement letters or in an addendum to their engagement letters.62 Among other things, the engagement letter or addendum should identify which firm or firms has the contractual relationship with the client and should state: the engagement is not with any other member firm absent contrary agreement, the lawyers responsible for the matter, the basis on which the firm is to be compensated for its services, and the law governing the relationship.63 By including this information in its engagement documents, the firm also covers itself in those matters in which a sister firm’s involvement is not anticipated at the outset of the representation, but becomes necessary or advisable as the representation develops. Relatedly, Model Rule 7.5(a) prohibits lawyers’ use of a “firm name, letterhead or other professional designation that violates Rule 7.1.”64 A firm’s letterhead that reflects only the verein’s name, brand, or logo, without also identifying the name of the

60 See D.C. Bar, D.C. Ethics Op. 302 (2000), available at http://www.dcbar.org/ bar-resources/legal-ethics/opinions/opinion302.cfm (observing that “because web pages allow multi-layered communications, questions may arise about whether a visitor to a web page may be misled because relevant disclosures are hidden many clicks away from the main pages. . . . The information needed to prevent a web site communication from being false and misleading should be readily available to visitors.”). 61 See id. 62 See ABA Formal Op. 94-388, supra note 49, at 4; see also NYC Eth. Op. 1995- 8, supra note 56 (approving of the ABA’s position in Formal Op. 94-388 to require “more detailed disclosure in communications with individual prospective clients (including retention letters), at least when such disclosure could be relevant to the particular client”). 63 See, e.g., Norton Rose Fulbright, Norton Rose Fulbright Standard Terms of Engagement, available at http://www.nortonrosefulbright.com/files/norton-rose- fulbright-standard-terms-of-engagement-25513.pdf (last visited Apr. 19, 2015); see also MODEL RULES OF PROF’L CONDUCT R. 8.5(b)(2) & cmt. 5 (2014) (explaining that in assessing a lawyer’s reasonable belief that the predominant effect of the lawyer’s conduct occurred in a specific jurisdiction, a written agreement between the lawyer and client reasonably specifying a particular jurisdiction may be considered if it was obtained with the client’s informed consent confirmed in the agreement). 64 MODEL RULES OF PROF’L CONDUCT R. 7.5(a) (2014). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

930 ST. JOHN’S LAW REVIEW [Vol. 88:917 member law firm and its relationship to the verein, may be found to violate a jurisdiction’s version of Model Rule 7.5(a).65 It is also possible that letterhead that does not accurately reflect the law firm’s relationship to the verein and vice versa might be alleged to implicate Model Rule 7.5(d), which provides that “[l]awyers may state or imply that they practice in a partnership or other organization only when that is the fact.”66 Although Model Rule 7.5(d) does not by its terms seem to apply to lawyers practicing in law firms that are members of vereins, its application comes into focus when you consider that (1) the rule essentially requires lawyers to “accurately designate [their] firm’s form of business organization,”67 and (2) vereins themselves do not practice law. In addition, state rules of professional conduct may restrict a law firm’s ability to adopt the verein’s name.68 This scenario snared the U.S. offices of the global verein Norton Rose Fulbright.69 A Texas ethics rule forced the U.S. member firm to at least temporarily retain its registered Fulbright & Jaworski LLP name rather than assume the verein’s global brand name.70 In a nutshell, because no one named “Norton” or “Rose” had ever been a partner in Fulbright & Jaworski LLP, or in any of the Texas firm’s predecessor firms, use of the name “Norton Rose Fulbright” alone was impermissible under Texas Disciplinary Rule of Professional Conduct 7.01.71 The apparent lesson of the

65 Id. R. 7.5(d). 66 MODEL RULES OF PROF’L CONDUCT R. 7.5(d). 67 HAZARD & HODES, supra note 58, § 59.8, at 59-9. 68 See, e.g., GA. RULES OF PROF’L CONDUCT R. 7.5(e)(1) (2013) (governing the use of lawyers’ names in law firm trade names); PA. RULES OF PROF’L CONDUCT R. 7.5(a) (2013) (providing in pertinent part that “[i]f otherwise lawful a firm may use as, or continue to include in, its name, the name or names of one or more deceased or retired members of the firm or of a predecessor firm in a continuing line of succession”). 69 Joshua Freedman, Norton Rose Fulbright Retains Jaworski Name in US Regulatory Twist, LAW. (June 14, 2013), http://www.thelawyer.com/news/regions/ americas-news/norton-rose-fulbright-retains-jaworski-name-in-us-regulatory-twist/ 3005972.article (on file with authors); Pui-Guan Man, Norton Rose Fulbright Faces US Name Change Conundrum, LEGAL WEEK (June 14, 2013), http://www.legal week.com/legal-week/news/2274694/norton-rose-fulbright-faces-us-name-change- conundrum (on file with authors). 70 Freedman, supra note 69; Man, supra note 69; see also TEX. DISCIPLINARY RULES OF PROF’L CONDUCT R. 7.01(a) (2010) (stating that “[a] lawyer in private practice shall not practice under a trade name, a name that is misleading as to the identity of the lawyer or lawyers practicing under such name, or a firm name containing names other than those of one or more of the lawyers in the firm”). 71 TEX. DISCIPLINARY RULES OF PROF’L CONDUCT R. 7.01(a) (2010). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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Norton Rose Fulbright imbroglio is that law firms intending to develop a global brand by forming a verein should consult trade name rules in their jurisdictions before attempting to forge a brand name that cannot be used in all markets absent successful completion of a potentially time-consuming or cumbersome effort to obtain special dispensation from state professional authorities. Finally, to avoid misleading prospective clients and the public about the verein and its member firms’ relationships, the verein’s website should also provide appropriate notices and disclaimers listing the legal name of the verein and each member firm, and emphasizing that each member firm is a separate legal entity that belongs to the verein.72 The website should clarify the verein’s role, such as coordinating member firms’ practices, formulating strategy, or maintaining the quality of legal services, and state that the verein itself does not provide legal services or practice law. A general reminder about member firms’ duties of confidentiality and loyalty, including whether and to what extent member firms may exchange client information, is also advisable.73

B. Imputing Conflicts of Interest A principal concern of lawyers practicing in firms structured as vereins is that one member firm’s conflicts of interest will be automatically imputed to all other members, thus subjecting the entire global firm to disqualification.74 “Verein means

72 See generally the legal notices and disclaimers for the following vereins: Legal Notices and Disclaimers, NORTON ROSE FULBRIGHT, http://www.nortonrose fulbright.com/legal-notices-and-disclaimers (last visited Apr. 19, 2015); Legal Notices, DLA PIPER, http://www.dlapiper.com/en/europe/footer/legalnoticespage/ (last visited Apr. 19, 2015); Legal Notice, SQUIRE PATTON BOGGS, http://www.squire pattonboggs.com/footer/legal-notice (last visited Apr. 19, 2015); Legal Notice, LITTLER, http://www.littler.com/content/legal-notice (last visited Apr. 19, 2015). 73 See, e.g., Legal Notices and Disclaimers, NORTON ROSE FULBRIGHT, http://www.nortonrosefulbright.com/legal-notices-and-disclaimers/ (last visited Apr. 19, 2015). 74 See United States v. Ross, 33 F.3d 1507, 1523 (11th Cir. 1994) (citing United States v. Kitchin, 592 F.2d 900, 904 (5th Cir. 1979) (explaining that “if one attorney in a firm has an actual conflict of interest,” then a court “impute[s] that conflict to all the attorneys in the firm, subjecting the entire firm to disqualification”). Law firms structured as vereins typically hold themselves out as a unified entity; indeed, such unity is a key reason for organizing as a verein. But such affiliation creates conflict imputation concerns because under U.S. conflict of interest regimes, if one attorney in a firm has a conflict of interest, the conflict is imputed to all the attorneys in the firm. MODEL RULES OF PROF’L CONDUCT R. 1.10(a) (2014). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

932 ST. JOHN’S LAW REVIEW [Vol. 88:917 association, society, club, or union.”75 Of course, for purposes of imputing conflicts of interest, the touchstone of being “in a firm” is “association.”76 Model Rule 1.10(a) imputes conflicts of interest to all lawyers “associated in a firm.”77 The term firm as used in Model Rule 1.10(a) broadly encompasses lawyers in a “partnership, professional corporation, . . . or other association authorized to practice law.”78 Similarly, section 123(1) of the Restatement (Third) of the Law Governing Lawyers imputes a lawyer’s conflicts to “affiliated lawyers” who are “associated with that lawyer . . . through a law partnership, professional corporation, . . . or similar association.”79 Mustang Enterprises, Inc. v. Plug-In Storage Systems, Inc.80 illustrates the ease with which courts find lawyers to be affiliated when looking to impute conflicts of interest.81 In that case, an

75 In re Parmalat Sec. Litig., 421 F. Supp. 2d 703, 707 n.15 (S.D.N.Y. 2006) (internal quotation marks omitted) (citing CASSEL’S GERMAN DICTIONARY 662 (1978)); Jarrett-Kerr & Wesemann, supra note 1, at 27; see also Jeffries v. Deloitte Touche Tohmatsu Int’l, 893 F. Supp. 455, 457 n.1 (E.D. Pa. 1995) (citing an affidavit of the defendant to explain: “[A] Swiss Verein is an entity without an exact legal counterpart in the United States, but which is somewhat akin to an incorporated membership association. It is legally distinct from its members.”). In Switzerland, the association is denoted by the initials “e.V.” for “eingetragener Verein” or “[r]egistered [a]ssociation.” Hasselback, supra note 28 (internal quotation marks omitted). 76 See MODEL RULES OF PROF’L CONDUCT R. 1.10(a) (2014) (stating that “[w]hile lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or 1.9”); RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 123(1) & cmt. c (2000) (applying conflict of interest restrictions to lawyers associated with another lawyer “in various forms of organization engaged in the private practice of law”). 77 MODEL RULES OF PROF’L CONDUCT R. 1.10(a) (2014); see also ABA Formal Op. 84-351, supra note 50, at 7 (explaining that “[a]n ‘affiliated’ or ‘associated’ law firm would normally mean a firm that is closely associated or connected with the other lawyer or firm in an ongoing and regular relationship”); N.Y.C. Comm. on Prof’l & Judicial Ethics, Formal Op. 2000-4 (2000), 2000 WL 33769163, at *4 [hereinafter NYC Eth. Op. 2000-4] (adhering to the view that “the relationship between firms must be sufficiently close, personal and continuing” to warrant the “affiliated” designation (internal quotation mark omitted)). 78 MODEL RULES OF PROF’L CONDUCT R. 1.10 cmt. 1 (2014). 79 RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 123(1) (2000). 80 874 F. Supp. 881 (N.D. Ill. 1995). 81 Id. at 888–89; see also NYC Eth. Op. 2000-4, supra note 77, at *1 (concluding that law firms that say they are “affiliated” with, or an “affiliate” of, another firm on their letterheads, in professional notices, and so on, must treat themselves as a single firm for conflict of interest purposes (internal quotation marks omitted)). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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Illinois federal court held that two law firms in different cities identifying themselves as “affiliated” on their letterheads and in their Martin-Hubbell listings should be treated as the equivalent of a two-office law firm for conflict of interest purposes.82 The court emphasized that “the term ‘associated’ plainly reflects a broad-brush approach intended to sweep up all nature of lawyer associations, rather than its being limited to traditional law partnership status or . . . professional corporation shareholder status.”83 As in Mustang Enterprises, courts tend to impute conflicts of interest to lawyers with mutual access to clients’ files and confidential information,84 or who hold themselves out to the public in a way to suggest they are a part of a single firm.85 In re Project Orange Associates, LLC86 discusses the latter scenario in the context of a law firm verein. Project Orange Associates, LLC (“Project Orange”) sought bankruptcy court approval to employ verein member firm DLA Piper LLP (“DLA Piper USA”) as its general bankruptcy counsel pursuant to section 327(a) of the Bankruptcy Code.87 Under that section, the attorney to be retained “must be both disinterested and not hold or represent any interest adverse to the [bankruptcy] estate.”88 The U.S. Trustee objected to Project Orange’s request, citing DLA Piper USA’s representation of

82 Mustang Enters., Inc., 874 F. Supp. at 889–90. 83 Id. at 884; see also Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311, 1320–21 (7th Cir. 1978) (holding that receipt of confidential information by the Washington office of the firm while engaged in lobbying disqualified all lawyers in the Chicago office of the same firm); Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1387 (2d Cir. 1976) (applying New York law and reasoning that the common partner of two law firms in separate cities made the firms in effect a single unit for conflict of interest purposes). 84 See, e.g., J2 Global Commc’ns Inc. v. Captaris Inc., No. CV 09-04150 DDP (AJWx), 2012 WL 6618272, at *1, *4 (C.D. Cal. Dec. 19, 2012) (disqualifying the defendants’ law firm in major patent litigation because it presumably obtained confidential information about the plaintiff through its collaboration with one of the corporate defendant’s “outside in-house counsel” who previously represented the plaintiff involving three of the four patents at issue in the lawsuits (internal quotation marks omitted)). 85 See MODEL RULES OF PROF’L CONDUCT R. 1.10(c) cmt. 2 (2014) (advising that the relevant considerations when evaluating whether lawyers are associated for purposes of imputing conflicts include whether they hold themselves out to the public in a way to suggest the entity is a firm). 86 431 B.R. 363 (Bankr. S.D.N.Y. 2010). 87 Id. at 365. 88 Id. at 369. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

934 ST. JOHN’S LAW REVIEW [Vol. 88:917 certain General Electric (“GE”) entities in other matters.89 One of those entities, General Electric International, Inc. (“GEII”), was Project Orange’s largest unsecured creditor.90 Project Orange’s bankruptcy was partly occasioned by maintenance problems with GE turbines serviced and maintained by GEII, which allegedly prevented Project Orange from generating sufficient income.91 Attempting to distance itself from GEII, DLA Piper USA argued that GEII “[was] not, and never ha[d] been” a client.92 GEII was a client of DLA Piper International, LLP (“DLA Piper International”), another member of the verein DLA Piper Global.93 DLA Piper USA asserted that it received no financial benefit from DLA Piper International’s work for GEII.94 In addition, DLA Piper USA emphasized that it had obtained a conflict waiver from GE “to shield it from allegations of ethical wrongdoing,” and that Project Orange hired another law firm as conflict counsel to handle any issues related to GEII.95 The bankruptcy court denied Project Orange’s application to retain DLA Piper USA.96 The court refused to distinguish between GE and GEII, observing that the conflict waiver combined GE and GEII as a single entity, and that the waiver request was addressed to GEII in care of a GE attorney.97 Equally important, the court refused to distinguish the sister law firms, pointing out that DLA Piper USA, not DLA Piper International, sent the conflict waiver to GE.98 Because DLA Piper USA “dealt with itself and its affiliates as one entity in negotiating a conflict waiver,” the court found it unnecessary “to consider whether different conflicts rules might apply in some circumstances where international law firms share a relationship through a Swiss verein.”99 Nevertheless, the In re Project Orange court seized the opportunity to quote parts of the verein’s website

89 Id. at 365. 90 Id. at 365–66, 368. 91 Id. at 366. 92 Id. at 368, 371. 93 Id. 94 Id. at 368. 95 Id. at 369. 96 Id. at 366. 97 Id. at 371. 98 Id. 99 Id. at 371 n.3. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 935 touting the firm’s worldwide reach, and then questioned the merits of a conflict of interest rule treating verein member law firms as distinct entities: DLA Piper holds itself out to the world as one firm, although it now tries to separate itself into separate firms for conflicts purposes. Followed to its logical conclusion, this would lead to the anomalous result that DLA Piper, on behalf of one client, could be adverse to DLA Piper International, on behalf of one of its clients, without violating ethical standards.100 Finally, the court determined that DLA Piper USA’s conflict waiver did not trump section 327(a)’s disinterestedness and non- adversity requirements, and that the retention of conflicts counsel did not satisfy section 327(a) under circumstances where the proposed general bankruptcy counsel had a conflict of interest with a creditor that was central to the debtor’s reorganization.101 In terms of evaluating the case, In re Project Orange arose out of a bankruptcy, in which courts are exquisitely sensitive to alleged conflicts of interest,102 and where the requirements of section 327(a) override conflict waivers and rules of professional conduct governing conflicts of interest.103 As the bankruptcy court noted, Project Orange and GE had a highly interdependent and adversarial relationship—GE and Project Orange had an extensive litigation history related to the turbines, GEII was Project Orange’s largest unsecured creditor, and GEII’s alleged failure to keep Project Orange’s turbines running was central to

100 Id. 101 Id. at 374–79. 102 See William Freivogel, Bankruptcy, FREIVOGEL ON CONFLICTS, http://www.freivogelonconflicts.com/bankruptcy.html (last visited Apr. 19, 2015) (“Federal bankruptcy law . . . . has superimposed upon the bankruptcy practice conflict-of-interest concepts that are quite removed from conflicts rules that apply to every other body of law.”). 103 See In re Persaud, 496 B.R. 667, 677 n.10 (Bankr. E.D.N.Y. 2013) (“For example, under New York Model Rule of Professional Conduct Rule 1.7(b), an attorney who represents one client whose interests are adverse to those of another client may continue such representation if each client consents. However, courts have recognized that conflicts waivers are not effective for purposes of satisfying the ‘adverse interest’ requirement of § 327(a) of the Bankruptcy Code.”); In re Perry, 194 B.R. 875, 880 (Bankr. E.D. Cal. 1996) (stating that “section 327(a) has a strict requirement of disinterestedness and absence of representation of an adverse interest which trumps the rules of professional conduct.”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

936 ST. JOHN’S LAW REVIEW [Vol. 88:917 the entire bankruptcy.104 Indeed, the court determined the conflict of interest to be so acute that it could not be mitigated or resolved by the retention of conflicts counsel.105 That level of adversity is unusual. Moreover, the court’s ruminations about the merits of treating law firms within a verein as separate entities are dicta. It is therefore debatable whether other courts will afford In re Project Orange persuasive value, or whether they will limit the holding to its facts. At the same time, the case should signal to verein member law firms practicing under a global brand the very real possibility that they will be considered a single firm for conflict of interest purposes, despite their status as separate legal entities. At a minimum, the decision In re Project Orange, when coupled with the holding in Mustang Enterprises, calls into doubt the ability of a verein member firm subject to Rule 1.10(a) to represent a client adverse to another verein member firm’s client. In the end, “whether an entity should be regarded as a ‘firm’ must be evaluated in light of the underlying purpose of Rule 1.10, namely, ensuring client loyalty and confidentiality.”106 Treating the various law firms within a verein as a single firm for conflict of interest purposes protects these crucial client interests.107

104 In re Project Orange Assocs., 431 B.R. 363, 367, 372–76 (Bankr. S.D.N.Y. 2010). 105 Id. at 375. 106 State v. Severson, 215 P.3d 414, 426 (Idaho 2009); see also MODEL RULES OF PROF’L CONDUCT R. 1.10 cmt. 2 (2014) (underscoring the principle that “a firm of lawyers is essentially one lawyer for purposes of the rules governing loyalty to the client”). By way of further illustration, law firms belonging to legal networks “that primarily consist of ‘casual referrals, or even periodic mutual backscratching’ ” may not be treated as a single firm for conflict of interest purposes if “the firms ‘in fact share no clients, no confidences, no fees and no professional engagements.’ ” Thomas D. Morgan, Conflicts of Interest and the New Forms of Professional Associations, 39 S. TEX. L. REV. 215, 240–41 (1998) (quoting ABA Formal Op. 94-388, supra note 49); see also Statement of Purpose, LEX MUNDI, http://www.lexmundi.com/lexmundi/ Statement_of_Purpose.asp (last visited Apr. 19, 2015) (“The members of Lex Mundi shall maintain complete autonomy; shall render professional services to their respective clients on an individual and separate basis; shall not be restricted in referring, handling or accepting cases or in joining other professional organizations; and are not affiliated for the joint practice of law.”). 107 See Morgan, supra note 106, at 241 (“Networks of firms whose members frequently interact to handle cases together should often be treated for conflicts purposes as if they were a single firm made up of practice groups.”). Professor Morgan observes that when two “networked” firms cooperate on a number of cases and later find themselves on opposing sides, a danger exists that one or both firms could “pull punches.” Id. (internal quotation marks omitted). He concludes that this FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 937

When a law firm consists of hundreds of lawyers in offices in various states, it can be a daunting task to identify and avoid conflicts of interest. When the same law firm joins a verein, with other member firms in countries around the world, the task becomes even more arduous. Verein member firms must share client intake and conflict-checking systems to detect and address potential conflicts of interest.108 Fortunately, and smartly, most law firms organized as vereins employ a single conflict-checking system that all lawyers in the constituent firms use for all matters.109 In fact, law firm policies and procedures designed to detect and cure or mitigate conflicts of interest on a global scale are essential, inasmuch as conflicts represent one of the two greatest professional liability risks to large law firms, dishonest clients being the other.110

C. Fee-Splitting Among Verein Member Firms Fee-splitting or fee-sharing generally refers to lawyers in different law firms dividing fees, as well as arrangements in which lawyers impermissibly share fees with non-lawyers.111 Model Rules 1.5(e) and 5.4(a) address the allocation of legal fees among lawyers and with non-lawyers, respectively.112 Fee- splitting issues may surface when a lawyer represents a client in a matter together with another lawyer governed by different rules, as where a lawyer practicing in a jurisdiction that has adopted the Model Rules collaborates with lawyers practicing in jurisdictions that permit them to share fees with non-lawyers.113 Given that law firms within a verein are separate firms, and a

danger may merit a court finding that a conflict of interest exists, even for unrelated litigation. Id. 108 See MODEL RULES OF PROF’L CONDUCT R. 1.7 cmt. 3 (2014) (“To determine whether a conflict of interest exists, a lawyer should adopt reasonable procedures, appropriate for the size and type of firm and practice, to determine in . . . matters the persons and issues involved.”). 109 Johnson, supra note 1, at 77. 110 Douglas R. Richmond, Essential Principles for Law Firm General Counsel, 53 U. KAN. L. REV. 805, 810 (2005). 111 DOUGLAS R. RICHMOND ET AL., PROFESSIONAL RESPONSIBILITY IN LITIGATION 102 & n.316 (2011). 112 MODEL RULES OF PROF’L CONDUCT R. 1.5(e) (2014) (governing the division of fees by lawyers who are not in the same firm); id. R. 5.4(a) (governing lawyers sharing fees with non-lawyers). 113 See generally ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 464 (2013) (addressing these issues). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

938 ST. JOHN’S LAW REVIEW [Vol. 88:917 key motivation behind adoption of the verein model is the anticipated increase of revenues and profits through the referral of matters between member firms,114 U.S. law firms in vereins must recognize the potential fee-splitting restrictions imposed by Rules 1.5(e) and 5.4(a).115

1. Model Rule 1.5(e) Considerations Some verein member law firms reportedly share costs as a way of compensating one another for client referrals while maintaining discrete profit pools to avoid compromising their legal and financial separation.116 It is prudent to ask whether a cost-sharing approach implicates Model Rule 1.5(e)’s fee-splitting requirements or triggers other ethics rules.117 Model Rule 1.5(e) governs fee-splitting between lawyers who are “not in the same firm.”118 Lawyers in the same firm may share fees however they like.119 Without question, “the collective earning and sharing of fees is a salient, if not quintessential, characteristic of a law firm.”120 Thus, the threshold question in a fee-splitting controversy is whether the lawyers are in the same firm.121 Lawyers who are otherwise independent contractors may be deemed to be in the same firm if they hold themselves out to clients as having such a relationship, or practice “as a single, collective business entity.”122 Although determining whether lawyers are in the same firm is a fact-intensive inquiry,123 some

114 See, e.g., Reeser & Foley, supra note 23 (discussing the mechanics of cost- sharing). 115 MODEL RULES OF PROF’L CONDUCT R. 1.5(e) (2014); id. R. 5.4(a). 116 See, e.g., Reeser & Foley, supra note 23. 117 See id. (questioning whether law firms practicing under vereins are complying with Model Rule 1.5(e)’s restrictions on fee-splitting). 118 MODEL RULES OF PROF’L CONDUCT R. 1.5(e) (2014). 119 See Tomar, Seliger, Simonoff, Adourian & O’Brien, P.C. v. Snyder, 601 A.2d 1056, 1059 (Del. Super. Ct. 1990) (“By its own terms, Rule 1.5(e) does not apply to lawyers who are in the same firm.”); ROTUNDA & DZIENKOWSKI, supra note 45, § 1.5- 4(a), at 197 (“The ethics rules simply do not concern themselves with intra-firm referrals.”). 120 Vincent Robert Johnson, Ethical Limitations on Creative Financing of Mass Tort Class Actions, 54 BROOK. L. REV. 539, 556 (1988). 121 RICHMOND ET AL., supra note 111, at 103. 122 Welch v. Davis, 114 S.W.3d 285, 290 (Mo. Ct. App. 2003). 123 Commonwealth v. Allison, 751 N.E.2d 868, 889 (Mass. 2001). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 939 observers argue that U.S. law firms that join a verein may test credibility if they claim to be in the same firm as other verein member firms for Model Rule 1.5(e) purposes.124 The Model Rules define the terms firm and law firm to mean a “partnership, professional corporation, sole proprietorship or other association authorized to practice law; or lawyers employed in a legal services organization or the legal department of a corporation or other organization.”125 Although it is true that a verein does not itself practice law, it is formed specifically to allow its constituent firms to practice law cooperatively and its member firms unquestionably are authorized to practice law.126 Indeed, the verein would not exist but for its members’ law practices. Unlike members of an affinity group, firms in a verein adopt a common brand name, embrace a common marketing strategy, form global practice groups, and may adopt various common business practices.127 The comments to Model Rule 1.0 recognize that the definition of firm invites fact-intensive inquiry into the nature of the group or organization.128 Factors to consider in deciding whether lawyers may be identified as being in a firm include whether they hold themselves out “to the public in a way that suggests that they are a firm or conduct themselves as a firm,” the terms of any agreement between them, and whether they “have mutual access to information concerning the clients they serve.”129 All those things are generally true regarding vereins. It is thus reasonable to conclude that law firms organized as vereins collectively constitute a single firm for professional responsibility purposes. That being so, the Model Rule 1.5(e) prohibition on fee-splitting ought not apply to them.130 As appealing or persuasive as the foregoing reasoning may be, however, it is worth testing its limits. Although law firms organized as vereins strive to convey one-firm unity to clients and prospective clients, such promotion will not by itself

124 See, e.g., Reeser & Foley, supra note 23 (questioning whether law firms practicing under vereins are complying with Model Rule 1.5(e)’s restrictions on fee- splitting). 125 MODEL RULES OF PROF’L CONDUCT R. 1.0(c) (2014). 126 Vetula, supra note 21, at 1178–79. 127 Id. 128 MODEL RULES OF PROF’L CONDUCT R. 1.0 cmt. 2 (2014). 129 Id. 130 See id. R. 1.5(e) (explaining the circumstances in which “lawyers who are not in the same firm” may divide fees). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

940 ST. JOHN’S LAW REVIEW [Vol. 88:917 inoculate lawyers in U.S. law firms against alleged Rule 1.5(e) violations when working with lawyers in sister firms, nor will the fact that affiliated firms “divulge or share client confidences to take advantage of the collective experience of [the verein].”131 Adversaries or professional authorities only need to look to the Model Rule 7.1 disclosure obligations to argue with some force that a U.S. member firm of a verein cannot reasonably post disclaimers on its website emphasizing the legal separateness of each member firm and, at the same time, claim to be in the same firm as its sister firm in, say, Australia, for Rule 1.5(e) purposes.132 Rules against fee-splitting are intended to protect clients and courts liberally construe them to accomplish the objectives of each rule.133 A claim that law firms within a verein are unified for some professional responsibility purposes, but separate for others tempts invocation of the adage that “you can’t have your cake and eat it too.” Based on the premise that two verein member firms are not in the same firm under Model Rule 1.5(e), they may divide fees only if: (1) the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation; (2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and (3) the total fee is reasonable.134 Working through these requirements in order, first, under Rule 1.5(e)(1), lawyers must divide fees in proportion to the services they each perform, or they must assume joint responsibility for the representation.135 These are alternative

131 See Commonwealth v. Allison, 751 N.E.2d 868, 890–91 (Mass. 2001) (concluding that any fee-sharing agreement among non-partnership office-sharing lawyers who divulge client confidences and utilize the collective experience of the associated lawyers must satisfy Rule 1.5(e)). 132 MODEL RULES OF PROF’L CONDUCT R. 7.1 (2014) (“A lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services.”). 133 For example, in Saggese v. Kelley, 837 N.E.2d 699 (Mass. 2005), the Supreme Judicial Court of Massachusetts amended Rule 1.5(e)’s requirements to further the rule’s policy to protect “the client against unreasonable fees through prior disclosure and client consent.” Id. at 705. More specifically, although Massachusetts’ version of Rule 1.5(e) was silent as to the method and timing of the disclosure of fee-sharing agreements, the court imposed a new compliance condition requiring a referring lawyer to disclose the fee-sharing agreement to the client before the referral is made and then secure the client’s consent in writing. Id. at 706. 134 MODEL RULES OF PROF’L CONDUCT R. 1.5(e) (2014). 135 Id. R. 1.5(e)(1). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 941 requirements.136 Regarding the first alternative, there is no uniform measure of proportionality.137 Lawyers may either (1) attempt to reasonably forecast the amount of work that each will do at the outset of the representation and allocate fees accordingly at that time, or (2) wait until the representation concludes and then divide the fees in reasonable conformity with the amount of work that each performed.138 As for the second alternative, joint responsibility means both supervisory responsibility under Model Rule 5.1 and the assumption of malpractice liability.139 Or, as a comment to Model Rule 1.5 explains, joint responsibility “entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership.”140 Second, Model Rule 1.5(e)(2) requires the client consent in writing to the division of fees, including the share that each lawyer or law firm will receive.141 Written confirmation need not take the form of a stand-alone document; lawyers may provide for the division of fees in their engagement agreements.142 Third, Model Rule 1.5(e)(3) requires the total fee to be divided to be reasonable.143 The reasonableness of a fee is generally evaluated according to the eight factors listed in Model Rule 1.5(a).144 The Model Rule 1.5(a) factors are not exclusive,145

136 In re Hailey, 792 N.E.2d 851, 862 (Ind. 2003). 137 RICHMOND ET AL., supra note 111, at 104. 138 Kummerer v. Marshall, 971 N.E.2d 198, 202 (Ind. Ct. App. 2012). 139 ROTUNDA & DZIENKOWSKI, supra note 45, § 1.5-4(c), at 197–98. 140 MODEL RULES OF PROF’L CONDUCT R. 1.5 cmt. 7 (2014). 141 Id. R. 1.5(e)(2). 142 See, e.g., Rice, Steinberg, & Stutin, P.A. v. Cummings, Cummings & Dudenhefer, 716 So. 2d 8, 16 (La. Ct. App. 1998) (finding no Rule 1.5(e) violation where engagement agreement included relevant provision); McCord & Burns Law Firm, LLP v. Piuze, 752 N.W.2d 580, 587 (Neb. 2008) (construing a fee-sharing provision in retainer agreement). 143 MODEL RULES OF PROF’L CONDUCT R. 1.5(e)(3) (2014). 144 Kummerer v. Marshall, 971 N.E.2d 198, 201–02 (Ind. Ct. App. 2012). 145 Nunn Law Office v. Rosenthal, 905 N.E.2d 513, 520 (Ind. Ct. App. 2009); Diamond Point Plaza Ltd. P’ship v. Wells Fargo Bank, N.A., 929 A.2d 932, 955 (Md. 2007); Twp. of W. Orange v. 769 Assocs., LLC, 969 A.2d 1080, 1088 (N.J. 2009); In re Jardine, 289 P.3d 516, 523 (Utah 2012). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

942 ST. JOHN’S LAW REVIEW [Vol. 88:917 however, and courts may consider other factors in appropriate cases.146 The reasonableness of attorney fees always depends on the facts and circumstances of the particular case.147 If the financial arrangement between a U.S. member firm and foreign member firm involves a direct division of the actual fee paid by the client, and the firms do not qualify as an association authorized to practice law as offered earlier, then Rule 1.5(e) compliance is plainly required.148 But because fees include a profit component, this scenario is squarely at odds with the recognized structural limitation on direct profit sharing among or between verein members.149 On the other end of the spectrum, if a lawyer in a U.S. member firm refers a matter to a foreign member firm, the matter requires only the foreign lawyers to perform the legal work, the client separately retains and pays the lawyers from the foreign firm, and there is no financial reward to the U.S. lawyer for the referral, then Rule 1.5(e) is not implicated. But this scenario fails to compensate the U.S. lawyer for originating the business, and therefore appears to undermine a primary benefit of joining a verein—that is, business growth.150 As mentioned previously, a possible financial arrangement between these hypothetical firms indirectly rewards the referring lawyer through a cost-allocation approach. Whether a cost-sharing arrangement circumvents Model Rule 1.5(e), however, is unclear. Model Rule 1.5(e) facially governs fees.151 No court has addressed whether profit-sharing by lawyers is subject to the same requirements as fee-sharing, much less whether the sharing of costs as an indirect profit-sharing mechanism implicates Rule 1.5(e). But in 1995, the New Jersey Supreme Court Advisory Committee on Professional Ethics was asked

146 See Berman v. Linnane, 748 N.E.2d 466, 469 (Mass. 2001) (quoting an earlier case listing additional factors). 147 Silver Creek Invs., Inc. v. Whitten Constr. Mgmt., Inc., 307 P.3d 360, 365 (Okla. Civ. App. 2013). 148 See ABA Formal Op. 94-388, supra note 49, at 8 (“The final issue that the Committee has been asked to address concerns fee sharing and other financial arrangements between related firms, however the relationship is denominated. A fundamental proposition, of course, is that all of the firms in the relationship must comply with ethical requirements regarding the sharing of fees.”). 149 Reeser & Foley, supra note 23. 150 Id. 151 MODEL RULES OF PROF’L CONDUCT R. 1.5(e) (2014). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 943 whether the following profit-sharing system between independent U.S. and London law firms violated New Jersey’s virtually identical version of Rule 1.5(e): Law firm A, which has offices located in various states, including New Jersey, and law firm B, which is located in London, England, would be closely affiliated with one another, but would not merge into a single law firm. The purpose of the proposed affiliation would be to provide enhanced legal services by making easily available to clients the combined expertise of lawyers in both firms. No referral fees would be paid by either firm if attorneys from only one of the firms performed work for a particular client, even if that work was referred by one firm to the other. If attorneys from both law firm A and law firm B worked on a matter for the same client, then the fee charged to the client would be divided in accordance with RPC 1.5(e)—that is, the division would be in proportion to the services provided by each firm, consent to the participation of all the lawyers involved would be obtained from the client, and the total fee would be reasonable. At the end of the fiscal year, a portion of each firm’s profits would be pooled, and then distributed between the two firms in accordance with a specified formula, unrelated to the amount of any business referred from one firm to the other. (As a practical matter, this probably would be accomplished by a single year- end payment from law firm A to law firm B, or vice versa.)152 The New Jersey Committee concluded in Formal Opinion 681 that the law firms’ proposed year-end pooling and sharing of profits did not constitute a division of fees and, thus, the firms did not need to satisfy Rule 1.5(e).153 The New Jersey Committee agreed with the inquirer that the proposed profit-sharing arrangement was distinguishable from fee-sharing.154 Focusing on the public policy rationale behind Rule 1.5(e), the New Jersey Committee initially reasoned that neither the profitability of a law firm, nor the disposition of those profits, triggered concerns within Rule 1.5(e)’s scope: Ethical regulation of fee sharing is grounded in a concern for protecting clients, by insuring that in arriving at the total fee,

152 N.J. Sup. Ct. Advisory Comm. on Prof’l Ethics, N.J. Eth. Op. 681, 1995 WL 427922, at *1 (1995) [hereinafter N.J. Eth. Op. 681]. 153 Id. at *5. 154 Id. at *3. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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the participating law firms do not submit parts which in sum exceed the whole. The premise is that the client should be charged only one overall fair and reasonable fee, calculated upon the totality of professional services rendered and responsibility assumed. . . . Profits are another matter. They depend not only on total fees received over a period of time, but also on other income and the expenses attendant to the business of the firm’s practice, turning on efficiency, methods of operation, and many other factors. With regard to the present inquiry, neither the profitability of a law firm nor the disposition of those profits raised concerns within the scope of RPC 1.5(e).155 In addition, the New Jersey Committee cited the express language of Rule 1.5(e), which governs the division of a “fee” charged to a client, as opposed to using broader language.156 Consistent with this limited construction, the New Jersey Committee observed that the comments to Model Rule 1.5 provided that “[a] division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm.”157 The New Jersey Committee’s analysis did not end with Rule 1.5(e). On its own initiative, the New Jersey Committee concluded that although the proposed profit-sharing scheme sidestepped Rule 1.5(e), it violated New Jersey Rule 7.3(d).158 That rule prohibits lawyers from compensating another for making referrals to that lawyer, except in the case of certain lawyer referral services.159 Unlike Rule 1.5(e), New Jersey Rule 7.3(d) “is grounded in a concern for protecting the public from various profit-oriented schemes to steer clients to certain lawyers, especially in circumstances where a client is likely to rely on the referral as connoting an endorsement of competence,

155 Id. at *3–4. 156 Id. at *4. 157 Id. (alteration in original) (quoting unspecified comments to Model Rule 1.5) (internal quotation marks omitted). 158 Id. at *5. 159 Id.; N.J. RULES OF PROF’L CONDUCT R. 7.3(d) (2013) (“A lawyer shall not compensate or give anything of value to a person or organization to recommend or secure the lawyer’s employment by a client, or as a reward for having made a recommendation resulting in the lawyer’s employment by a client except that the lawyer may pay for public communications permitted by RPC 7.1 and the usual and reasonable fees or dues charged by a lawyer referral service operated, sponsored, or approved by a bar association.”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 945 expertise, integrity or some other positive value.”160 The New Jersey Committee reasoned that the profit-sharing pool violated New Jersey Rule 7.3(d) because it was an effort to compensate or give something of value, that is, shared profits, in return for the referring firm’s efforts to make a referral recommendation.161 Formal Opinion 681 raises multiple red flags for verein member law firms that share costs to avoid the possible ramifications of profit-sharing and otherwise reward partners for referrals and business origination. At first blush, it is easy to take comfort in the New Jersey Committee’s narrow construction of dividing fees under Rule 1.5(e) and conclude that profit- sharing and cost-sharing systems fall outside of Rule 1.5(e). Under the arrangement presented, however, the U.S. and London firms also agreed to (1) comply with Rule 1.5(e) on all matters requiring both firms to perform legal work, and (2) have the referring attorney decline a referral fee even when the matter was handled entirely by the receiving firm.162 The other practical problem is that the hypothetical U.S. and London firms were not in a verein, and thus could freely pool profits if the arrangement was otherwise permissible. Verein member law firms that want to maintain the legal separateness and limited liability protection afforded by the verein structure may balk at complying with Rule 1.5(e). To avoid the Rule 1.5(e) requirements, they might instead use a cost-allocation approach as a means of dividing fees on the back end, or even as an indirect means of compensating the originating lawyer. Depending on how firms structure or manage cost-sharing approaches, a court could conclude that such a system is disguised fee-sharing. Courts typically mandate strict compliance with Rule 1.5(e),163 and lawyers who violate the Rule 1.5(e) ban on fee-splitting risk discipline, even if their conduct does not harm clients.164 In addition, agreements to divide fees that violate Rule 1.5(e) or equivalent rules are unenforceable in many jurisdictions.165

160 N.J. Eth. Op. 681, supra note 152, at *5. 161 Id. 162 Id. at *1. 163 In re Law Offices of James Sokolove, LLC, 986 A.2d 997, 1004–05 (R.I. 2010). 164 See, e.g., In re Hart, 605 S.E.2d 532, 534 (S.C. 2004) (finding violation in absence of harm to client). 165 See, e.g., Eng v. Cummings, McClorey, Davis & Acho, PLC, 611 F.3d 428, 432–35 (8th Cir. 2010) (applying Missouri law); Barnes, Crosby, Fitzgerald & FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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Even if a verein’s profit-sharing or cost-sharing system did not offend Rule 1.5(e), the New Jersey Committee’s disapproval of the profit-sharing pool under New Jersey Rule 7.3(d) is concerning. Model Rule 7.2(b), which is similar to New Jersey Rule 7.3(d), generally prohibits lawyers from giving something of value to others for recommending the lawyer’s services or channeling work.166 This ban extends to “indirect compensation for referrals.”167 One of the express exceptions to Model Rule 7.2(b) permits mutual referrals of clients between lawyers if they are otherwise permitted by the rules, the agreement is not exclusive, and the client is informed of the existence and nature of the agreement.168 But even then, the comments to Model Rule 7.2(b) reaffirm that “[e]xcept as provided in Rule 1.5(e), a lawyer who receives referrals from a lawyer . . . must not pay anything solely for the referral.”169 The entire concept of a verein dividing and sharing fees is difficult to reconcile with member firms maintaining their legal separateness and avoiding direct profit sharing.170 Firms’ acceptance of joint responsibility on a legal matter may be one option to stay within the confines of Model Rule 1.5(e), comply with the verein’s structural limitation on profit-sharing, and realize their expected rewards.171 Yet, this negates one of the verein’s defining characteristics—the maintenance of member

Zeman, LLP v. Ringler, 151 Cal. Rptr. 3d 134, 141 (Ct. App. 2012) (discussing an equivalent California rule); Donald W. Fohrman & Assocs., Ltd. v. Mark D. Alberts, P.C., 7 N.E.3d 807, 815–23 (Ill. App. Ct. 2014) (refusing to enforce referral agreement in the absence of strict compliance with Rule 1.5(e); substantial compliance with the rule is inadequate); Daniel v. Aon Corp., 952 N.E.2d 638, 645 (Ill. App. Ct. 2011) (refusing to enforce an agreement that failed to comply with Rule 1.5(e)); Christensen v. Eggen, 577 N.W.2d 221, 224–25 (Minn. 1998) (finding that a fee-splitting agreement that violated Rule 1.5(e) offended public policy and therefore was unenforceable); Neilson v. McCloskey, 186 S.W.3d 285, 287 (Mo. Ct. App. 2005) (“[A]n agreement to share attorney fees that does not comply with [Missouri] Rule 4– 1.5(e) is unenforceable.”); Kalled v. Albee, 712 A.2d 616, 618 (N.H. 1998) (concluding that a contract that violated the fee-splitting rule was against public policy and thus void). But see Poole v. Prince, 61 So. 3d 258, 282 (Ala. 2010) (concluding that a Rule 1.5(e) violation does not invalidate a fee-sharing agreement because the sole remedy for the violation is a disciplinary penalty). 166 MODEL RULES OF PROF’L CONDUCT R. 7.2(b) & cmt. 5 (2014). 167 ELLEN J. BENNETT ET AL., ANNOTATED MODEL RULES OF PROFESSIONAL CONDUCT 545 (7th ed. 2011) [hereinafter ANNOT. MODEL RULES]. 168 MODEL RULES OF PROF’L CONDUCT R. 7.2(b)(4) (2014). 169 Id. R. 7.2 cmt. 8. 170 Reeser & Foley, supra note 23. 171 Id. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 947 firms’ separate legal identities and financial independence. Another possible solution when a matter requires more than one firm to carry out the representation is to have each firm separately bill the client for its own services. As a practical matter, however, sending a client multiple bills covering the same time frame is an undesirable alternative because it is unwieldy, complicates the attorney-client relationship, erodes vereins’ claims that they are unified firms providing seamless service to clients in the jurisdictions in which their lawyers practice, and, again, fails to fulfill the first attorney’s and firm’s reasonable expectations of reward for business origination.172 When Model Rule 1.5(e) is read in conjunction with Model Rule 7.1, a verein member law firm is required to communicate to the client in an engagement letter whether any part of the fees earned in the representation will be shared with another member firm and obtain the client’s consent to the division.173 That should be easy to do.174 Indeed, clients of the type global law

172 Id. 173 See MODEL RULES OF PROF’L CONDUCT R. 1.5(e) (2014); Id. R. 7.1. 174 Mechanically, it is simple for a lawyer to send an engagement letter to a client detailing the fee-sharing arrangement between verein member firms. Ideally, to achieve the client’s written agreement to the fee-sharing arrangement under Model Rule 1.5(e)(2), a lawyer handling the matter will have a separate conversation with the client to explain the division of fees that is later confirmed in a writing acknowledged by the client, or will at least obtain a signed copy of the engagement letter from the client. But assume that neither scenario occurs. Rather, the client does not object after receiving the engagement letter, or merely says nothing at all. Is the client’s receipt of a unilateral engagement letter disclosing the fee-sharing arrangement, without more, sufficient to manifest the client’s consent for purposes of Model Rule 1.5(e)(2)? The answer is unclear. See, e.g., MODEL RULES OF PROF’L CONDUCT R. 1.0 cmt. 7 (2014) (explaining that obtaining informed consent usually requires the client’s affirmative response because generally “a lawyer may not assume consent from a client’s or other person’s silence,” but then noting that consent may be inferred “from the conduct of a client or other person who has reasonably adequate information about the matter”). The pre-2002 amendment version of Model Rule 1.5(e)(2) provided that lawyers can split fees if “the client is advised of and does not object to the participation of all the lawyers.” MODEL RULES OF PROF’L CONDUCT R. 1.5(e)(2) (2001) (emphasis added). This pre-2002 amendment language suggested that a client who “passively acquiesce[d] in the fee-split” would “be deemed to have consented to it.” See Stephen E. Kalish, The Sale of Law Practice: The Model Rules of Professional Conduct Point in a New Direction, 39 U. MIAMI L. REV. 471, 490 (1985); see also In re W/B Assocs., 307 B.R. 476, 482–83 (Bankr. W.D. Pa. 2004); Donald R. Lundberg & Charles M. Kidd, You Say You Want An Evolution?: An Overview of the Ethics 2000 Amendments to the Indiana Rules of Professional Conduct, 38 IND. L. REV. 1255, 1276 (2005) (Under pre-amendment Rule 1.5(e), “a written agreement was only required in cases where the division of fee was not in proportion to each lawyer’s FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

948 ST. JOHN’S LAW REVIEW [Vol. 88:917 firms typically represent are unlikely to care about fee-splitting in the verein context.175

2. Model Rule 5.4(a) Considerations Taking fee-splitting one step further, if, for example, lawyers in a U.S. member firm collaborate with lawyers in a sister firm in the United Kingdom or Australia, which permit non-lawyer ownership of law firms, will the U.S. lawyers violate Model Rule 5.4(a)’s general prohibition against sharing fees with nonlawyers?176 The concern here is that the U.S. lawyers will be held to share a legal fee in violation of Model Rule 5.4(a) because the

services. Also, the client did not necessarily have to be informed of the specifics of the fee division and did not need to explicitly agree.”). The 2002 amendments to Model Rule 1.5(e) tightened the consent element, adding “a requirement that the client agree in writing to the participation of each lawyer, including the share each will receive.” ANNOT. MODEL RULES, supra note 167, at 88. In short, while an engagement letter that is not signed by the client generally is reliable proof of the parties’ agreement, inferring or implying consent based on a client’s failure to object to a term is not foolproof. There is good reason to believe a court will hold that the client consented to the arrangement. See, e.g., Flynn v. Sarasota Cnty. Pub. Hosp. Bd., 169 F. Supp. 2d 1363, 1370 n.6 (M.D. Fla. 2001) (determining that “the parties had a valid fee agreement consisting of the engagement letter as confirmed by [their] subsequent conduct,” and observing that “[a]lthough the engagement letter was unsigned and a unilateral agreement, it became binding on the parties upon the mutual performance of the respective obligations”); Macy’s Inc. v. J.C. Penny Corp., 107 A.D.3d 616, 617, 968 N.Y.S.2d 64, 65–66 (1st Dep’t 2013) (holding that J.C. Penney had accepted an advance conflict waiver in an engagement letter because, although J.C. Penney claimed that it never countersigned the letter, the letter expressly provided that “your instructing us or continuing to instruct us on this matter will constitute your full acceptance of the terms set out above” and it was undisputed that the law firm continued to represent J.C. Penney after receipt of the letter). Some courts may disagree, however. See W/B Assocs., 307 B.R. at 483 (stating that “[a]n unsigned [engagement letter], in and of itself, raises material questions as to its validity and applicability”). 175 See generally MODEL RULES OF PROF’L CONDUCT R. 1.5 cmt. 7 (2014) (“A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist”). 176 Under Model Rule 5.4(a), lawyers are prohibited from sharing fees with nonlawyers, except in four distinct circumstances: (1) payments to the survivors or estates of deceased lawyers; (2) payments made under Model Rule 1.17 to purchase the practice of a deceased, disabled, or disappeared lawyer; (3) firm compensation and retirement plans; and (4) sharing court-awarded fees with nonprofit organizations. MODEL RULES OF PROF’L CONDUCT R. 5.4(a) (2014). “The exception for firm compensation and retirement plans depends on whether the profits being shared are ‘tied to particular clients or particular matters.’ ” ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 464, at 2 (2013) [hereinafter ABA Formal Op. 464] (quoting ANNOT. MODEL RULES, supra note 167, at 461). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 949 foreign lawyers’ portion of the fee will ultimately be distributed to non-lawyers holding an ownership interest in the foreign firm. To be sure, this is not an issue where the foreign firm has no lay owners. Regardless, U.S. firms may find shelter under a recent ethics opinion by the ABA Standing Committee on Ethics and Professional Responsibility.177 ABA Formal Opinion 464, issued in August 2013, concludes: [The] division of a legal fee by a lawyer or law firm in a Model Rules jurisdiction with a lawyer or law firm in another jurisdiction that permits the sharing of legal fees with nonlawyers does not violate Model Rule 5.4(a) simply because a nonlawyer could ultimately receive some portion of the fee under the applicable law of the other jurisdiction.178 Emphasizing that Model Rule 5.4 is intended to protect a “lawyer’s independent professional judgment by limiting the influence of nonlawyers on the client-lawyer relationship,” the Committee suitably gathered that there is scant reason to believe that the non-lawyer in the other jurisdiction would influence the professional judgment of the lawyer or law firm subject to the Model Rules.179 Accordingly, as long as a lawyer subject to the Model Rules complies with Rule 5.4(c)’s requirement of professional independence, the lawyer may work with other lawyers or law firms practicing in jurisdictions with rules that permit fee-sharing with non-lawyers.180 Although Formal Opinion 464 expressly mentions only the District of Columbia as an example of a jurisdiction permitting non-lawyer ownership of law firms,181 the analysis easily extends to lawyers practicing in foreign jurisdictions such as Australia or the United Kingdom. A lawyer in a Model Rules jurisdiction may reasonably conclude that the client needs the services of a second lawyer in another verein member firm in which a non-lawyer holds an ownership interest. The possibility that the second

177 ABA Formal Op. 464, supra note 176, at 1. 178 Id. at 4. 179 Id. 180 Id. at 1, 4. ABA Formal Opinion 464 is not without its detractors. Some critics have lamented that the ABA overstepped its jurisdiction in issuing Formal Opinion 464, and that the opinion otherwise represents a drastic change in long- standing ABA policy prohibiting non-lawyer ownership of law firms. See, e.g., James Podgers, Second Time Around: An ABA Ethics Opinion Sparks Renewed Debate over Nonlawyer Ownership of Law Firms, A.B.A. J., Dec. 2013, at 20–21. 181 ABA Formal Op. 464, supra note 176. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

950 ST. JOHN’S LAW REVIEW [Vol. 88:917 lawyer may share a fee, or other consideration for the referral work, with a non-lawyer should not expose the lawyer in the Model Rules jurisdiction to discipline. Model Rule 5.4 addresses a lawyer’s professional independence.182 Barring any undue influence exerted by a non-lawyer in the second firm—which seems like a remote and speculative possibility at best183—verein member firms in Model Rules jurisdictions should not view Rule 5.4(a) as an obstacle to teaming with sister firms in jurisdictions that permit the sharing of legal fees with non-lawyers.184

D. Summary and Synthesis The Model Rules of Professional Conduct are rules of reason.185 In many, if not most, circumstances, a lawyer’s own interests are served by interpretations of ethics rules that advance the client’s objectives as well. In some situations this will not necessarily be true, and courts almost always decide uncertain cases in the client’s favor.186 At times, the ramifications of this approach may seem unfair to global law firms organized as vereins. It is arguably inconsistent to treat a verein and its member law firms as the same firm when imputing conflicts of interest, and then as separate firms for purposes of fee-splitting. From a client perspective, however, it

182 MODEL RULES OF PROF’L CONDUCT R. 5.3 cmt. 1 (2014). Model Rule 5.4 is generally concerned with financial relationships entered into between lawyers and non-lawyers. For instance, Rule 5.4(d) prohibits a lawyer from practicing law in a professional corporation or association that practices law for profit if a non-lawyer owns an interest in the entity, is a director or officer, or has the right to direct or control the lawyer’s decisions in rendering legal services. 183 See Podgers, supra note 180, at 21 (“If you presume that you are dealing with the typical lawyer—that is, one who tries to be ethical and who is reasonably aware of her obligations under the rules of professional conduct—I see little likelihood that this type of fee sharing by co-counsel would have any impact on the lawyer in the Model Rules state or her client.” (quoting Paula J. Frederick, chair of the ABA’s Standing Committee on Ethics and Professional Responsibility) (internal quotation marks omitted)). 184 See Vetula, supra note 21, at 1186 (“Deciding that a structure like the Swiss verein, in which a U.S. law firm is a member of an association alongside a U.K. firm allowing nonlawyer investment, does not violate the Model Rule[] [5.4] would . . . allow U.S. firms to adapt to the globalization of legal services while respecting other nations’ public policy interests as well as the American bar’s policy goals.” (emphasis omitted)). 185 MODEL RULES OF PROF’L CONDUCT: Preamble and Scope para. 3 (2014). 186 See, e.g., David B. Wilkins, Legal Realism for Lawyers, 104 HARV. L. REV. 468, 473 (1990) (stating that “the traditional model strongly implies that doubts about the exact contours of the law should be resolved in the client’s favor”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 951 is easy to understand why a good client of verein member Firm A would, for example, be displeased upon learning that verein member Firm B represents its adversary in major litigation.187 By the same token, clients have the right to choose their lawyers and to be aware of the details related to the payment of fees, especially in light of verein member law firms’ notices and disclaimers emphasizing their legal separateness. Whether applying standards of professional conduct generally, or focusing on vereins specifically, “all doubts should be resolved in favor of furthering the best interest of the client.”188 For lawyers who might doubt the vitality of this principle in the global legal marketplace, where the clients tend to be large, sophisticated, and capable of protecting their own interests, it is worth recalling that courts have repeatedly declined to deviate from the client primacy principle, even when the client is sophisticated and appears to be able to protect its own interests, as in the case of corporations with in-house law departments.189 Although some courts analyzing professional responsibility issues such as conflicts of interest have, from a lawyer’s perspective, been more attuned to current commercial realities of large law firm practice,190 such understanding is never assured. In terms of eliminating perceived inconsistencies, a reasonable alternative may be to treat constituent law firms within a verein as the same firm for both conflict of interest and fee-splitting purposes. Most law firms organized as vereins employ unified conflict-checking systems, arguably suggesting that they consider themselves a single firm for conflict of interest purposes. As explained in connection with fee-splitting, the

187 See NYC Eth. Op. 2000-4, supra note 77, at *4 (mandating that “affiliated” firms “treat the clients of each member as clients of every member of the group” (internal quotation marks omitted)). 188 Wilkins, supra note 186, at 473 n.17, 476. 189 See, e.g., Celgene Corp. v. KV Pharm. Co., Civ. No. 07-4819(SDW), 2008 WL 2937415, at *14–15 (D.N.J. July 29, 2008) (concluding that the plaintiff had not given “truly informed consent” to a concurrent conflict of interest and thus disqualifying the lawyers for the defendant notwithstanding the presence of a well- crafted advance waiver of conflicts (internal quotation marks omitted)). 190 See, e.g., Galderma Labs., L.P. v. Actavis Mid Atl. LLC, 927 F. Supp. 2d 390, 395–406 (N.D. Tex. 2013) (enforcing an advance waiver of conflicts of interest executed by a client with in-house lawyers and thus declining to disqualify the law firm that obtained the waiver in litigation between the client granting the advance waiver and another client of the firm). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

952 ST. JOHN’S LAW REVIEW [Vol. 88:917 definition of firm and law firm in Model Rule 1.0(c) to include partnerships, professional corporations, and “other association[s] authorized to practice law” supports a one-firm approach.191 The complication, obviously, is the potential effect on verein firms’ civil liability that single-firm treatment under the ethics rules might yield. This may be a greater concern for some law firms than it is for others, but still requires consideration. It is to the professional liability ramifications of the verein structure that we now turn.

III. POTENTIAL LIABILITY RAMIFICATIONS OF THE VEREIN STRUCTURE One of the defining features of the verein structure is the isolation of liabilities among the verein entity and its individual members.192 One law firm within a verein should not be vicariously liable for a sister firm’s alleged errors merely by virtue of its affiliation or association. By analogy, courts generally respect corporate boundaries when it comes to liability.193 A corporation is liable for the acts of a separate but related entity, such as a subsidiary or sister subsidiary, only in extraordinary circumstances, as when disregarding the corporate form is necessary to prevent fraud or injustice.194 Courts have yet to address whether verein-structured law firms should escape liability for a sister firm’s torts. Despite the absence of case law and the isolation of potential liabilities that organization as a verein is intended to achieve, it is plausible that the right circumstances could expose a verein itself or a member law firm to vicarious liability for another member law firm’s misconduct. Although there is currently no law firm experience on which to draw, lawsuits filed by plaintiffs to reach the deep pockets of global accounting firms provide guidance on threshold personal jurisdiction limitations on claims against global law firms structured as vereins, the application of traditional vicarious

191 MODEL RULES OF PROF’L CONDUCT R. 1.0(c) (2014); see supra notes 131–34 and accompanying text. 192 Jarett-Kerr & Wesemann, supra note 1, at 28. 193 Spartan Tube & Steel, Inc. v. Himmelspach, 102 F.3d 223, 226 (6th Cir. 1996) (applying Michigan law); Murray v. Miner, 74 F.3d 402, 404 (2d Cir. 1996) (applying New York law). 194 Murray, 74 F.3d at 404 (applying New York law); Arctic Ocean Int’l, Ltd. v. High Seas Shipping Ltd., 622 F. Supp. 2d 46, 53 (S.D.N.Y. 2009) (applying federal maritime common law). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 953 liability theories to law firms organized as vereins, and even barriers to subpoenaing U.S. law firms within vereins to obtain documents in the custody of foreign law firms in the same vereins.195 Pointedly, plaintiffs’ efforts to hold vereins and their member accounting firms responsible for the wrongs of other member firms have seldom succeeded.196 A few reported decisions, however, offer plaintiffs a roadmap for defeating law firms’ dispositive motions.197 This is significant. If a plaintiff can survive a motion to dismiss or motion for judgment on the pleadings, the costs for a verein and its members to defend the suit going forward may be substantial—even if the court ultimately rejects the plaintiff’s claims. If a plaintiff can defeat summary judgment, the risk of trial may prompt a law firm to negotiate a substantial settlement, notwithstanding the existence of valid legal defenses to liability. Finally, there is the alarming possibility that a verein entity and its entire network of firms might be held liable for the wrongdoing of one member firm. What conditions might allow a plaintiff to effectively pursue a one-firm theory of liability? In light of several global verein law firms pushing the integration envelope,198 it is perhaps possible that these firms are inadvertently laying the foundation for a viable theory of collective liability.

A. Personal Jurisdiction over Vereins and Foreign Member Firms Before a verein or its member firms may be exposed to various liability based on the theories plaintiffs commonly raise, the Due Process Clause of the U.S. Constitution must permit courts to exercise of personal jurisdiction over them.199 The few courts confronting personal jurisdiction challenges from vereins and their foreign members in the accounting firm context have

195 See Arctic Ocean Int’l, Ltd., 622 F. Supp. 2d at 49 (discussing admiralty jurisdiction and maritime transactions); Murray, 74 F.3d at 404–05 (discussing employer liability). 196 See Turley v. ISG Lackawanna, Inc., 960 F. Supp. 2d 425, 441 (W.D.N.Y. 2013); Saleh v. Pretty Girl, Inc., 09-CV-1769(ENV)(RER), 2012 WL 4511372, at *10 (E.D.N.Y. Sept. 28, 2012). 197 Arctic Ocean Int’l, Ltd., 622 F. Supp. 2d at 52–53. 198 See Johnson, supra note 1, at 75–76 (surveying law firms organized as a verein to determine how well they are integrated structurally). 199 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 474 (1985). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

954 ST. JOHN’S LAW REVIEW [Vol. 88:917 applied familiar constitutional analysis for the exercise of either specific or general jurisdiction over a nonresident defendant,200 with foreseeable results.201 The Texas Court of Appeals’ decisions in Gutierrez v. Cayman Islands Firm of Deloitte & Touche202 and Deloitte & Touche Netherlands Antilles & Aruba v. Ulrich,203 both of which involved global accounting firms structured as vereins, are instructive. In Gutierrez v. Cayman Islands Firm of Deloitte & Touche, foreign investors filed a class action against the verein Deloitte Touche Tohmatsu International (“DTT”) and its member firms DT-Cayman and DT-Texas arising out of the collapse of InverWorld Ltd.204 InverWorld had engaged DT-Cayman to serve as its independent accounting and auditing firm for a five-year period.205 DT-Cayman then contracted with DT-Texas to perform the bulk of the audit work at InverWorld’s San Antonio headquarters.206 The engagement letter named both a DT- Cayman partner and a DT-Texas partner as joint accountants in charge.207 Although no DTT-Cayman accountants ever went to Texas, DT-Cayman reserved ultimate responsibility for the audit,

200 It is settled that a court may exercise personal jurisdiction over a nonresident defendant only if there are “ ‘minimum contacts’ between the defendant and the forum state.” World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 291 (1980). This standard may be satisfied in two ways. First, a court may exercise specific jurisdiction “if the defendant has purposefully directed his activities at residents of the forum, and the litigation results from alleged injuries that arise out of or relate to those activities.” AST Sports Science, Inc. v. CLF Distrib. Ltd., 514 F.3d 1054, 1058 (10th Cir. 2008) (quoting Burger King Corp., 471 U.S. at 472) (internal quotation marks omitted). Second, a court may exercise general jurisdiction when the cause of action does not arise from activities in the forum “based on the defendant’s business contacts with the forum state.” Intercon, Inc. v. Bell Atl. Internet Solutions, Inc., 205 F.3d 1244, 1247 (10th Cir. 2000). If the defendant has sufficient minimum contacts with the forum state, the court must then analyze whether the exercise of personal jurisdiction over the defendant would offend “traditional notions of fair play and substantial justice.” Asahi Metal Indus. Co. v. Superior Court, 480 U.S. 102, 113 (1987) (internal quotation marks omitted). 201 See, e.g., Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 491 (S.D.N.Y. 2001) (holding that verein member firm Deloitte & Touche-Bermuda was hard pressed to argue that its relationship with the United States was random, fortuitous, or attenuated where it knew that it served a fund managed entirely in New York). 202 100 S.W.3d 261 (Tex. App. 2002). 203 172 S.W.3d 255 (Tex. App. 2005). 204 Gutierrez, 100 S.W.3d at 265–66. 205 Id. at 266, 269. 206 Id. at 266. 207 Id. at 269–70. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 955 communicated regularly with DT-Texas, and issued the annual final auditor’s reports.208 DTT did no work on the InverWorld audits.209 The trial court ruled that it lacked personal jurisdiction over DT-Cayman and DTT.210 The plaintiffs filed an interlocutory appeal.211 The Texas Court of Appeals reversed the trial court’s decision concerning DT-Cayman.212 Refusing to find an agency relationship without any evidence of DT-Cayman’s right to control DT-Texas’s audit work, the court concentrated on DT- Cayman’s connection to Texas.213 Because DT-Cayman knew it was serving a client managed entirely in San Antonio, the court quickly concluded that DT-Cayman purposely directed its activities toward Texas and that the minimum contacts required for specific jurisdiction existed.214 In contrast, the Gutierrez court was not persuaded by the plaintiffs’ argument that DTT was subject to Texas jurisdiction because DTT had a “worldwide presence,” advertised its “full service capacity in all regions of the world,” and acted as a “conduit” for activities in Texas.215 The court noted that aside from maintaining a website and lending its name to multiple accounting firms, DTT had no relationship to the lawsuit.216 More specifically, DTT had performed no services for DT-Cayman or DT-Texas in connection with the InverWorld audit, and did not otherwise interact with InverWorld.217 Addressing only the absence of specific jurisdiction, the Gutierrez court affirmed the trial court’s ruling that DTT could not reasonably anticipate being hailed into a Texas court.218 Just three years later, the Texas Court of Appeals considered another personal jurisdiction challenge involving DTT, this time tied to Deloitte Touche Netherlands Antilles and Aruba

208 Id. at 266, 270. 209 Id. at 270. 210 Id. at 265. 211 Id. 212 Id. 213 Id. at 271. 214 Id. at 273. 215 Id. at 268, 270 (internal quotation marks omitted). 216 Id. at 270. 217 Id. 218 Id. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

956 ST. JOHN’S LAW REVIEW [Vol. 88:917

(“DTNA”).219 In Deloitte & Touche Netherlands Antilles & Aruba v. Ulrich,220 fifty-four investors filed a lawsuit in Texas state court against DTT and DTNA, among others, arising out of a fraudulent securities scheme involving Integra Bank, an international bank incorporated in the Netherlands Antilles.221 DTNA had contracted to audit Integra Bank for three years, with substantial portions of the work in Texas, where Integra Bank handled most of its administrative and accounting operations.222 DTNA did not contract with a U.S.-based verein member to perform the Texas portion of the audit.223 Rather, DTNA sent one of its own accountants to Texas each year.224 Based on DTNA’s clear expectation to profit from its Texas activities, both the trial court and the Texas Court of Appeals easily concluded that DTNA’s Texas business contacts supported the exercise of specific jurisdiction.225 In short, DTNA fared no better than DT- Cayman did in Gutierrez. The end result for DTT, however, changed dramatically from Gutierrez. The court in Ulrich held that DTT was subject to general jurisdiction based on its continuous and systematic contacts with Texas.226 The court initially recited DTT’s position that it had no “offices, salaried employees, property, telephone numbers, mailing addresses, bank accounts, licenses to do business, agents for services of process, or taxpayer identification numbers in Texas.”227 The court also noted that DTT did not provide audit, tax, or consulting services to the individual member firms’ clients.228 As opposed to engaging in “commercial business,” DTT maintained that it “provide[d] services only to its member firms.”229 Setting these arguments aside, the Ulrich court

219 Deloitte & Touche Neth. Antilles & Aruba v. Ulrich, 172 S.W.3d 255, 259 (Tex. App. 2005). 220 172 S.W.3d 255. 221 Id. at 259, 261. 222 Id. at 261–62. 223 Id. at 263. 224 Id. 225 Id. at 259, 269–70. 226 Id. at 267. 227 Id. at 265. 228 Id. at 264. 229 Id. at 265 (internal quotation marks omitted). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 957 carefully detailed the operations base maintained by DTT in Texas for the prior ten years230—evidence which was noticeably absent from the record in Gutierrez.231 During this period, DTT member firm DT-U.S. seconded a partner and three employees to DTT full-time.232 Under this arrangement, DTT reimbursed DT-U.S. for office space in Houston, Texas, as well as the individuals’ earnings.233 The partner managed DTT’s member firms in the Latin American region and one of the employees facilitated training for the verein’s member firms in that region.234 Predictably, the court in Ulrich rejected DTT’s perceived attempt to split hairs about the absence of “salaried” employees or “commercial” business in Texas.235 The court determined that the seconded personnel in Texas were DTT’s employees because their work was “DTT work ultimately paid for and controlled by DTT.”236 The court then held that a verein or any other foreign association “that sets up what is, in effect, a permanent office in Texas, and uses this base for conducting out-of-state or global business, could reasonably anticipate a Texas court may exercise general jurisdiction over the firm.”237 Accordingly, under Ulrich, a verein that maintains an office for a continuous period of time and staffs the office with seconded employees conducting business on its behalf may be subject to general jurisdiction.238 The results in Gutierrez and Ulrich are straightforward. Foreign law firms within vereins that contract to work on matters for clients with U.S. operations likely will be held to have the necessary minimum contacts to satisfy state long-arm statutes and constitutional due process requirements. The verein itself will not be subjected to jurisdiction on the basis that it advertises itself as a global firm capable of servicing clients around the world, or licenses its name to member firms located in the United States. The verein must either have a meaningful

230 Id. at 265–66. 231 Gutierrez v. Cayman Is. Firm of Deloitte & Touche, 100 S.W.3d 261, 269–70 (Tex. App. 2002). 232 Ulrich, 172 S.W.3d at 265. 233 Id. at 265–66. 234 Id. at 265. 235 Id. at 266 (internal quotation marks omitted). 236 Id. 237 Id. 238 See id. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

958 ST. JOHN’S LAW REVIEW [Vol. 88:917 relationship to the actual transaction at issue in the litigation to trigger specific jurisdiction or a permanent business office in the state conducting activities of such a substantial nature and quality to support general jurisdiction. Even that possibility seems unlikely given that a verein does not practice law. Finally, although not addressed in Gutierrez or Ulrich, another possible ground for the exercise of personal jurisdiction over a verein or a foreign member law firm is to impute the contacts of a U.S. member firm to the verein or foreign member firm under an agency, alter ego, or joint enterprise theory.239 The underlying justification for imputation in this context is that because the two entities are effectively the same entity, “the jurisdictional contacts of one are the jurisdictional contacts of the other” under the Supreme Court’s due process analysis.240 Although these liability theories are discussed in the next section, for purposes of exercising personal jurisdiction, courts have consistently refused to impute contacts to a foreign defendant based solely on references in marketing materials or other public statements about the defendant’s status as a global or worldwide firm.241

239 See, e.g., Patin v. Thoroughbred Power Boats Inc., 294 F.3d 640, 653 (5th Cir. 2002) (observing that “federal courts have consistently acknowledged that it is compatible with due process for a court to exercise personal jurisdiction over an individual or a corporation that would not ordinarily be subject to personal jurisdiction in that court when the individual or corporation is an alter ego or successor of a corporation that would be subject to personal jurisdiction in that court”). 240 Id. 241 See, e.g., Aerotel, Ltd. v. Sprint Corp., 100 F. Supp. 2d 189, 193–94 (S.D.N.Y. 2000) (addressing the sufficiency of the pleadings to establish jurisdiction on an alter ego theory, and determining that public statements intended to create the impression that a global communications company existed would not be sufficient to “create” a single entity structure, though the allegations that the entities were “mere departments” of a parent were sufficient to defeat the motion to dismiss for lack of jurisdiction); Howard v. Klynveld Peat Marwick Goerdeler, 977 F. Supp. 654, 661–62 (S.D.N.Y. 1997) (dismissing for lack of personal jurisdiction an employment discrimination complaint filed against a Netherlands-based association with no office or employees in the United States, and observing that marketing statements to the effect that the defendant was an international network of member firms was insufficient to confer personal jurisdiction over the foreign defendant); Reingold v. Deloitte Haskins & Sells, 599 F. Supp. 1241, 1253–54 & n.10 (S.D.N.Y. 1984) (refusing to exercise personal jurisdiction over an Australian accounting firm because it shared referral fees with its United States-based affiliate, and concluding that their joint membership in “a single cohesive worldwide organization” was insufficient to make the American entity the alter ego of the Australian entity for jurisdictional purposes (internal quotation marks omitted)). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 959

B. Vicarious Liability Theories

1. Agency Courts have uniformly rejected the claim that a verein, as an umbrella organization, is structured in such a way that its member firms always act as agents of the verein when performing services.242 Bare assertions that member firms of a verein are agents of one another have also failed to gain judicial traction.243 It is hornbook law that control is the essential element in establishing an agency theory of vicarious liability.244 A plaintiff premising liability on agency cannot simply allege facts permitting an inference of a principal’s control or influence over an agent,245 but must instead allege the principal’s control or

242 See Star Energy Corp. v. RSM Top-Audit, No. 08 Civ. 00329(DC), 2008 U.S. Dist. LEXIS 99825, at *11–12 (S.D.N.Y. Nov. 26, 2008) (concluding that an agency relationship cannot be grounded on the general assertion that RSM International “advertises itself as one combined organization” and has “member firms in over 64 countries and is represented in each of the top 40 major business centres throughout the world” (internal quotation marks omitted)); Skidmore Energy, Inc. v. KPMG, No. 3: 03-CV-2138-B, 2004 U.S. Dist. LEXIS 28396, at *10–14 (N.D. Tex. Dec. 28, 2004) (concluding that plaintiffs failed to state a claim against KMPG’s U.S. member firm for the actions of KMPG’s Morocco member firm based on bare-bones allegations that KPMG was operating as a “worldwide organization” (internal quotation marks omitted)); In re Worldcom, Inc. Sec. Litig., No. 02 Civ. 3288(DLC), 2003 U.S. Dist. LEXIS 10863, at *31 (S.D.N.Y. June 25, 2003) (dismissing securities claim against Andersen Worldwide SC because the plaintiff’s agency theory was premised on the sole allegation that AWSC was an “umbrella organization for its member firms worldwide” (internal quotation marks omitted)). 243 See In re AM Int’l Inc. Sec. Litig., 606 F. Supp. 600, 607 (S.D.N.Y. 1985) (dismissing complaint against Pricewaterhouse entities outside the United States after rejecting the argument that all Pricewaterhouse affiliates worldwide were “in fact one entity, and acted as agents of one another”). 244 See, e.g., In re Parmalat Sec. Litig., 594 F. Supp. 2d 444, 451 (S.D.N.Y. 2009) (noting that control is generally considered to be “the essential characteristic of the principal-agent relationship”); see also In re Lernout & Hauspie Sec. Litig., 230 F. Supp. 2d 152, 173 (D. Mass. 2002) (citing the lack of specific allegations supporting an inference of an agency relationship, such as audits bearing the name, logo, or signature of the verein; a memorandum or other writing implying that the verein itself was retained as an independent auditor; or that cooperation between various member firms on different aspects of the audit occurred under the direction of, or subject to the control of, the verein). 245 Green v. Beer, No. 6 Civ. 4156(KMW)(JCF), 2009 U.S. Dist. LEXIS 27503, at *42 (S.D.N.Y. Mar. 30, 2009); see also Neubauer v. Eva-Health USA, Inc., 158 F.R.D. 281, 285 (S.D.N.Y. 1994) (holding that the bare allegation of control did not suffice to allege control person liability “as the Court need not accept as true on a motion to dismiss allegations which amount simply to legal conclusions”); In re Amaranth Natural Gas Commodities Litig., 587 F. Supp. 2d 513, 547 (S.D.N.Y. 2008) (stating FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

960 ST. JOHN’S LAW REVIEW [Vol. 88:917 influence over the particular activity at issue.246 In an effort to satisfy the control test, plaintiffs have primarily focused on some combination of the verein’s branding and promotional materials, member firms’ compliance with uniform professional standards and procedures approved by the verein, and cooperation between the putative principal and agent on a certain part of the relevant transaction. Although a facially appealing basis for liability, a verein’s global marketing of its member firms or promotion of a uniform brand name does not transform member firms into agents of the verein.247 Nor does a member firm become an agent or partner of other member firms by using the same brand name.248 For

that where the only language justifying a principal-agent relationship “is general, vague, and conclusory,” the relationship has not been sufficiently alleged). 246 See Star Energy Corp., 2008 U.S. Dist. LEXIS 99825, at *7–8 (dismissing plaintiff’s vicarious liability claim grounded on allegations that the umbrella entity supervised the compliance of member firms by auditing their work to ensure compliance with its strict procedures, controlled eligibility for membership and ability to use the brand name, and dictated the attributes of members before allowing them to bear the brand name); In re Asia Pulp & Paper Sec. Litig., 293 F. Supp. 2d 391, 393, 396 (S.D.N.Y. 2003) (concluding that allegations of cost and profit sharing, partner overlap, global setting of professional standards, maintenance of a global infrastructure and administration, and marketing of a “one firm” concept through website and press releases were insufficient to demonstrate “control person” liability under securities laws, and noting the significant absence of allegations that the global entity “was able to control or in any way influence the particular audits conducted or opinions offered by its individual member firms” (internal quotation marks omitted)). 247 Nuevo Mundo Holdings v. PriceWaterhouseCoopers LLP, No. 03 Civ. 0613(GBD), 2004 U.S. Dist. LEXIS 780, at *15–18 (S.D.N.Y. Jan. 22, 2004) (rejecting agency theory between PricewaterhouseCoopers, Arthur Anderson, and their respective Peruvian member firms when the plaintiff's only specific allegations were the statements of the member firms themselves and the fact that they shared an associational name); Lernout, 230 F. Supp. 2d at 170–72 (holding that allegations that KPMG International touted itself as a unitary global firm that provided service around the world through global service teams and that there was collaboration and coextensive responsibility for auditing Lernout & Hauspie was insufficient to plead an agency relationship with member firms KPMP Belgium, UK, and United States); Reingold v. Deloitte Haskins & Sells, 599 F. Supp. 1241, 1254 n.10 (S.D.N.Y. 1984) (noting that references in brochures and pamphlets describing an entity as “a single cohesive worldwide organization” could not alone contradict the plain language of business agreements between the Australian and American accounting firms (internal quotation marks omitted)). 248 Nuevo Mundo Holdings, 2004 U.S. Dist. LEXIS 780, at *7 (recognizing that “[m]ember firms in an international accounting association are not part of a single firm and are neither agents nor partners of other member firms simply by virtue of using the same brand name”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 961 example, in In re Lernout & Hauspie Securities Litigation,249 the plaintiffs attempted to substantiate an agency relationship between Swiss verein KPMG International and its member firms using excerpts from KPMG’s website and annual shareholder report touting its global services regime.250 Rejecting the plaintiffs’ allegations, the court opined that KPMG’s public relations materials proclaiming firm unity and referring to the firm as a global entity were undercut by the very same web pages and marketing information declaring the legal separateness of the verein and each member firm.251 These declarations alone precluded any reasonable inference of actual or apparent authority.252 Lernout affirms the principle that the actual interaction between the putative principal and agent is the determinative inquiry, not a third party’s perception of the relationship. Cases involving global accounting firms also illustrate that agency is not created because member firms share quality assurance standards established and enforced by the verein.253 In Nuevo Mundo Holdings v. PriceWaterhouseCoopers LLP,254 for

249 230 F. Supp. 2d 152. 250 Id. at 171–72. 251 Id. at 173 n.16; see also Skidmore Energy, Inc. v. KPMG, No. 3: 03-CV-2138- B, 2004 U.S. Dist. LEXIS 28396, at *12 (N.D. Tex. Dec. 28, 2004) (observing that, despite plaintiff’s allegations that KPMG was a world-wide organization, KPMG’s website stated that KPMG itself did not serve clients and that its member firms were separate and independent legal entities). 252 Lernout, 230 F. Supp. 2d at 173 n.17. 253 See, e.g., Newby v. Enron Corp., 394 F.3d 296, 308–09 (5th Cir. 2004) (noting that Andersen Worldwide’s responsibility for promulgating and enforcing professional standards would not be sufficient to hold it liable for the actions of its U.S. member firm Arthur Andersen); Nuevo Mundo Holdings, 2004 U.S. Dist. LEXIS 780, at *15–16 (concluding that an allegation that the putative principal and agent used the same accounting standards was insufficient to infer an agency relationship); In re Asia Pulp & Paper Sec. Litig., 293 F. Supp. 2d 391, 396 (S.D.N.Y. 2003) (concluding that general allegations that AWSC set management and policies for Andersen member firms was insufficient for the purpose of pleading control person liability under securities laws); Maresca v. Holiday Inns, Inc., No. 92 Civ. 4550(RPP), 1993 U.S. Dist. LEXIS 57, at *14–15 (S.D.N.Y. Jan. 5, 1993) (requiring licensees or franchisees to comply with quality standards does not create a principal- agent relationship); see also United States v. Bestfoods, Inc., 524 U.S. 51, 72 (1998) (holding that “[a]ctivities that involve [a subsidiary’s] facility but which are consistent with the parent[] [corporation’s] investor status, such as monitoring of the subsidiary’s performance, supervision of the subsidiary’s finance and capital budget decisions, and articulation of general policies and procedures, should not give rise to direct [parental] liability” (internal quotation marks omitted)). 254 No. 03 Civ. 0613(GBD), 2004 U.S. Dist. LEXIS 780. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

962 ST. JOHN’S LAW REVIEW [Vol. 88:917 example, the court refused to find a principal-agent relationship between two global accounting firms and their affiliates based, in relevant part, on allegations that the umbrella organizations required their member firms to adhere to certain procedures and conducted reviews to ensure that member firms followed those procedures.255 Key to the court’s ruling was the absence of any indication that the global entities participated in decisions about how their member firms completed audit reports; that they were aware of, or contributed to, a decision to alter the relevant audit reports; or that the global entities and their firms mutually understood that the global entities’ controlled the firms’ accounting services.256 Similarly, in Star Energy Corp. v. RSM Top-Audit,257 the court held that Star Energy’s assertions that the verein RSM International controlled its U.S. member firm’s eligibility for membership use of the RSM brand name, and promulgated the audit manual and policies that enabled its member firm to serve U.S. companies, was insufficient to sustain an agency claim that RSM International controlled the U.S. member firm’s dealings with Star Energy.258 Just as a verein’s oversight of its constituent firms to assure compliance with professional standards does not establish agency,259 simple collaboration between a member firm and the verein or another member firm on an engagement is insufficient to impose vicarious liability.260 In In re Royal Ahold N.V. Securities & ERISA Litigation,261 for example, the plaintiffs alleged that Deloitte US and Deloitte Netherlands effectively

255 Id. at *8, *18. 256 Id. at *16. 257 No. 08 Civ. 00329(DC), 2008 U.S. Dist. LEXIS 99825 (S.D.N.Y. Nov. 26, 2008). 258 Id. at *7–8. 259 See, e.g., Nuevo Mundo Holdings, 2004 U.S. Dist. LEXIS 780, at *9–10 (rejecting agency claims where the umbrella entity oversaw the activities of member firms to assure compliance with professional standards and ethical requirements); Howard v. Klynveld Peat Marwick Goerdeler, 977 F. Supp. 654, 661–62 (S.D.N.Y. 1997) (concluding that an umbrella organization that set standards for member accounting firms and provided general assistance did not have a principal-agent relationship with its member firms). But see Banco Espirito Santo Int’l, Ltd. v. BDO Int’l, 979 So. 2d 1030, 1033–34 (Fla. Dist. Ct. App. 2008) (holding that evidence demonstrating that a global entity could require member firms to provide services to clients, comply with global operating directives and restrictions, and submit to compliance reviews, presented a triable issue as to agency). 260 In re Parmalat Sec. Litig., 594 F. Supp. 2d 444, 454 n.71 (S.D.N.Y. 2009). 261 351 F. Supp. 2d 334 (D. Md. 2004). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 963 operated as one based on the corporate website’s description of Deloitte as a global brand name and its characterization of Deloitte US’s service as a “file reviewer” for Deloitte Netherlands to ensure that audits conformed to generally accepted accounting principles in the U.S.262 The court held that, at most, these facts established “that the two firms ‘acted as a source of information’ for one another and coordinated efforts.”263 Thus, even if a firm confers with the verein or another member firm, this interaction does not necessarily indicate that the first firm was subject to another’s direction and control in a legally relevant sense.264 It is one thing for a member firm to consult or to obtain recommendations, but it is quite another to require a member firm to seek the approval of the verein or another member before it can act.265 In summary, courts’ reluctance to accept agency allegations grounded on a mix of marketing slogans, compliance with professional protocols, and collaboration on a specific project task should comfort global law firms structured as vereins. Nevertheless, two fairly recent decisions from the Southern District of New York provide a cautionary tale about the inherent risks of defending against agency allegations. a. Cromer Finance Ltd. v. Berger In Cromer Finance Ltd. v. Berger,266 the plaintiffs sought to hold accounting giant Deloitte Touche & Tohmatsu (“DTT”), a Swiss verein, and its Bermuda member firm, DT-Bermuda, liable for audits of Manhattan Investment Fund, Ltd., an offshore investment fund managed from New York.267 DTT successfully moved to dismiss all claims against it due to the plaintiffs’ failure to sufficiently allege DTT’s scienter, an essential element of the plaintiffs’ various theories of recovery.268 The deficient complaint

262 Id. at 385 n.41 (internal quotation marks omitted). 263 Id. 264 Maung Ng We v. Merrill Lynch & Co., No. 99 Civ. 9687(CSH), 2000 U.S. Dist. LEXIS 11660, at *20 (S.D.N.Y. Aug. 14, 2000). 265 See Butto v. Collecto Inc., 845 F. Supp. 2d 491, 496 (E.D.N.Y. 2012) (citing cases for the proposition that one entity’s right to review the work of another entity with respect to a project “does not necessitate a finding of agency”). 266 Nos. 00 CIV. 2284(DLC), 00 CIV. 2498(DLC), 2002 U.S. Dist. LEXIS 7782 (S.D.N.Y. May 2, 2002). 267 Id. at *2. 268 Cromer Fin. Ltd. v. Berger, 137 F. Supp. 2d 452, 493–96 (S.D.N.Y. 2001). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

964 ST. JOHN’S LAW REVIEW [Vol. 88:917 relied heavily on the presence of DTT’s name and logo on the audit reports to establish DTT’s knowledge of the allegedly false and misleading information contained therein.269 DTT’s good fortune to exit a lawsuit with alleged damages in excess of $400 million,270 however, was short-lived. Following the dismissal, the plaintiffs sought leave to amend their complaint to add ten causes of action against DTT.271 To overcome the scienter hurdle, the plaintiffs alleged DTT’s participation in the audits on an agency theory.272 The purported agency relationship was not between DTT and DT-Bermuda, but instead between DTT and William Jack, a partner in DT- Bermuda who was in charge of the audits.273 The plaintiffs claimed that DTT identified Jack as a “global practice leader,” a member of DTT’s Global Financial Services Industries (“GFSI”) practice, a member of DTT’s global investment management and hedge fund practice, and DTT’s “contact person in Bermuda for asset management company audits.”274 Based on these representations, the plaintiffs alleged that Jack had actual authority to act on DTT’s behalf and that “he signed off on the Fund audits not only in his capacity as a [DT-Bermuda] partner but also in his capacity as an agent exercising actual authority to act on behalf of [DTT].”275 The court held that the plaintiffs had sufficiently alleged facts showing that Jack had actual authority to act as DTT’s agent when performing the underlying audit work.276 The court was unimpressed with DTT’s position that it was not truly a single international accounting firm because it and its member firms promoted the “ ‘concept’ of uniformity of service, without ‘conveying that a single international accounting firm actually exist[ed].’ ”277 The court reasoned that the plaintiffs’ allegations of agency rested not only on DTT’s organization of its business operations and its use of its member firms generally, but also on Jack’s specific performance of the audit work that

269 Id. at 493–94. 270 Cromer Fin. Ltd. v. Berger, 245 F. Supp. 2d 552, 553 (S.D.N.Y. 2003). 271 Cromer Fin. Ltd., 2002 U.S. Dist. LEXIS 7782, at *5–6. 272 Id. at *3. 273 Id. at *2, *7–8. 274 Id. at *7. 275 Id. at *10. 276 Id. at *13. 277 Id. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 965

DTT advertised it was equipped to handle around the world.278 The court emphasized that its decision did not pivot solely on DTT’s marketing materials.279 Nevertheless, the court believed that at the dismissal stage, it was reasonable to infer that DTT’s representations to third parties in its marketing materials bore a relationship to how DTT conducted its business.280 Things did not improve for DTT at summary judgment. There, the court focused on the extent to which DTT’s organized globalization efforts rendered DTT partners, who were responsible for those efforts, agents of DTT, thereby imputing their alleged scienter to DTT.281 Ultimately, DTT could not overcome Jack’s participation in the GFSI practice,282 which DTT created to build a “seamless global practice.”283 Although some documents reflected that DTT did not establish GFSI as a command operation to direct every aspect of member firms’ operations, the evidence permitted a finding that Jack’s work on behalf of DTT generally, and GFSI specifically, was subject to DTT’s control.284 The more complex issue was whether the knowledge Jack acquired about the Fund’s audits was within the scope of that agency.285 According to the court, the evidence permitted an inference that DTT invited Jack to join GSFI’s Investment Funds Committee precisely because of his expertise in similar engagements, and that a jury could conclude that GFSI required him to acquire and share knowledge about the performance of off-shore investment funds and advise how DTT and its member firms could improve their performance.286 Cromer presented the court a set of facts beyond the stock verein agency allegations. Like plaintiffs in previous cases, the Cromer plaintiffs pointed to DTT’s promotional materials. DTT marketed itself as an auditor conducting audits through its “internationally experienced professionals” deployed across the

278 Id. at *14. 279 Id. at *14–17. 280 Id. at *14. 281 Cromer Fin. Ltd. v. Berger, 245 F. Supp. 2d 552, 553 (S.D.N.Y. 2003). 282 Id. at 561. 283 Id. at 557 (internal quotation marks omitted). 284 Id. at 561. 285 Id. 286 Id. at 561–62. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

966 ST. JOHN’S LAW REVIEW [Vol. 88:917 globe to support clients’ needs.287 But not only did the relevant engagement letter and audit reports all display DTT’s name and logo, one of the Fund’s audits was signed in cursive “Deloitte & Touche.”288 Moreover, the plaintiffs in Cromer, as with prior litigants, cited the provision of the verein’s governing charter conferring upon DTT the power and authority to promulgate professional standards for its member firms.289 The Cromer plaintiffs carried this one step further, citing DTT’s professional practice manual for member firms that required audits to follow DTT’s prescribed methodology—including the software package Jack used to perform the Fund audits.290 As expected, DTT invoked the legal separateness disclaimers on its websites.291 It also championed its license agreement between DTT and DT- Bermuda, which specified that verein membership did not authorize “the Verein, Member Firm or any other Member Firm to act as agent or representative of the other.”292 Considering all of the other evidence in the record, these materials only bolstered the court’s resolution that material factual issues remained for trial. b. Parmalat In 2003, Italian dairy conglomerate Parmalat Finanziaria, S.p.A. and its subsidiaries imploded in an accounting scandal.293 Parmalat insiders, to the purported knowledge of the company’s auditors at the Italian member firm (“DT-Italy”) of Deloitte Touche & Tohmatsu (“DTT”), engaged in a scheme involving misleading transactions and off-shore entities that falsely indicated that Parmalat was financially strong and allowed the company to operate normally even as it was failing.294 Parmalat’s auditors allegedly blessed the company’s financial statements throughout the relevant period, but the scheme eventually

287 Cromer Fin. Ltd. v. Berger, Nos. 00 CIV. 2284(DLC), 00 CIV. 2498(DLC), 2002 U.S. Dist. LEXIS 7782, at *6 (S.D.N.Y. May 2, 2002) (internal quotation marks omitted). 288 Id. at *8–9; Cromer Fin. Ltd., 245 F. Supp. 2d at 555 (internal quotation marks omitted). 289 Cromer Fin. Ltd., 2002 U.S. Dist. LEXIS 7782, at *6–7; Cromer Fin. Ltd., 245 F. Supp. 2d at 555–56. 290 Cromer Fin. Ltd., 245 F. Supp. 2d at 556. 291 Cromer Fin. Ltd., 2002 U.S. Dist. LEXIS 7782, at *15–16. 292 Cromer Fin. Ltd., 245 F. Supp. 2d at 556 (internal quotation mark omitted). 293 In re Parmalat Sec. Litig., 375 F. Supp. 2d 278, 282–83 (S.D.N.Y. 2005). 294 Id. at 283–84. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 967 became unsustainable and the company failed.295 These events resulted in suits by Parmalat investors under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.296 The plaintiffs in these cases sought to hold DTT vicariously liable for the alleged misconduct of DT-Italy in connection with Parmalat’s downfall.297 In response to DTT’s motion to dismiss, the plaintiffs underlined the structural characteristics of DTT’s verein.298 DTT’s website communicated the legal separateness of DTT and its member firms.299 DTT marketed itself and its members under the same global brand name and reported firm revenues on a combined basis.300 DTT had a centralized leadership headed by a global CEO and a global board of directors.301 The member firms followed “professional standards and auditing procedures promulgated by DTT,” cross-checked each other’s work to ensure quality, and cooperated in bidding for audit services.302 Partners and associates of DTT’s member firms also attended DTT meetings and participated in global practice groups.303 In line with the plaintiffs’ strategy in Cromer, the plaintiffs in Parmalat intertwined the verein’s structural features with DT-Italy’s alleged misconduct. Specifically, the plaintiffs alleged that DT-Italy “sought direction and help” from DTT on the specific audit and that DTT helped direct aspects of the alleged fraud, including “directing—or directing the removal of—auditors on the Parmalat audit.”304 At the dismissal stage, the Parmalat court refused to decide whether these activities reflected “simple collaboration or an agency relationship.”305 But even more damaging, the Parmalat court armed future plaintiffs with a weapon to combat website notices declaring the legal separateness of the verein and its member firms. Responding to DTT’s steadfast reliance on its disclaimers, the court issued a

295 Id. 296 Id. at 283. 297 Id. at 289. 298 Id. at 287–88. 299 Id. at 288. 300 Id. 301 Id. at 292–93. 302 Id. at 287. 303 Id. at 287–88. 304 Id. at 294–95. 305 Id. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

968 ST. JOHN’S LAW REVIEW [Vol. 88:917 subsequent opinion holding that “written disclaimers of agency are not controlling, but merely raise an issue of fact with respect to an alleged agent’s authority.”306 The upshot is that, at least at the motion to dismiss stage, Parmalat allows a plaintiff to defeat a disclaimer based on reasonably detailed allegations that “a principal’s actions are ‘sufficiently inconsistent’ with any such disclaimer or limitation of authority.”307 The district court later denied DTT’s summary judgment motion.308 In the Parmalat court’s view, DTT’s overall structure demonstrated control over DT-Italy’s affairs.309 Each member firm agreed in DTT’s governing verein document to follow DTT’s policies, resolutions, and protocols; adhere to DTT’s specific methodologies to conduct audits and the particular software and document procedures to be used in audits; and comply with DTT’s “quality standards, specifications, directions, and procedures.”310 The court noted that DTT controlled member firms’ acceptance and rejection of engagements, prohibited member firms from suing each other, required member firms to accept client work referrals from each other, and played a substantial role in member firms’ legal and risk management affairs, including requirements to purchase specific levels of insurance coverage.311 The Parmalat court’s decision, though, was not exclusively tied to DTT’s structure. The court also focused on evidence supporting DTT’s authority in the specific context of the Parmalat audit.312 The high point was DTT’s binding resolution of a dispute between DT-Italy and member firm DT-Brazil, pursuant to DTT’s professional practice manual, about the disclosure of a transaction on the Parmalat audit report.313 The court viewed this as “evidence that would permit the conclusion that DTT had the power to impose its will on a member firm’s

306 In re Parmalat Sec. Litig., 377 F. Supp. 2d 390, 404 (S.D.N.Y. 2005). 307 Id. 308 In re Parmalat Sec. Litig., 594 F. Supp. 2d 444, 455 (S.D.N.Y. 2009). 309 See id. 310 Id. at 452 (internal quotation marks omitted). 311 Id. at 452–53. 312 Id. at 453. 313 Id. at 454–55. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 969 professional judgment.”314 Once the court allowed the investors to proceed to trial against DTT based on DT-Italy’s alleged misconduct, the parties settled the case.315 In summary, to succeed on an agency theory, a plaintiff must marshal facts suggesting that a verein or a member firm had the power to control the manner in which another member firm delivered the actual services to the client.316 The Cromer and Parmalat courts embraced a fact-intensive, totality of the circumstances approach to determining agency. The verein structure is not itself determinative if negated by the firms’ behavior.317 Likewise, when a verein’s liability disclaimers on its materials or website are contradicted by other facts, the result is a genuine issue of material fact precluding summary judgment for the verein. The end result is that on the right facts a verein may become entangled in onerous litigation and protracted discovery, even if the plaintiffs’ claims lack merit.318 To alleviate this concern, some commentators have urged courts to adopt a bright-line rule allowing international associations to escape vicarious liability as a matter of law when member firms’ agreements contain certain requirements, such as requiring member firms to maintain liability insurance.319 The problem with this solution in some instances lies in the amount of insurance required to be maintained versus the value or worth of the matters that spawn any litigation. If plaintiffs’ alleged losses potentially exceed the liability limits of any single member firm’s

314 Id. 315 See Pamela H. Woldow & Douglas Richardson, Do You Want Swiss With That? Client Perceptions of the Trend Toward Global Law Firms, EDGE INT’L REV., 2012, at 54, 60 (reporting the settlement). 316 See Nuevo Mundo Holdings v. PriceWaterhouseCoopers LLP, No. 03 Civ. 0613(GBD), 2004 U.S. Dist. LEXIS 780, at *13–18 (S.D.N.Y. Jan. 22, 2004). 317 In re Parmalat Sec. Litig., 421 F. Supp. 2d 703, 718 (S.D.N.Y. 2006); Vetula, supra note 21, at 1189. 318 See Daniel Allen & Mindy Haverson, Note, An Alternative Approach to Vicarious Liability for International Accounting Firm Networks, 15 STAN. J.L. BUS. & FIN. 426, 427–28 (2010) (“Even though the Parmalat approach only allows for the possibility of vicarious liability and places the final determination of agency in the hands of a jury, the possibility alone imposes significant costs on international accounting firm networks.”). 319 See id. at 428 (urging courts to “adopt a bright-line rule that allows international coordinating entities whose member firm agreements fulfill certain key criteria, such as requiring member firms to maintain liability insurance, to escape vicarious liability as a matter of law”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

970 ST. JOHN’S LAW REVIEW [Vol. 88:917 insurance coverage, the plaintiffs will be understandably motivated to sue every potential defendant in hopes of being made whole.

2. Alter Ego Alter ego theory offers another potential basis to hold a verein or member firm vicariously liable for the misconduct of another member firm. To explain, courts will disregard corporate form when one entity has been so dominated by another, and its separate identity so disregarded, that it primarily transacted the dominating entity’s business rather than its own and the domination was used to commit a fraud or other injustice that caused the plaintiff’s loss.320 In essence, the plaintiff must prove that the two entities legally are one.321 Early in the Parmalat litigation, the alter ego doctrine was a key element of the plaintiffs’ case. 322 Specifically, the plaintiffs sought to hold Deloitte USA (“DT-USA”) liable as DTT’s alter ego.323 This alter ego theory rested on marketing materials that indicated a close relationship between DT-USA and DTT, and the fact that DT-USA’s top executives also served as the top

320 Gartner v. Snyder, 607 F.2d 582, 586 (2d Cir. 1979) (applying New York law). 321 See Gov’t Dev. Bank ex rel. P.R. v. HoltMarine Terminal, Inc., No. 02-7825, 2011 U.S. Dist. LEXIS 30983, at *39–40 (E.D. Pa. Mar. 24, 2011). Some courts characterize the doctrines of alter ego and piercing the corporate veil as interchangeable or indistinguishable. See, e.g., Balmer v. 1716 Realty LLC, No. 05 CV 839(NG)(MDG), 2008 U.S. Dist. LEXIS 38113, at *12 n.5 (E.D.N.Y. May 9, 2008) (explaining that the standards for imposing liability under an alter ego theory and piercing the corporate veil theory under New York law are “indistinguishable, do not lead to different results, and should be treated as interchangeable” (quoting Wm. Passalacqua Builders, Inc. v. Resnick Developers S., Inc., 933 F.2d 131, 138 (2d Cir. 1991) (internal quotation marks omitted)); In re Steffner, 479 B.R. 746, 762 (Bankr. E.D. Tenn. 2012) (stating that under Tennessee law, “the alter ego analysis is the same as piercing the corporate veil”). But see Drury Dev. Corp. v. Found. Ins. Co., 668 S.E.2d 798, 800 n.1 (S.C. 2008) (noting that “[a]lthough often used interchangeably, the terms ‘alter ego’ and ‘piercing the corporate veil’ are not one and the same”). Other authorities distinguish the two theories on the basis that “alter ego” describes a theory of procedural relief, whereas “piercing the corporate veil” refers to the relief itself. Francis C. Amendola et al., “Alter Ego” Doctrine; Instrumentality in General: Generally, 18 C.J.S. Corporations § 23 (2015); 1 WILLIAM MEADE FLETCHER ET AL., FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS § 41.10, at 132, 136–37 (perm. ed., rev. vol. 2006). 322 In re Parmalat Sec. Litig., 375 F. Supp. 2d 278, 296 (S.D.N.Y. 2005). 323 Id. at 287. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 971 executives of DTT.324 At the motion to dismiss stage, the Parmalat court accepted the plaintiffs’ agency claims, but it firmly rejected their alter ego claims.325 The court agreed that the marketing materials and the existence of overlapping executives favored a finding of domination, but nonetheless held that an alter ego relationship could not be inferred from these alleged facts.326 The court was troubled by the absence of any allegations that suggested “an intermingling of funds or a failure to adhere to corporate formalities.”327 The plaintiffs had to “do more than allege that [DT-USA] had the opportunity to dominate DTT. They [had to] allege that it in fact dominated DTT and used it in a relevant manner.”328 Otherwise, an alter ego relationship could be inferred between almost every parent and subsidiary.329 The same court also rejected an alter ego liability theory between member firms DT-USA and DT-Italy in a parallel lawsuit.330 There, Dr. Enrico Bondi, who served as the Italian equivalent of a bankruptcy trustee, alleged that DT-USA and DT-Italy “commingled their assets, operated with centralized management, shared fees among individual member firms, and applied uniform standards.”331 The court first faulted Bondi’s contention that the member firms commingled funds because the allegation stemmed only from the fact that “the Deloitte entities reported revenue on an aggregate basis and shared in compensation generated by the Parmalat engagement.”332 As the court aptly noted, that was “not what is meant by the ‘commingling of funds.’ ”333 The court also observed that the only alleged overlapping personnel actually existed between DT-USA and DTT, which shared the same chief executive.334 Finally, and most significantly, there were no allegations that the two member firms “had overlapping personnel, failed to maintain

324 Id. at 296. 325 Id. at 296–97. 326 Id. 327 Id. at 296. 328 Id. at 297. 329 Id. 330 In re Parmalat Sec. Litig., 377 F. Supp. 2d 390, 408 (S.D.N.Y. 2005). 331 Id. at 407. 332 Id. at 408. 333 Id. 334 Id. at 407. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

972 ST. JOHN’S LAW REVIEW [Vol. 88:917 corporate records or had inadequate capitalization,” or that one firm in fact controlled the other or used it as an instrumentality for a fraudulent purpose.335 Given these deficiencies, the court concluded that it had no choice but to dismiss the alter ego claim.336 Law firm vereins should not sleep on the viability of an alter ego theory based on the Parmalat plaintiffs’ inability to state alter ego claims. Certainly, advertising a close relationship between constituent firms in marketing materials and an overlap of some top leaders, without more, will not support an alter ego relationship.337 Courts have articulated a variety of factors to assess whether one entity is the alter ego of another for purposes of piercing the corporate veil.338 Common considerations include the entities’ failure to adhere to corporate formalities; inadequate capitalization; overlap in officers, directors, employees, or ownership; intermingling of assets or funds; centralized accounting; the degree of business discretion displayed by the allegedly dominated entity; whether the dealings between the entities are at arm’s length; whether the entities are treated as independent profit centers; whether both entities are engaged in the same business, or even related or supplementary enterprises; a common business name; payment of debts of the dominated entity by other entities in the group; common office space; and insurance under the same policy.339 The inherent difficulty for verein law firms defending against alter ego claims is that “[n]o single factor, either by its presence or absence, is dispositive” to the analysis.340 The alter ego standard is flexible and heavily fact-specific, and often

335 Id. at 407–08. 336 Id. at 408. 337 In re Parmalat Sec. Litig., 375 F. Supp. 2d 278, 296–97 (S.D.N.Y. 2005). 338 Backus v. Watson, 619 So. 2d 1342, 1345 (Ala. 1993); Doughty v. CSX Transp., Inc., 905 P.2d 106, 111 (Kan. 1995); In re New Orleans Train Car Leakage Fire Litig., 690 So. 2d 255, 257 (La. Ct. App. 1997); Hoffmann v. Dandurand, 180 S.W.3d 340, 348 (Tex. App. 2005); Laura Hunter Dietz et al., Corporate Entity: Piercing the Corporate Veil, 18 AM. JUR. 2D Corporations § 47 (2015). 339 Parmalat Sec. Litig., 375 F. Supp. 2d at 291–92; Nuevo Mundo Holdings v. PriceWaterhouseCoopers LLP, No. 03 Civ. 0613(GBD), 2004 U.S. Dist. LEXIS 780, at *18–20 (S.D.N.Y. Jan. 22, 2004); Thompson v. Bernard G. Janowitz Constr. Corp., 301 A.D.2d 588, 588–89, 754 N.Y.S.2d 50, 50–51 (2d Dep’t 2003). 340 A & P Brush Mfg. Corp. v. NLRB, 140 F.3d 216, 219 (2d Cir. 1998); see also J.M. Tanaka Constr., Inc. v. NLRB, 675 F.2d 1029, 1033 (9th Cir. 1982). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 973 presents a close question.341 A verein adopting a cost-sharing approach to avoid the anticipated problems triggered by direct revenue-sharing automatically invites a commingling or pooling of funds challenge.342 The presence of this factor, coupled with a combination of other relevant factors—such as one member firm having a majority of directors on the verein’s board of directors,343 or an undercapitalized member firm—may leave a verein unable to win a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) or a state equivalent. The firm’s defense costs will then escalate regardless of the alter ego claim’s ultimate merits.

3. Joint Venture and Partnership Theories As liability theories of last resort, plaintiffs have attempted to convert vereins into joint ventures or partnerships. The line between joint ventures and partnerships is imprecise.344 The terms are often used interchangeably,345 and the same legal rules govern both joint ventures and partnerships.346 The distinction between the two is that a joint venture is usually arranged for a limited purpose or single transaction, while a partnership is

341 NLRB v. Allcoast Transfer, Inc., 780 F.2d 576, 581 (6th Cir. 1986); NLRB v. Tricor Prods., Inc., 636 F.2d 266, 269 (10th Cir. 1980). 342 See Johnson, supra note 1, at 75 (observing that although member firms are not restricted from directly sharing profits, this course of action “could undermine their status as independent legal entities and potentially expose them to various additional tax liabilities”). 343 But see United States v. Bestfoods, 524 U.S. 51, 69–70 (1998) (stating that the mere fact that there are dual officers and directors making policy decisions and supervising the subsidiary’s activities is not enough, standing alone, to provide a basis for imposing liability on the parent for the wrongs committed by the subsidiary). 344 Weiner v. Fleischman, 816 P.2d 892, 895 (Cal. 1991); see also In re Groff, 898 F.2d 1475, 1477 (10th Cir. 1990) (explaining that the “present trend is to include joint ventures as a recognized type of partnership, rather than a distinct but analogous business entity” (internal quotation marks omitted)). 345 Donovan v. Harrah’s Md. Heights Corp., 289 F.3d 527, 529 n.3 (8th Cir. 2002) (applying Missouri law). 346 See, e.g., Scholastic, Inc. v. Harris, 259 F.3d 73, 84 (2d Cir. 2001) (applying New York law); Transit Mgmt. of Se. La., Inc. v. Grp. Ins. Admin., Inc., 226 F.3d 376, 383 (5th Cir. 2000) (applying Louisiana law); see WILLIAM A. GREGORY, THE LAW OF AGENCY AND PARTNERSHIP § 266, at 445–52 (3d ed. 2001) (discussing the merging of partnership and joint venture law and stating that as a general rule joint ventures are governed by the same rules as partnerships); Adam B. Weissburg, Note, Reviewing the Law on Joint Ventures with an Eye Toward the Future, 63 S. CAL. L. REV. 487, 488 (1990) (stating that courts apply partnership principles to joint ventures); Karl Oakes, Introduction: Employer and Employee, 48A C.J.S. Joint Ventures § 5 (2015). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

974 ST. JOHN’S LAW REVIEW [Vol. 88:917 formed to conduct an ongoing business.347 The general elements of both organizational forms are the sharing of profits and losses; joint control and management of the business; contribution by each party of property, financial resources, effort, skill, or knowledge; and the parties’ intention to be partners or joint venturers.348 The absence of any one element is fatal to a finding of a partnership or joint venture,349 as the holding in Howard v. Klynveld Peat Marwick Goerdeler350 demonstrates. In Howard, the plaintiff sought derivative jurisdiction over the Netherlands-based association Klynveld Peat Marwick Goerdeler (“KPMG”) by imputing the acts of its U.S. member firm under partnership theory.351 Typical of many umbrella organizations, KPMG set standards for its member firms as conditions for using its brand name, collected annual dues from member firms, provided “general assistance upon request to member firms in obtaining professional literature and other information,” distributed marketing materials indicating that KPMG was a “global firm or an international network of member firms,” and did not itself provide any accounting or auditing services in the United States.352 Concluding that this evidence was insufficient to prove a partnership, the court stressed the lack of any affirmative showing that KPMG and its U.S. member firm shared liabilities, profits, losses, property, or business skills, or jointly controlled or managed their general business activities.353 As a final blow to the plaintiff, the court quoted KPMG’s license agreement, which expressly stated that “[n]othing contained herein shall be construed to place the parties in the relationship of agents, partners or joint venturers, and the Member Firm shall have no power to obligate or bind [KPMG] in any manner whatsoever.”354

347 Sadelmi Joint Venture v. Dalton, 5 F.3d 510, 513 (Fed. Cir. 1993); Int’l Raw Materials, Ltd. v. Stauffer Chem. Co., 978 F.2d 1318, 1332 (3d Cir. 1992); In re PCH Assocs., 949 F.2d 585, 599 (2d Cir. 1991); Queen v. Schultz, 888 F. Supp. 2d 145, 159 (D.D.C. 2012). 348 In re Parmalat Sec. Litig., 377 F. Supp. 2d 390, 403 (S.D.N.Y. 2005); Kids Cloz, Inc. v. Officially for Kids, Inc., 320 F. Supp. 2d 164, 171–72 (S.D.N.Y. 2004); Howard v. Klynveld Peat Marwick Goerdeler, 977 F. Supp. 654, 662 (S.D.N.Y. 1997). 349 Kids Cloz, Inc., 320 F. Supp. 2d at 171–72. 350 977 F. Supp. 654. 351 Id. at 662. 352 Id. at 661–62. 353 Id. at 662. 354 Id. at 663 n.5 (alteration in original) (internal quotation marks omitted). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 975

Howard underscores the heavy load that a plaintiff must carry to succeed on either a joint venture or partnership theory against a verein.355 Well-crafted articles of association disclaiming the intent of the parties to form a joint venture or partnership should form the centerpiece of any defense.356 The articles of association may also undercut the joint control or management element.357 The fact that all member firms follow policies and procedures issued by the verein does not give rise to a reasonable inference that any one member firm can direct the policies and procedures of another member firm, let alone that each firm possesses an equal right to dictate the same.358 Joint control and management is also difficult to prove when the plaintiff is primarily focused on an agency theory. By trying to establish that a verein or member firm controlled another member firm, or vice versa, a plaintiff ostensibly destroys any credible argument that the verein and its member firms possessed the right to direct and govern the conduct of each other.359 Relatively speaking, the verein structure is probably the most vulnerable on the profit- and loss-sharing element. At least at the motion to dismiss stage, a verein utilizing cost and expense-sharing techniques to sidestep the aforementioned drawbacks to direct profit-sharing may struggle to convince a court that the plaintiff cannot satisfy this factor.360 In the end, however, joint venture and partnership theories present the least likely bases for imposing vicarious liability on a verein and its member firms.

355 See also Reingold v. Deloitte Haskins & Sells, 599 F. Supp. 1241, 1254 n.10 (S.D.N.Y. 1984) (determining that the fact that defendant firm’s brochures and pamphlets described the firm as a “single cohesive worldwide organization” does not warrant a legal finding of partnership absent clear facts or an agreement establishing a relationship of partnership (internal quotation marks omitted)). 356 See id. 357 Id. at 1254. 358 In re Parmalat Sec. Litig., 377 F. Supp. 2d 390, 407 (S.D.N.Y. 2005). 359 See id. at 401, 407 (finding that the plaintiff’s allegations of control for purposes of establishing a joint venture between DTT, DT-USA, and DT-Italy were inadequate where the complaint was fashioned in such a way to focus on events exhibiting DTT’s right to control its member firms). 360 See id. at 406 (stating that, while the plaintiff’s allegation that each member firm shared in compensation was “vague,” the court could not conclude at the motion to dismiss stage that the plaintiff would be unable to prove facts showing that the “compensation mechanism in fact was a duty to share profits or losses”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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C. Subpoenas of U.S. Member Firms To Obtain Verein and Foreign Member Firm Documents Challenges to the verein structure have also arisen in third- party discovery. In at least two reported decisions, courts addressed disputes involving subpoenas to U.S. verein member firms for documents in the possession of sister firms in foreign jurisdictions.361 In each case, the court recognized the legal separateness of the verein and its individual members for purposes of obtaining discovery under Federal Rule of Civil Procedure 45.362 First, in In re Nortel Networks Corp. Securities Litigation,363 the district court addressed a motion filed by class action plaintiffs to compel Deloitte USA to produce documents in the possession and control of Deloitte Canada, both members of the Deloitte Touche Tohmatsu (“DTT”) verein.364 The plaintiffs argued that Deloitte USA had either the legal right or the practical ability to obtain certain audit materials that Deloitte Canada prepared, but never shared with Deloitte USA.365 Analyzing Deloitte USA’s suggested legal right and practical ability to obtain Deloitte Canada’s documents, the court focused on the verein charter agreement and Deloitte Canada’s practice manual setting forth that firm’s policies for handling, retaining, and disclosing documents.366 The governing provisions in those two documents made it, at best, a discretionary decision on Deloitte Canada’s part whether to provide documents to another verein member firm.367 The evidence further indicated that Deloitte Canada did not make its documents routinely accessible to other verein members.368 Rather, when Deloitte Canada assisted a sister firm with an audit, it shared only as much

361 See generally In re Nortel Networks Corp. Sec. Litig., No. 01 Civ. 1855(RMB)(MHD), 2004 U.S. Dist. LEXIS 19129 (S.D.N.Y. Sept. 21, 2004); United States v. Deloitte & Touche USA LLP, 623 F. Supp. 2d 39 (D.D.C. 2009). 362 See FED. R. CIV. P. 45 (governing the issuance of subpoenas in federal cases). 363 No. 01 Civ. 1855(RMB)(MHD), 2004 U.S. Dist. LEXIS 19129. 364 Id. at *2. 365 Id. at *2–3. Under Rule 45, a non-party may be required to produce for discovery documents which are in the non-party’s “possession, custody, or control.” FED. R. CIV. P. 45(a)(1)(A)(iii). “ ‘Control’ has been construed broadly by the courts as the legal right, authority, or practical ability to obtain the materials sought upon demand.” SEC v. Credit Bancorp, Ltd., 194 F.R.D. 469, 471 (S.D.N.Y. 2000). 366 Nortel Networks Corp. Sec. Litig., 2004 U.S. Dist. LEXIS 19129, at *4. 367 Id. at *4–5. 368 Id. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 977 information with the other firm as was necessary to permit that firm to carry out its assigned tasks on the specific audit.369 Based on Deloitte USA’s inability to demand access to other members’ documents, and the absence of any evidence that Deloitte Canada previously disclosed the desired documents to Deloitte USA, the court squarely rejected the class plaintiffs’ proposal that “member firms all own and control each others’ documents.”370 The court held that the class plaintiffs failed to establish that Deloitte USA possessed either an enforceable legal right, or practical ability, to obtain the documents from Deloitte Canada.371 Deloitte USA again found itself in the middle of a discovery battle in United States v. Deloitte & Touche USA LLP.372 This time, the government moved to compel Deloitte USA to produce documents kept by member firm Deloitte Switzerland.373 Stressing the entities’ close working relationship during a specific audit, the government maintained that Deloitte USA had sufficient control over the documents maintained by Deloitte Switzerland, as well as the practical ability to obtain them.374 The government fared no better than the plaintiffs in Nortel Networks. Rejecting the government’s position, the court held that “[c]lose cooperation on a specific project does not, per se, establish an ability, let alone a legal right or authority . . . to acquire documents maintained solely by a legally distinct entity.”375 Notably, the opinion is silent as to whether Deloitte Switzerland ever shared the targeted documents with Deloitte USA during the particular audit assignment. These two decisions illustrate courts’ acknowledgement that verein member firms are legally separate entities for subpoena purposes. The fact that two firms are members of a verein, or work together on a matter, should not automatically satisfy a subpoenaing party’s burden to show the existence of a firm’s legal right or practical ability to obtain documents from a sister firm. On the other hand, the subpoenaing party’s burden will lighten if: (1) the governing verein documents specifically provide for

369 Id. at *10. 370 Id. at *7. 371 Id. at *11–12. 372 623 F. Supp. 2d 39 (D.D.C. 2009). 373 Id. at 40. 374 Id. at 41. 375 Id. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

978 ST. JOHN’S LAW REVIEW [Vol. 88:917 shared ownership, control, or access to each member’s documents; (2) member firms exchange or share files in the ordinary course of business; or (3) member firms previously shared the subject documents.376 Ordinarily, the only ground for allowing a litigant to pursue discovery from an entity not in possession of documents is that the entity can more readily obtain the documents from the custodian than the discovering party.377 If that is not the case, the litigant must pursue the discovery from the entity with custody and control over the documents.378

D. Integration Leading to One-Firm Liability? For law firms looking to expand globally, the liability protection the verein structure offers is often said to be a prominent feature favoring its selection as an organizational form.379 The verein structure arguably would lose appeal, and law firm combinations might be retarded, if plaintiffs could regularly reach into vereins’ wallets and those of all their members based on the alleged misconduct of a single constituent firm. Indeed, if a tribunal held a U.S. law firm liable for the conduct of another verein member firm practicing in another country under a different set of legal rules, the U.S. firm would be subjected to potentially unlimited liability for conduct that it could know nothing about and could not control. Relying on traditional vicarious liability theories, plaintiffs seeking to hold a verein and its members liable for the acts of a single member have, with a few notable exceptions, fallen short. Courts have also rejected the one-firm “unified company theory” based on bare-bone allegations that a global verein and its member firms act as a worldwide organization.380

376 See generally id.; In re Nortel Networks Corp. Sec. Litig., No. 01 Civ. 1855(RMB)(HMD), 2004 U.S. Dist. LEXIS 19129 (S.D.N.Y. Sept. 21, 2004). 377 Nortel Networks Corp., 2004 U.S. Dist. LEXIS 19129, at *9 n.5. 378 Id. 379 Johnson, supra note 1, at 74. 380 See, e.g., Rocker Mgmt. L.L.C. v. Lernout & Hauspie Speech Prods. N.V., No. 00-5965(JCL), 2005 U.S. Dist. LEXIS 16776, at *22–23 (D.N.J. June 8, 2005) (internal quotation marks omitted) (declining to adopt a “one firm theory” against global accounting giant KPMG (internal quotation marks omitted)); Skidmore Energy, Inc. v. KPMG, No. 3: 03-CV-2138-B, 2004 U.S. Dist. LEXIS 28396, at *10 (N.D. Tex. Dec. 28, 2004) (citing decisions requiring a plaintiff to allege “substantially more than a bare bones ‘unified company theory’ ”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 979

Despite its intended purpose, the verein structure may one day create the opportunity for a plaintiff to proceed on a one firm, unified company theory of liability. Recent literature suggests that many verein law firms are moving toward tightly- orchestrated, comprehensive global practices.381 If a verein holds itself out to the world as one firm with lawyers in offices worldwide, and in reality is a fully-integrated firm, a court might recognize a collective liability theory and thereby jeopardize the concept of a verein and its member firms as distinct legal entities.382 In other words, in some cases, a coordinated and integrated international legal practice might be too coordinated and integrated. Recently, in an article focused on vereins, the American Lawyer magazine formulated thirteen criteria to assess whether global law firms are well-integrated: (1) a shared global name brand in all jurisdictions that is also used on a common website and for all marketing purposes; (2) a global management body responsible for devising and executing firm-wide strategies; (3) a single set of global executive officers who report to the global management body; (4) a global practice structure with single heads for each global group and which reports to the global management body; (5) a centralized global profit pool without regional profit centers; (6) a scheme whereby all equity partners share the cost of firm investments, such as new offices or new technology, regardless of where the investment is made; (7) a common partner compensation system that applies the same measures to all equity partners and is controlled by a single global management body; (8) a partner compensation system that rewards equity partners for sharing work and clients between offices; (9) a united approach to lateral hires, promotions to partner, and partner performance review shared across all officers and managed at a global level; (10) all equity partners possess equal voting rights on all firm matters; (11) a single conflict-checking system used by all offices and for all matters globally without exception, and with conflicts of interest managed at a global level; (12) all offices use common

381 Johnson, supra note 1, at 76–77. 382 See Reeser, supra note 5 (questioning how far a law firm can “push the integration of branding and sharing operational economies as well as shared objectives, before the limits of association are tested and perhaps the liability segregation is jeopardized”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

980 ST. JOHN’S LAW REVIEW [Vol. 88:917 information technology and support systems and lack internal firewalls between offices; and (13) a global key-client management program utilized by all offices.383 The American Lawyer surveyed several law firm vereins to compare their practices and procedures against this list.384 The firms that responded to the survey all said they had twelve of these thirteen structures in place.385 The lone exception was the presence of a unified profit pool, which is not surprising given the verein concept overall.386 Without question, financial integration through the sharing of direct profits between a verein and its member firms presents the clearest path to potential collective liability. But at the same time, it is currently unknown whether verein firms replicating the existence of a single profit pool through cost-sharing methods would fare better in court. When defending a plaintiff’s challenge to the legal separateness of a verein and its member firms, reliance on a virtual single profit pool rather than an actual one may represent an exercise in form over substance. Furthermore, and consistent with our prior warning that at some point a coordinated and integrated international legal practice might become too coordinated and integrated for law firms organized as vereins to avoid alleged collective liability, at least at the motion to dismiss stage, some combination of the other American Lawyer factors may be sufficient to convince a court to permit a plaintiff to pursue a collective liability theory. Beyond the factors on the American Lawyer’s checklist, one might expect a global verein law firm to foster integration through other means.387 One possibility is secondments between

383 Johnson, supra note 1, at 76–77. 384 Id. at 74. 385 Id. at 74, 76–77. 386 Id. at 74. 387 Some verein law firms, such as Squire Sanders before it became Squire Patton Boggs, reportedly have procured a “global professional liability insurance policy.” Id. at 79. A global insurance policy is yet another device that may unintentionally suggest the existence of a single entity for liability purposes. See, e.g., Thompson v. Bernard G. Janowitz Constr. Corp., 301 A.D.2d 588, 588, 754 N.Y.S.2d 50, 50 (2d Dep’t 2003) (concluding that workers’ compensation and general liability coverage issued under the same policies, among other relevant factors, supported the existence of a corporate “alter ego” relationship); Carty v. E. 175th St. Hous. Dev. Fund Corp., No. 307553/08, 32 Misc. 3d 1217(A), 2010 N.Y. Misc. LEXIS 6652, at *6–7 (Sup. Ct. Bronx Ctny. Mar. 11, 2010), aff’d, 83 A.D.3d 529, 921 N.Y.S.2d 237 (1st Dep’t 2011) (holding to the same effect); Simon v. PABR Assoc. LLC, No. 3108/04, 18 Misc. 3d 1117(A), 2008 N.Y. Misc. LEXIS 120, at *2 (Sup. Ct. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 981 member firms. Secondments ordinarily entail loaning individual lawyers to a host organization to gain experience, absorb the host’s culture and work habits, and cement the bond between the firm and the organization.388 It is fair to ask, however, whether secondments should support collective liability or whether they weigh against it. On the one hand, secondments support integration between the firms and thus collective liability. On the other hand, the mere need for secondments suggests separateness. The seconded lawyer will at some point return to the lawyer’s own law firm.389 Law firms regularly second lawyers to institutional clients and vice versa, yet no court would ever suggest that the client and law firm are one as a result. In the end, the effect of a secondment on a court’s analysis of law firm collective liability will depend on the nature of the particular arrangement and the facts of the case.

N.Y. Cnty. Jan. 14, 2008), aff’d, 61 A.D.3d 663, 877 N.Y.S.2d 356 (2d Dep’t 2009) (holding to the same effect). When focusing on insurance, the inclusion of a non- cumulation or similar “other insurance” clause in a policy limiting liability for an occurrence to a maximum aggregate amount, or otherwise providing that individual firms’ policies are separate, is evidence that the firms are separate entities for liability purposes, but it is not necessarily dispositive. See generally Hercules Inc. v. Aetna Cas. & Sur. Co., Nos. 92C-10-105, 90C-FE-195-1-CV, 1998 Del. Super. LEXIS 459, at *5 (Del. Super. Ct. Sept. 30, 1998) (stating that “a non-cumulation clause is an insurance provision stating that if the insured is entitled to recover under the policy, the insured may not recover more than once for the loss”); Spaulding Composites Co. v. Aetna Cas. & Sur. Co., 819 A.2d 410, 420 (N.J. 2003) (contrasting “other insurance” and non-cumulation clauses, and explaining that “a non- cumulation clause governs successive policies and prevents the accretion of limits when the policies have been triggered by a single occurrence”). In fact, the presence of a global insurance policy, standing alone, should not support collective liability; rather, it is at most one factor for a court to consider in deciding whether law firms within a verein should be treated separately or singularly. In addition, individual law firms within a verein may purchase separate policies specific to the jurisdictions in which they practice. In some instances, the law of a jurisdiction may require a law firm doing business there to purchase an insurance policy from an insurer admitted to do business in the jurisdiction. The presence of such firm-specific local compulsory coverage should be held to constitute evidence that the firms within the verein should not be treated as a single entity or otherwise be aggregated for liability purposes. 388 See Ass’n of the Bar of the City of N.Y., NYC Eth. Op. 2007-2, 2007 WL 758154, at *1 (2007) [hereinafter NYC Eth. Op. 2007-2] (discussing the secondment of lawyers by law firms to host organizations, such as clients, government agencies, or charities); Comm. on Prof’l and Judicial Ethics, Formal Opinion 2007-02: Secondment of Law Firm Attorneys: Association with a Law Firm, THE RECORD, 2007, at 155, 156 (discussing some benefits of law firm secondments). 389 See NYC Eth. Op. 2007-2, supra note 388, at *1 (noting that a seconded lawyer serves the host organization “temporarily”). FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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ABA Formal Opinion 94-388 may further cloud the picture. ABA Formal Opinion 94-388 cautions that “the use of the same name by all the firms in a network will effectively represent that they are all offices of one and the same firm.”390 In other words, if a law firm “licenses its name to other firms, all firms so licensed must, in fact, operate as a single firm and be treated as part of a single firm for all purposes under the Model Rules.”391 Although one entity status under the Model Rules is distinct from one entity status as a liability mechanism, the ABA position injects another variable to the equation. The chances of a plaintiff tagging a verein and its members on a collective liability theory inevitably increases with each checkmark placed next to a standard criterion for law firm integration.392 In Ramnarine v. Memorial Center for Cancer and Allied Diseases,393 the court held that evidence establishing that four entities operated as one by sharing corporate officers, a common budget, a single insurance policy, a single human resources department, and other essential aspects of their operations, demonstrated that even entities with separate certificates of incorporation may be alter egos.394 Ramnarine arose in a different context, but it is easy to extend its basic logic to a verein and its member firms. Global law firms that achieve business integration through market branding, the adoption of global standards for the delivery of legal services, the internationalization of practice groups and client service teams, firm-wide technology and accounting systems, and the establishment of a single intake and conflicts system, for example, potentially lay the foundation for collective liability. Firms that financially integrate and treat themselves as one economic unit through a single profit pool, shared partner

390 ABA Formal Op. 94-388, supra note 49, at 7; see also ABA Formal Op. 84- 351, supra note 50, at 11 (“When a firm elects to affiliate or associate another with it and to communicate that fact to the public and clients, there is no practical distinction between the relationship of affiliates under that arrangement and the relationship of separate offices in a law firm.”). 391 ABA Formal Op. 94-388, supra note 49, at *1. 392 See also Vetula, supra note 21, at 1189 (asserting that law firms favoring the verein organizational form should “carefully consider how the policies and procedures they are considering adopting would appear both to the courts and to the ABA to ensure that the limited liability that they desire vis-à-vis member firms and the Swiss verein would be found to exist”). 393 281 A.D.2d 218, 722 N.Y.S.2d 493 (1st Dep’t 2001). 394 Id. at 218–19, 722 N.Y.S.2d at 494–95. FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

2014] LIABILITY ASPECTS OF VEREINS 983 compensation measures, or a single global insurance policy, creep even closer to the edge. If a verein behaves as one firm, then a court may treat it as one firm for all purposes—including professional liability. For some law firms, the threat of unitary liability may be of relatively little concern. If a firm organized as a verein has selected that structure principally for its flexibility and the ability to avoid the practical difficulties that can accompany mergers or other combinations—rather than the capability of isolating sister firms’ liabilities—the cultural, financial, and client relations benefits that flow from thorough integration may outweigh liability concerns. It is surely true that among the law firms that have gone the verein route, some have engaged in just such cost-benefit analysis and concluded that the benefits of meaningful integration outweigh related professional liability risks because they believe those risks are minimal, manageable, or insurable. That is a perfectly reasonable business decision that the leaders of any law firm are entitled to make.

CONCLUSION Driven by the ever-increasing globalization of legal services and the practical hurdles frequently associated with traditional mergers, large law firms have identified the Swiss verein as a preferred organizational structure for international expansion. The Swiss verein offers compatible firms the flexibility to structure themselves as a collection of independent firms operating under one brand, a cohesive unit functioning as one fully integrated global enterprise, or something in between. Vereins may present law firms with opportunities for improved marketing and enhanced business development, elevated and expanded client relationships, diminished liability exposure, and, presumably, increased profitability. At the same time, firms must also appreciate potential professional responsibility and liability ramifications that may flow from organizing as Swiss vereins. Courts generally resolve uncertainties about lawyers’ responsibilities under the Model Rules of Professional Conduct in the client’s favor. With respect to civil liability, verein member firms can take solace in the fact that past attempts by plaintiffs to reach the pocketbooks of global accounting firms organized as vereins have enjoyed limited success. But as demonstrated by the Cromer and FINAL_RICHMOND&CORBIN 5/29/2015 11:34 AM

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Parmalat cases, vicarious liability theories are not always amenable to early dismissal, forcing vereins and their member firms to incur enormous expense to defend or even settle related litigation, regardless of the merits of the litigation. Law firms operating as vereins may also inadvertently expose themselves to a viable one-firm theory of collective liability depending on how far they advance their integration efforts. For some law firms, of course, the threat of unitary liability may be of relatively little concern. If a firm organized as a verein has selected that structure principally for its flexibility and the ability to avoid the practical difficulties often associated with mergers or other combinations rather than the capability of isolating affiliates’ liabilities, the many perceived benefits that flow from integration may outweigh liability concerns. It is surely true that among the law firm vereins, some have engaged in precisely such cost- benefit analysis and concluded that the benefits of meaningful integration outweigh related professional liability risks. That is the sort of reasonable business decision that law firm leaders are entitled to make. There is much we do not yet know about the efficiency or durability of the Swiss verein as an organizational form for law firms. Some law firms that have cast themselves as vereins probably are still developing as organizations. But whatever the uncertainties that accompany law firm vereins or the potential for their evolution over time, the Swiss verein is now an important mechanism for law firms eager to expand their global practices. It will undoubtedly remain one for the foreseeable future. Meyer, Janis 11/19/2015 For Educational Use Only

In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114

estate to be employed to represent estate under KeyCite Yellow Flag - Negative Treatment Bankruptcy Code. 11 U.S.C.A. § 327(a). Distinguished by In re Washington Mutual, Inc., Bankr.D.Del., January 7, 2011 431 B.R. 363 7 Cases that cite this headnote United States Bankruptcy Court, S.D. New York.

In re PROJECT ORANGE ASSOCIATES, LLC, Debtor. [2] Attorney and Client Bankruptcy No. 10–12307(MG). | June 23, 2010. Prohibition on adverse interests under conflicts of interests test for estate’s employment of professionals includes economic and personal Synopsis interests of an attorney. 11 U.S.C.A. § 327(a). Background: United States Trustee (UST) objected to Chapter 11 debtor’s retention of law firm as general bankruptcy counsel, based on firm’s representation in 4 Cases that cite this headnote unrelated matters of debtor’s largest unsecured creditor and essential supplier.

[3] Bankruptcy Holdings: The Bankruptcy Court, Martin Glenn, J., held Employment of Professional Persons or that: Debtor’s Officers

[1] debtor’s execution of stipulation with creditor did not Conflicts of interests test for estate’s resolve conflict of interest between creditor and law firm; employment of professionals is not

[2] retrospective; courts only examine present creditor’s conflicts waiver did not permit law firm’s interests when determining whether a party has employment under statute; and an adverse interest. 11 U.S.C.A. § 327(a).

[3] debtor’s use of conflicts counsel did not allow debtor’s employment of firm as general bankruptcy counsel. 3 Cases that cite this headnote

Objection sustained.

[4] Bankruptcy Employment of Professional Persons or Debtor’s Officers West Headnotes (13) Generally, the adverse interest test for estate’s employment of professionals is objective and [1] Bankruptcy excludes any interest or relationship, however Employment of Professional Persons or slight, that would even faintly color the Debtor’s Officers independence and impartial attitude required by the Bankruptcy Code and rules. 11 U.S.C.A. § Professionals must be both disinterested and not 327(a). hold or represent any interest adverse to the © 2015 Thomson Reuters. No claim to original U.S. Government Works. 1

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2 Cases that cite this headnote [8] Bankruptcy Employment of Professional Persons or Debtor’s Officers

Bankruptcy courts lack the power to authorize [5] Bankruptcy estate’s employment of a professional who has a Employment of Professional Persons or conflict of interest. 11 U.S.C.A. § 327. Debtor’s Officers

Courts determine existence of adverse interest Cases that cite this headnote precluding estate’s employment of professional on a case-by-case basis, examining the specific facts in a case. 11 U.S.C.A. § 327(a).

[9] Bankruptcy 1 Cases that cite this headnote Employment of Professional Persons or Debtor’s Officers

Bankruptcy Code requires disqualification of a professional from employment by estate [6] Bankruptcy following an objection from United States Employment of Professional Persons or Trustee (UST) or a creditor where there is an Debtor’s Officers actual conflict of interest. 11 U.S.C.A. § 327(c).

Bankruptcy courts may consider the interests of the estate and the debtor’s creditors, accounting Cases that cite this headnote for the expeditious resolution of a case, when analyzing a retention motion. 11 U.S.C.A. § 327(a).

[10] Bankruptcy Cases that cite this headnote Employment of Professional Persons or Debtor’s Officers

Bankruptcy statute governing estate’s employment of professionals prevents [7] Bankruptcy disqualification based solely on professional’s Employment of Professional Persons or prior representation of or employment by a Debtor’s Officers creditor, but does not obviate the essential requirement that a professional not have an Courts must take the requirements of statute interest adverse to estate. 11 U.S.C.A. § 327(c). governing estate’s employment of professionals seriously, as they ensure that a professional fulfills his duties in accordance with his Cases that cite this headnote fiduciary duties to the estate. 11 U.S.C.A. § 327.

Cases that cite this headnote [11] Attorney and Client Bankruptcy

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Chapter 11 debtor’s execution of stipulation [13] Attorney and Client with creditor did not resolve disabling conflict Bankruptcy of interest between creditor and law firm that debtor sought to retain as its general bankruptcy Chapter 11 debtor’s use of conflicts counsel did counsel where stipulation, by its terms, was not not allow debtor’s employment, as general effective without court approval and adversity bankruptcy counsel, of law firm that had conflict would still remain even if court approved of interest with creditor that was both debtor’s stipulation, given requirement under parties’ largest creditor and central to debtor’s settlement that creditor repair turbine reorganization, which hinged upon creditor’s components before installing turbines at debtor’s return and installation of turbines at debtor’s steam and electricity cogeneration facility, and steam and electricity cogeneration facility; given given debtor’s highly contentious state-court creditor’s strong interests and active stance in litigation with its landlord; debtor and creditor case, addressing issues with creditor would take remained completely adverse until repair and considerable time and skill on range of matters. installation of turbines was complete, and 11 U.S.C.A. § 327(a). landlord’s success in establishing prepetition lease termination would leave debtor without assets to pay creditor. 11 U.S.C.A. § 327(a); 2 Cases that cite this headnote Fed.Rules Bankr.Proc.Rule 9019, 11 U.S.C.A.

1 Cases that cite this headnote

Attorneys and Law Firms

*365 Diana G. Adams, by Elisabetta G. Gasparini, Esq., [12] Attorney and Client New York, NY, United States Trustee for Region 2. Bankruptcy DLA Piper LLP (US), by Timothy W. Walsh, Esq., Conflicts waiver obtained from creditor by law Christopher R. Thompson, Esq., New York, NY, firm that Chapter 11 debtor sought to retain as Proposed Attorneys for the Debtor and Debtor in general bankruptcy counsel did not, by Possession. contractually permitting firm to represent debtor on some matters adverse to creditor, trump statutory requirements governing estate’s employment of professionals and severely limited firm’s ability to act in debtor’s best MEMORANDUM OPINION AND ORDER interests with regard to creditor, by barring law SUSTAINING THE UNITED STATES TRUSTEE’S firm from bringing action and threatening to OBJECTION TO DEBTOR’S APPLICATION FOR bring action against creditor or its affiliates for AN ORDER AUTHORIZING THE EMPLOYMENT monetary damages or equitable relief, even AND RETENTION OF DLA PIPER LLP (US) AS within context of negotiations, and therefore COUNSEL NUNC PRO TUNC TO THE PETITION waiver did not permit firm’s employment under DATE statute. 11 U.S.C.A. § 327(a).

MARTIN GLENN, Bankruptcy Judge. 2 Cases that cite this headnote This opinion addresses an important issue whether the use of conflicts counsel to deal with the debtor’s largest unsecured creditor and essential supplier is sufficient to permit court approval under section 327(a) of the

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Bankruptcy Code of a debtor’s choice for general University (where the cogeneration facility is located bankruptcy counsel that also represents that creditor in pursuant to a lease and other agreements), and unrelated matters. Project Orange Associates, LLC maintenance issues with two electric turbines (the (“Project Orange” or “Debtor”) seeks to retain DLA Piper “Turbines”) manufactured and, until recently, maintained LLP (US) (“DLA Piper”) as general bankruptcy counsel by GE. (See id. at ¶¶ 12–16.) The Debtor earns money by, pursuant to section 327(a) of the Bankruptcy Code. The inter alia, providing electrical services to the New York United States Trustee (“U.S. Trustee”) objects, arguing Independent System Operator (“NYISO”), an entity that DLA Piper’s representation of certain General charged with overseeing New York’s electricity markets. Electric (“GE”) entities, as well as inadequate disclosure NYISO makes payments to the Debtor for (i) producing about DLA Piper’s relationship with other creditors, and supplying electricity to NYISO (“Energy Payments”); requires the Court to deny DLA Piper’s employment (ii) being available to produce electricity, if required application. GE is the Debtor’s largest *366 unsecured (“Capacity Payments”); (iii) selling “Vars” or so-called creditor. Perhaps more importantly, the Debtor has “reactive power”; and (iv) permitting NYISO to control acknowledged that resolving all past and future issues the load levels of the Debtor’s generators while they are with GE—the supplier of gas turbines to Debtor’s operational (“Regulation Payments”). The Debtor states operations—is essential to the Debtor’s successful that it is not generating sufficient income because of reorganization. DLA Piper argues that it does not have a maintenance issues with its GE gas turbines.1 (Id. at ¶ 24.) disqualifying conflict with GE, and that, in any event, the Debtor’s use of conflicts counsel to deal with certain aspects of the Debtor’s relationship with GE, is sufficient to avoid DLA Piper’s conflict and to permit its retention A. The Debtor’s History with GE as general bankruptcy counsel. For the following reasons, In 1992, Project Orange and GE entered into a the Court agrees with the U.S. Trustee and denies DLA maintenance agreement (the “Maintenance Agreement”) Piper’s employment application. for long term maintenance, including necessary repairs to the Turbines. The Debtor states that, starting *367 in 2004, the Turbines began suffering from failures that impacted Project Orange’s energy production. (Id. at ¶ 20.) The problems continued throughout 2004, and I. BACKGROUND according to the Debtor, in April 2005 one of the Turbines suffered a “catastrophic failure.” Following this The Debtor filed for chapter 11 protection in this Court on event, GE and Project Orange amended the Maintenance April 29, 2010. On May 20, 2010, DLA Piper filed its Agreement. (See id. at ¶ 21.) employment application (the “DLA Employment Application”). (ECF # 58.) The U.S. Trustee filed its These contractual changes did not resolve the Debtor’s objection on May 27, 2010 (the “U.S. Trustee’s Obj.”). issues with the Turbines. The Turbines allegedly (ECF # 68.) The Court heard argument on the DLA continued to breakdown, and in 2008 one Turbine failed Employment Application on June 7, 2010. Following the less than two days after being repaired by GE. GE hearing, DLA Piper requested permission to file a removed the Turbine for repairs. Shortly afterwards the supplemental brief in support of the DLA Employment remaining Turbine failed, leaving Project Orange with no Application. (ECF # 95.) The Court granted the request, operational turbines and prompting GE to install a permitting both DLA Piper and the U.S. Trustee to file temporary loaned turbine. The Debtor, however, claims supplemental briefs. (ECF # 96.) that it cannot operate this loaned turbine for extended periods of time due to faulty maintenance performed by The Debtor has retained ownership and continues to GE. This negatively affects the Energy Payments the operate a steam and electricity cogeneration facility (the Debtor receives from NYISO for providing electricity as “Facility”) in Syracuse, New York. (Affidavit of Adam well as the Regulation Payments the Debtor receives in Victor Pursuant to Rule 1007–2 of the Local Bankruptcy consideration for allowing NYISO to control load levels Rules (“Victor Local Rule 1007–2 Aff.”) at ¶¶ 5–7 (ECF of its Turbines when operating. The Debtor also maintains # 4).) The Debtor attributes its current financial that operating the replacement turbine at capacity would predicament to the deregulation of the New York State result in its failure, stripping the Debtor of the Capacity energy market, ongoing litigation with Syracuse Payments NYISO makes in consideration of the Debtor’s © 2015 Thomson Reuters. No claim to original U.S. Government Works. 4

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In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114 availability to produce electricity, if necessary. (Id. at ¶ Piper’s Restructuring Practice Group. The first Walsh 22.) Declaration (the “Initial Walsh Declaration”) reveals that Walsh and his partners represent certain GE affiliates in The Debtor’s issues with GE eventually led to matters unrelated to this bankruptcy. (Initial Walsh disagreements over invoices. On December 17, 2008, GE Declaration at ¶ 8 (ECF # 58).) Walsh maintains that the commenced an arbitration against Project Orange to “vast majority” of work DLA Piper completes for GE recover approximately $2.5 million in outstanding fees entities is for General Electric Healthcare (“GEHC”). (Id.) and $5,249,604.93 plus interest for services rendered and The Initial Walsh Declaration also discloses that the GE termination of the Maintenance Agreement (the affiliate which is a creditor in this case, General Electric “Arbitration”). On April 11, 2010, the arbitrator International, Inc. (“GEII”), is not, and never has been, a concluded that GE properly terminated the Maintenance client of DLA Piper, but instead is a client of DLA Piper Agreement and awarded GE $4,113,017.35 plus interest. International, LLP (“DLA Piper International”), a The Debtor’s schedules reflect a claim in this amount in separate affiliate of DLA Piper. (Id.) favor of GE. (Id. at ¶ 25.) GE filed a motion to have the arbitration award confirmed in New York State Supreme Walsh’s second declaration (the “Supplemental Walsh Court. Briefing in that matter is stayed as a result of the Declaration”) further explains the relationship between automatic bankruptcy stay. GE also filed a motion DLA Piper and DLA Piper International. (ECF # 84.) requesting relief from the automatic stay to permit the DLA Piper and DLA Piper International are the two state court to confirm the arbitration award. (See U.S. components of DLA Piper Global, a Swiss verein entity.2 Trustee’s Obj. at ¶¶ 16–17.) The Supplemental Walsh Declaration claims that GEII is technically a client of Advokafirma DLA Piper Norway Despite these issues, the Debtor now maintains that “all DA, which is a limited partner in DLA Piper major litigation with GE has been substantially resolved.” International. Walsh argues that as a result DLA Piper (DLA Piper’s Resp. to U.S. Trustee’s Obj. at 1 (ECF # receives no financial benefit from the work DLA Piper 84).) Indeed, the Debtor has presented a settlement International and its components complete for GEII. stipulation (the “Stipulation”) between itself and GE to (Supplemental Walsh Declaration at ¶¶ 2–3.) the Court for approval. (ECF # 118.) The Stipulation recites that GE asserts that, at a minimum, $1,227,152.99 The Walsh Declarations also state that DLA Piper has of the Arbitration award represents amounts invoiced for represented, and may currently represent, numerous other services in repairing one of the Turbines and is secured by potential parties in interest including Syracuse University, a possessory artisan’s lien on the Turbine and spare parts. AECOM, National Grid, JP Morgan Chase, U.S. Bank, (Stipulation at ¶ E.) The terms of the Stipulation call for City of Syracuse, Chartis National Union Fire Insurance certain payments to GE, funded by the Debtor’s various Company of Pittsburgh, PA., and BP Energy Company insurers, to satisfy this lien and pay for the installation of (together with GEII, the “Conflict Parties”). (Initial Walsh certain Turbine components, a gas generator and Declaration at ¶ 8; Schedule 2 to Initial Walsh accompanying spare parts. (Stipulation at ¶ 3.) These Declaration.) Walsh’s Supplemental Declaration clarifies payments, however, do not eliminate GE’s entire claim that DLA Piper may be adverse to Syracuse University. against Project Orange, only the secured portion. (Supplemental Walsh Declaration at ¶¶ 2–3.) Walsh (Stipulation at ¶ 3(c).) After receipt of these amounts, GE further reveals that the Conflict Parties, with the would deliver the gas generator and the spare parts to the exception of GE, represent less than 1% of the revenues Debtor. GE would then install these components after the generated by DLA Piper in 2008, 2009, and to date in completion of repairs and installation of another key 2010. (Initial Walsh Declaration at ¶ 8 n. 5.) Walsh also Turbine component, the power turbine. notes, however, that DLA Piper’s work for GE entities constituted .92% of revenue in 2008, 1.6% of revenue in 2009, and has accounted for .90% of revenues to date in 2010. (Id. n. 6.) B. DLA Piper’s Relationship with GE and other Potential Parties in Interest Walsh’s third declaration (the “Second Supplemental The Debtor’s application to employ DLA Piper is Walsh Declaration”), filed after the June 7, 2010 hearing supported with three declarations *368 from Timothy W. on this motion, clarifies that DLA Piper would not sue Walsh (“Walsh”), a partner and Vice Chair of DLA certain Conflict Parties, specifically AECOM, Chartis © 2015 Thomson Reuters. No claim to original U.S. Government Works. 5

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National Union Fire Insurance Company of Pittsburgh, against GE.... PA., BP Energy Company, and GEII. (Second Supplemental Walsh Declaration at Ex. A. (ECF # 101).) (Conflict Waiver at 1–2.) Lastly, the Conflict Waiver indicates that DLA Piper may take positions regarding The DLA Employment Application acknowledges that relief from the automatic stay, use of cash collateral, DIP DLA Piper’s relationship with GE gives rise to a conflict. financing, or confirmation of a plan that differ from that (DLA Employment Application at ¶ 19.) At the June 7, of GE “except to the extent that any such position taken 2010 hearing on the DLA Employment Application, DLA by [the Debtor] may not be more inconsistent with any Piper affirmed its conflict with GE. (June 7, 2010 Tr. provision of any intercreditor agreement.” (Conflict 55:23–56:5 (“The Court:.... Don’t you agree you have a Waiver at 2.) DLA Piper claims that no such intercreditor conflict [with GE]? Mr. Walsh: I do.”).) Following the agreement exists. (DLA Piper’s Resp. to U.S. Trustee’s June 7, 2010 hearing, however, DLA Piper retreated from Obj. at ¶ 7.) its position, and now argues that it has no *369 conflict of interest in representing the Debtor. (Supplement to Application of Debtor for Order Authorizing Employment and Retention of DLA Piper LLP (US) (“DLA Supplemental Brief”) at 2 (ECF # 102).) Notably, DLA II. DISCUSSION Piper does not maintain that it doesn’t have a conflict with GE. In fact, the Debtor has retained Golenbock Eisenman Assor Bell & Peskoe LLP (“Golenbock”) to handle all A. Retention of Professionals under Section 327(a) of matters for which DLA Piper cannot adequately represent the Bankruptcy Code [1] Section 327(a) of the Bankruptcy Code permits a the Debtor, including issues regarding GEII. (See Order debtor in possession to employ professionals to represent Granting Application to Employ Golenbock as Conflicts the estate during bankruptcy with court approval. In re Counsel, ECF # 106.) WorldCom, Inc., 311 B.R. 151, 163 Despite DLA Piper’s current position, its relationship (Bankr.S.D.N.Y.2004). The statute reads: with GE caused it sufficient concern that it obtained a conflict waiver from GE to shield it from allegations of Except as otherwise provided in ethical wrongdoing (the “Conflict Waiver”). (See U.S. this section, the trustee, with the Trustee’s Objection at ¶¶ 30–31.) A copy of the Conflict court’s approval, may employ one Waiver is attached as an Exhibit to the Supplemental or more attorneys, accountants, Walsh Declaration. (See ECF # 84.) The Conflict Waiver appraisers, auctioneers, or other is contained in a letter from DLA Piper, not DLA Piper professional persons, that do not International, and is addressed to GEII, care of senior hold or represent an interest general counsel for GE. The Conflict Waiver states that adverse to the estate, and that are DLA Piper “will not bring any litigation or threaten any disinterested persons, to represent litigation for the recovery of monetary damages from GE or assist the trustee in carrying out or its affiliates or for any equitable relief against GE or the trustee’s duties under this title. any of its affiliates.” (Conflict Waiver at 1.) The Conflict Waiver, however, would permit DLA Piper to 11 U.S.C. § 327(a). Professionals must be both disinterested and not hold or represent any interest (a) negotiate with GE on all adverse to the estate to be employed under section 327(a). matters, and (b) review loan, lease Vouzianas v. Ready & Pontisakos (In re Vouzianas), 259 or other documents relating to the F.3d 103, 107 (2d Cir.2001) (citing Bank Brussels prepetition credit facilities or lease; Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610, provided, however that [the 621 (2d Cir.1999)). Debtor] has engaged special counsel of its own choosing ... with The structure of the Bankruptcy Code distills these dual respect to the potential of bringing requirements into a single *370 test for analysis of a or prosecuting any such adversary conflict of interest. Bankruptcy Code § 101(14) defines a proceeding or contested matter “disinterested person.” In re WorldCom, 311 B.R. at 164. © 2015 Thomson Reuters. No claim to original U.S. Government Works. 6

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Under section 101(14)(C) a disinterested person is one however slight, that would even faintly color the who “does not have an interest materially adverse to the independence and impartial attitude required by the Code interest of the estate or of any class of creditors” for any and Bankruptcy Rules.” In re Granite Partners, 219 B.R. reason. 11 U.S.C. § 101(14)(C). This definition overlaps at 33; see also In re Angelika Films 57th, 227 B.R. 29, 38 with the adverse interest requirement of section 327(a), (Bankr.S.D.N.Y.1998) (“The determination of adverse creating a single test for courts to employ when interest is objective and is concerned with the appearance examining conflicts of interest. Hogil Pharm. Corp. v. of impropriety.”) Sapir (In re Innomed Labs, LLC), No. 07 Civ. 4778(WCC), 2008 WL 276490, at *2 (S.D.N.Y. Jan.29, [5] [6] [7] [8] Courts determine whether an adverse interest 2008) (citing In re WorldCom, 311 B.R. at 164). A exists on a case-by-case basis, examining the specific professional must not “hold or represent an interest facts in a case. In re AroChem Corp., 176 F.3d at 623 adverse to the estate.” See In re AroChem Corp., 176 F.3d (“Whether an adverse interest exists is best determined on at 622–23 (observing that the “adverse interest” language a case-by-case basis.”); In re Angelika Films 57th, 227 appears in section 327(a) and in the definitions in section B.R. at 39 (stating that “the determination of counsel’s 101 regarding disinterested persons and articulating the disinterestedness is a fact-specific inquiry”). Bankruptcy relevant test as whether an entity “hold[s] or represent[s] courts may consider the interests of the estate and the an interest adverse to the estate”); In re Innomed Labs, debtor’s creditors, accounting for the expeditious LLC, 2008 WL 276490, at *2 (same). See also In re resolution of a case when analyzing a retention order. In Granite Partners, L.P., 219 B.R. 22, 33 re Vouzianas, 259 F.3d at 107 (quoting In re AroChem, (Bankr.S.D.N.Y.1998) (observing that “the two prongs of 176 F.3d at 621). Courts, however, must take the section 327(a) are duplicative and form a single test to requirements of section 327 seriously, as they ensure that judge conflicts of interest”) (internal citation omitted). a professional fulfills his duties in accordance with his fiduciary duties to the estate. In re Leslie Fay *371 Cos., [2] [3] [4] The Second Circuit has defined “hold or represent 175 B.R. 525, 532 (Bankr.S.D.N.Y.1994) (“The an adverse interest” as requirements of section 327 cannot be taken lightly, for they ‘serve the important policy of ensuring that all (1) to possess or assert any professionals appointed pursuant to [the section] tender economic interest that would tend undivided loyalty and provide untainted advice and to lessen the value of the assistance in furtherance of their fiduciary bankruptcy estate or that would responsibilities.’ ”) (quoting Rome v. Braunstein, 19 F.3d create either an actual or potential 54, 58 (1st Cir.1994)). Moreover, courts lack the power to dispute in which the estate is a rival authorize the “employment of a professional who has a claimant; or (2) to possess a conflict of interest.” In re Mercury, 280 B.R. at 55. predisposition under circumstances that render such a bias against the [9] [10] Congress has explicitly stated that a professional’s estate. representation of a creditor in another case does not automatically disqualify it from being retained under In re AroChem Corp., 176 F.3d at 623 (quoting In re section 327. See 11 U.S.C. § 327(c) (“a person is not Roberts, 46 B.R. 815, 827 (Bankr.D.Utah 1985), aff’d in disqualified for employment under this section solely part and rev’d in part on other grounds, 75 B.R. 402 because of such person’s employment or representation of (D.Utah 1987)). The prohibition on adverse interests a creditor”). The statute, however, requires includes “economic and personal interests of an attorney.” disqualification of a professional following an objection See In re Mercury, 280 B.R. 35, 54 from the U.S. Trustee or a creditor where there is an (Bankr.S.D.N.Y.2002) (citation omitted). The test is not actual conflict of interest. Id. (“the court shall disapprove retrospective; courts only examine present interests when such employment if there is an actual conflict of determining whether a party has an adverse interest. In re interest”). Section 327(c) acknowledges the difficulties AroChem, 176 F.3d at 623–24 (observing that Congress debtors have in large chapter 11 bankruptcies to retain intended only to proscribe those who presently have an competent attorneys with the resources to handle the adverse interest from representing a debtor under section scope of the cases. See 3 COLLIER ON BANKRUPTCY 327(a)). Generally stated, the adverse interest test is ¶ 327.04[7][b] (15th ed. rev.2010). The statute “prevents objective and excludes “any interest or relationship, disqualification based solely on the professional’s prior © 2015 Thomson Reuters. No claim to original U.S. Government Works. 7

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In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114 representation of or employment by a creditor” but does that it “does not have a conflict of interest in representing not obviate the essential requirement that a professional the Debtor.” (Id. at 2.) It is only barred from acting in not have an interest adverse to the estate. In re AroChem, “litigation directly adverse to GE” and it has “no conflict 176 F.3d at 621 (quoting In re Interwest Bus. Equip., 23 with representing the Debtor opposite GE in developing F.3d 311, 316 (10th Cir.1994)). Thus, even where section and negotiating a plan of reorganization.” (DLA Piper’s 327(c) is applicable, if a court determines that there is an Resp. to U.S. Trustee’s Obj. at 1–2.) In support of this actual conflict of interest following an objection from the position, DLA Piper argues that the Court should focus U.S. Trustee or a creditor the court must disapprove the “on the actions DLA Piper proposes to take as to [Project employment. Orange] in this bankruptcy case” and eschew DLA Piper’s other relationships. (See DLA Supplemental Brief at 3.) DLA Piper apparently believes that the Stipulation with GE—which would provide for the eventual return of B. DLA Piper’s Relationship with GE Precludes it Turbine components to the Debtor, but not resolve GE’s from Being Employed by the Debtor Under § 327(a) unsecured claim against the estate—combined with the DLA Piper attempts to distance itself from GE, Conflict Waiver and its use of conflicts counsel somehow maintaining that the creditor in this case, GEII, is not even permits DLA Piper to represent the Debtor as general a client of DLA Piper, but rather a client of DLA Piper bankruptcy counsel despite its close relationship and International. (Initial Walsh Declaration at ¶ 8; acknowledged conflict with GE. The Court disagrees with Supplemental Walsh Declaration at ¶¶ 2–3.) But the DLA Piper’s assessment of the law. Conflict Waiver severely undermines DLA Piper’s effort to segregate its relationship to GEII. Specifically, the Conflict Waiver was sent by DLA Piper, not DLA Piper International. Moreover, it is addressed to GEII “care of” an attorney at GE itself. Lastly, the Conflict Waiver 1. The Debtor’s Execution of the Stipulation did not combines GEII and GE into a single entity, GE, when Resolve DLA Piper’s Conflict with GE requesting a waiver. Thus, the Court does not accept DLA [11] Piper’s effort to draw artificial lines in an attempt to DLA Piper argues in its Supplemental Brief—filed isolate itself from GEII. As DLA Piper’s Conflict Waiver after the Debtor entered into the Stipulation with conflates GE and GEII as a single entity, this Court too GE—that the Debtor’s signing of the Stipulation resolved will treat them as one and the same for purposes of this all conflicts between itself and GE. (DLA Supplemental motion.3 Brief at 2.) DLA Piper is severely mistaken. The Stipulation, by its own terms, is not effective until this *372 Using this approach the U.S. Trustee argues that Court reviews the Stipulation in accordance with Federal DLA Piper’s ongoing relationship with GE precludes it Rule of Bankruptcy Procedure 9019 and approves the from being retained as general bankruptcy counsel in this settlement. (Stipulation at ¶ 1.) Until then, no settlement matter. (U.S. Trustee Obj. at 1–2, 14.) Indeed, the Debtor exists and GE remains directly adverse to Project Orange. and DLA Piper agree that DLA Piper cannot represent the Notably, even if the Court approves the Stipulation, Debtor in many matters regarding GE. Specifically, the adversity would still remain. Under the terms of the DLA Employment Application admits that DLA Piper is settlement, GE must complete repairing a Turbine conflicted from taking certain actions in the bankruptcy component before it can install the Turbine in accordance due to its representation of GE affiliates. (See DLA with other Stipulation provisions. Repairs on the Employment Application at ¶ 19.) And, during the component are anticipated to be completed by July 10, hearing on the retention application, counsel for DLA 2010, but the Stipulation states that this date is subject to Piper confirmed the presence of a conflict with GE. (June change. If repairs are more difficult than anticipated, the 7, 2010 Tr. 55:23–56:5.) DLA Piper’s Supplemental Brief return of the Debtor’s Turbines to operation is not also confirms the presence of conflict between the DLA assured. Moreover, there would likely be contentious Piper and GE. (DLA Supplemental Brief at 2 (“no conflict *373 litigation over the installation of the Turbines. As will exist between DLA Piper and GE going forward after summer is the Debtor’s busiest months, any delay on a settlement is finalized regarding the turbine”).) GE’s part would almost necessitate the Debtor to threaten a lawsuit to expedite the repair and installation process. Despite this acknowledged conflict, DLA Piper argues Indeed, until the repair and installation of the Turbines is © 2015 Thomson Reuters. No claim to original U.S. Government Works. 8

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In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114 complete, GE and Project Orange remain wholly adverse. bankruptcy counsel. Central to the court’s decision was the fact that there was no ongoing litigation between the Moreover, Project Orange is locked in highly debtor and the secured creditor and no such litigation was contentious—but currently stayed—litigation in state envisioned. See id. at *3–4 (“The Debtors are not in any court with its landlord, Syracuse University, regarding the active litigation against [secured creditor] or any other validity of their lease. The University maintains that the creditor ... and the Court is advised that no such litigation lease was terminated prepetition as a result of several is envisioned.”). Similarly, in In re Dynamark, Ltd., 137 Project Orange defaults. Under the terms of the Debtor’s B.R. 380 (Bankr.S.D.Cal.1991), the court approved the lease with the University, arguments exist that termination retention of an attorney as general bankruptcy counsel of the lease would result in the entire Facility reverting to who represented the estate’s largest secured creditor in the University: Section 27.02(b)(ii) of the lease unrelated matters, finding no outstanding litigation specifically allows the University to repossess both the between the parties. See id. at 381 (“it appears that no leased property as well as the Facility on termination of actual conflict or adverse interest has surfaced in this case the lease. As defined in other agreements between the two so far”). In stark contrast, here the Debtor had litigation parties, the Facility includes the Turbines. Thus, even if pending with GE, DLA Piper’s client, before the the Stipulation and settlement become effective, if bankruptcy was even *374 filed. The Debtor and GE are Syracuse University is successful in establishing that the still directly adverse, as the Stipulation has not yet been lease terminated prepetition, Project Orange will have no approved by the Court. Moreover, enforcement and assets to liquidate to pay its largest unsecured creditor. performance of the Stipulation will continue to place the Debtor and GE directly at odds and could well give rise to DLA Piper, however, ignores these clear conflicts, new litigation. suggesting that the Stipulation resolved all adversity in this case. DLA Piper cites to cases that distinguish between present and potential conflicts, arguing that because only the potential for adversity with GE exists, it may be retained in this case. But other bankruptcy judges 2. DLA Piper’s Conflict Waiver Does Not Permit DLA in this district have refused to distinguish between actual Piper’s Employment Under 327(a) and potential conflicts. In re Angelika Films 57th, 227 [12] B.R. at 39 (“The distinction between ‘potential’ and The Conflict Waiver does not save DLA Piper’s ‘hypothetical’ conflicts merely confuses the analysis, and application from these infirmities. Both commentators several courts have rejected it as artificial.”); In re and courts conclude that disabling adverse interests may Granite Partners, 219 B.R. at 33 (“The distinction exist where the professional to be retained also represents [between actual and potential conflicts] often seems creditors of the debtor. In re American Printers & artificial, and some courts have rejected it.”). These Lithographers, Inc., 148 B.R. 862, 865–66 judges instead focus on the facts of each case to determine (Bankr.N.D.Ill.1992) (finding adverse interest between whether an attorney has an adverse interest without debtor’s proposed law firm and the debtor’s secured limiting labels. See, e.g., In re Leslie Fay Cos., 175 B.R. creditor based on law firm’s continuing representation of at 532–33 (rejecting the actual/potential dichotomy and secured creditor in unrelated matters); 2 NORTON observing that courts should focus on the facts of a case BANKRUPTCY LAW AND PRACTICE 3D § 30:5 (3d when reviewing retention applications). ed.2010) (observing that the “most common areas in which conflicts arise are where the professional also Even if the Court ignores the disfavored actual/potential represents ... creditors of the debtor”). Indeed, in distinction, the cases cited by DLA Piper fail to persuade American Printers, the court concluded that a conflict the Court that DLA Piper has no disabling conflict of existed because debtor’s proposed counsel, who interest with GE. Indeed, the two cases DLA Piper most represented a secured creditor of the debtor in unrelated heavily relies upon are easily distinguishable from the matters, could not negotiate with the secured creditor on present case. In In re Rockaway Bedding, Inc., No. the debtor’s behalf. Thus, the proposed attorney was 07–14890, 2007 WL 1461319 (Bankr.D.N.J. May 14, disqualified. See In re American Printers, 148 B.R. at 2007), the court determined that a law firm that 865–66. Here, DLA Piper contemplates engaging in the represented a debtor’s biggest secured creditor in exact conduct the American Printers court determined unrelated matters could be the debtor’s general created a disabling conflict between proposed counsel and © 2015 Thomson Reuters. No claim to original U.S. Government Works. 9

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In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114 the debtor’s secured creditor—“developing and installation schedule to take advantage of the summer negotiating a plan of reorganization.”4 (DLA Piper’s electricity season. Valid negotiation strategies may Resp. to U.S. Trustee’s Obj. at ¶ 7.) include threatening lawsuits or withholding payments to be made under the Stipulation. It is unclear whether the DLA Piper argues that because GE has contractually Conflict Waiver would permit DLA Piper to take either permitted DLA Piper to represent the Debtor on some course of action. matters adverse to GE that it cures all conflicts for purposes of section 327(a). But an agreement between DLA Piper and GE, i.e., the Conflicts Waiver, cannot trump the requirements of section 327(a). Even if GE agreed that DLA Piper could act against GE on all issues, 3. The Debtor’s Use of Conflicts Counsel Does Not through litigation, negotiation or otherwise, DLA Piper Warrant DLA Piper’s Employment Under 327(a) must still satisfy the statutory requirements of section [13] 327(a) to be retained as general bankruptcy counsel. See, In many cases, the employment of conflicts counsel to e.g., In re Granite Partners, L.P., 219 B.R. at 34 handle issues where general bankruptcy counsel has an (observing that while clients may, in some instances, adverse interest solves most questions regarding the waive conflicts, “the mandatory provisions of section retention of general bankruptcy counsel. Indeed, DLA 327(a) do not allow for waiver”); In re Perry, 194 B.R. Piper has identified cases where courts determined that 875, 880 (E.D.Cal.1996) (stating that “section 327(a) has the use of conflicts counsel could insulate proposed a strict requirement of disinterestedness and absence of counsel from hypothetical and speculative conflicts that representation of an adverse interest which trumps the may arise in the course of a bankruptcy case with entities rules of professional conduct”). that are not central to the debtor’s reorganization efforts. See, e.g., In re Enron Corp., No. 01–16034(ALG), 2002 *375 Moreover, the Conflict Waiver severely limits DLA WL 32034346, at *9–10 (Bankr.S.D.N.Y. May 23, 2002) Piper’s ability to act in the best interests of the Debtor (refusing to disqualify law firm on mere speculation that with regards to GE. Under the terms of the Conflict it had an adverse interest and finding that use of conflicts Waiver, DLA Piper is barred from both bringing suit and counsel was appropriate to handle certain limited threatening to bring suit against GE or its affiliates for investigations where firm had an adverse interest). But monetary damages or equitable relief. (Conflict Waiver at DLA Piper has not provided the Court with any case law 1.) While the Conflict Waiver purportedly allows DLA indicating that the use of conflicts counsel warrants Piper to negotiate with GE “on all matters” and review retention under section 327(a) where the proposed general loan or lease documents relating to the Debtor’s bankruptcy counsel has a conflict of interest with a prepetition credit facilities and lease, the Court does not creditor that is central to the debtor’s reorganization. The believe that DLA Piper can negotiate with full efficacy Court determines that this is such a case where the use of without at least being able to hint at the possibility of conflicts counsel does not allow the retention of the litigation. In re American Printers & Lithographers, Inc., Debtor’s chosen counsel under section 327(a). 148 B.R. at 865–66 (“Debtor’s counsel must at least vigorously negotiate ... in order to fulfill its duties to Even if Golenbock performed all work related to GE in Debtor, even if litigation is not warranted.”). this case, the fig leaf of conflicts counsel does not convince the Court that retention of DLA Piper as general This is particularly true with regards to the Stipulation. bankruptcy counsel is appropriate in these circumstances. The Debtor’s ongoing relationship with GE is a core issue As previously indicated, GE is central to this case. It is for a successful reorganization of the Debtor. Specifically, the Debtor’s largest unsecured creditor. The return and return of the Turbines to operation is central to the installation of the Turbines, which are central to the Debtor’s profitability. (See May 3, 2010 Tr. at 15–16, 19 Debtor’s ability to reorganize, is currently subject to a (“Mr. Victor: Nobody’s going to get paid unless we can Stipulation *376 which may or may not be entered by the run [both Turbines] and let ... us see how we can Court. Moreover, even if the Court approves the maximize [them].”).) Yet, as indicated above, under the Stipulation, there is considerable uncertainty regarding Stipulation there is a possibility that the installation date the timeline for installation of the Turbines. Any of the Turbines may slip. If this occurs, Project Orange disagreement on installation would likely give rise to will be forced to quickly and vigorously negotiate the highly contentious proceedings. In fact, GE has shown its © 2015 Thomson Reuters. No claim to original U.S. Government Works. 10

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In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114 willingness to vigorously defend itself in this forum by Continental and draft a plan of reorganization. Id. making multiple filings. GE has moved the Court to lift the automatic stay to confirm its $4.1 million arbitration *377 DLA Piper argues that Amdura is distinguishable award. (ECF # 13.) GE has also objected to the Debtor’s because “DLA is willing and able if necessary to take request to pay prepetition wages, salaries, and taxes. (ECF positions opposed by [GE] and advance a plan of # 15.) GE has further filed a motion to lift the automatic reorganization that is in the best interests of the Debtor.” stay with regards to two checks issued by AIG to both the (See DLA Piper’s Resp. to U.S. Trustee’s Obj. at ¶ 9.) Debtor and GE. (ECF # 64.) Given GE’s strong interests This argument erroneously assumes that DLA Piper can and active stance in this case, it is clear that addressing contractually obviate the mandatory requirements of issues with GE will take considerable time and skill on a section 327(a) with its Conflict Waiver. See, e.g., In re range of matters. Indeed, the Debtor essentially Granite Partners, L.P., 219 B.R. at 34 (stating that “the acknowledged that Golenbock would need to take mandatory provisions of section 327(a) do not allow for numerous actions in this case by seeking to retain the firm waiver”). Moreover, this case shares much in common pursuant to section 327(a) of the Bankruptcy Code and with Amdura: in both cases, proposed counsel could not not the more limited “special purpose” contemplated by investigate and prosecute claims against the key creditor section 327(e). Thus, even assuming DLA Piper does not in the case; in both cases, the conflict existed with the complete any work regarding GE, the Court does not largest creditor and raised issues central to the resolution believe DLA Piper’s employment is permissible. of the bankruptcy case. As in Amdura, it does not appear that DLA Piper can “fairly and fully advise” in the Other courts have determined that where proposed negotiation and drafting of a plan when it may not even counsel is conflicted from representing a debtor with be able to advocate litigation against GE. In re Amdura regards to matters central to the bankruptcy, even the Corp., 121 B.R. at 867. presence of conflicts counsel does not make the retention appropriate.5 In In re Amdura Corp., 121 B.R. 862 Similarly, in In re Git–N–Go, Inc., 321 B.R. 54 (Bankr.D.Colo.1990), the court examined an attempt to (Bankr.N.D.Okla.2004), the bankruptcy court reviewed an use conflicts counsel to enable an otherwise conflicted employment application under section 327(a). The general bankruptcy counsel to be retained under section proposed counsel was intimately involved with a holding 327(a). Winston & Strawn (“Winston”) sought to company (“Holding Company”) central to the bankruptcy. represent the debtor. The primary creditor in the case, The relationship between the Holding Company and Continental Bank (“Continental”), had loaned the debtor proposed counsel had lasted for decades and the parties $215 million. Id. at 866. Winston previously intended to continue the arrangement following the represented—and continued to represent—Continental bankruptcy case. Id. at 57. The Holding Company owned during the bankruptcy in unrelated matters. Winston 87% of the debtor’s stock and the debtor was forced to stated that it could not investigate the loan Continental file for bankruptcy in part due its relationship with a made to the debtor but an examiner could be appointed to wholly owned subsidiary of the holding company, 4 Front do so. Winston further stated that, to the extent the debtor Petroleum, Inc. (“4 Front”). 4 Front purchased gas from needed to sue Continental, it could use separate counsel. Citgo and resold the gas to the debtor, who in turn sold Id. at 867. The court found that Winston’s inability to be the gas to consumers. Citgo, however, withheld hundreds adverse to Continental constituted a conflict of interest of thousands of dollars in the debtor’s gas sales to set off disallowing its retention under section 327(a). Id. The against debt 4 Front owed to Citgo. Despite the court further found that this conflict could not be resolved bankruptcy, Citgo continued to withhold and set off the through the use of separate counsel. While theorizing that debtor’s gas sales. Id. at 57–58. Proposed counsel the use of conflicts counsel may resolve conflicts issues disclosed that it represented Citgo in unrelated matters where proposed general counsel previously represented and that Citgo accounted for approximately 1% of its smaller creditors whose interests were not central to the revenues from the previous years. While proposed resolution of the case, the court concluded that because counsel had a waiver from Citgo allowing it to contest resolution of issues with Continental could be the Citgo’s withholding of gas sales from the debtor, it never “lynch-pin of the case,” Winston had a conflict that could did so and instead counseled the debtor to retain not be resolved through the use of alternative counsel. alternative counsel to challenge Citgo’s actions. Id. at 58. The court specifically questioned Winston’s ability to The court determined that proposed counsel’s relationship adequately advise the debtor in negotiations with with the Holding Company and Citgo created conflicts of © 2015 Thomson Reuters. No claim to original U.S. Government Works. 11

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In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114 interest. Id. at 59, 61 (concluding that due to its dispute with Citgo that created a conflict of interest that relationship with the Holding Company, its subsidiaries could not be resolved through the use of other counsel. In and Citgo, Proposed Counsel “cannot provide the re Git–N–Go, Inc., 321 B.R. at 60–61 (observing “the fact objective and independent advice ... required for the that [proposed counsel] is unable or unwilling to represent Debtor’s performance of its fiduciary obligations”). With the [d]ebtor in its dispute with Citgo also creates an actual respect to proposed counsel’s conflict with the Holding disqualifying conflict of interest” which cannot be cured Company, the court determined that substituting the through the use of conflicts counsel). In fact, proposed creditors’ committee in its stead would not resolve the counsel in Git–N–Go only represented Citgo in matters conflict. The court reasoned that investigating potential unrelated to the debtor. Id. at 58. Here, just as in causes of action against the Holding Company was Git–N–Go, DLA Piper represented GE prior to the “among the primary duties assigned to the debtor in petition in matters unrelated to the Debtor and is unable to possession, and ... cannot simply be delegated to a take certain actions against GE pursuant to the Conflict creditors’ committee when the debtor’s counsel is Waiver. unavailable because representation of the estate would implicate an adverse interest.” Id. at 60–61. As to Finally, the bankruptcy court in In re Envirodyne Indus., proposed counsel’s conflict with Citgo, the court Inc., 150 B.R. 1008 (Bankr.N.D.Ill.1993), analyzed a determined that proposed counsel’s refusal to be directly similar situation. The court analyzed a motion to vacate adverse to Citgo could not be cured by the use of conflicts an order authorizing the employment of Cleary, Gottlieb, counsel. The court reasoned that conflicts counsel would Steen & Hamilton (“Cleary”). Id. at 1011. Cleary had need to represent the debtor in “core bankruptcy matters” represented an investment bank, Salomon Brothers, Inc. and it would not be “appropriate or in the best interests of (“Salomon”), in connection with a leveraged buy-out the estate” to use conflicts *378 counsel to conduct the (“LBO”) of the debtor. Salomon owned nearly two-thirds duties of general bankruptcy counsel. Id. at 61–62. of the entity that purchased the debtor and held a majority of seats on the debtor’s board of directors. Salomon was DLA Piper attempts to distinguish Git–N–Go, arguing also a creditor of the debtor. After the LBO was that unlike the case at bar proposed counsel in Git–N–Go completed Cleary represented the debtor in most matters (i) represented both the debtor and “several” adverse requiring outside counsel, including two bond parties; (ii) admitted it was ethically incapable of acting issues—both underwritten by Salomon—and in as counsel for the debtor in certain circumstances; and structuring a loan from Salomon to the debtor. Cleary also (iii) represented parties in interest in matters regarding the advised the debtor on debt restructuring and the debtor prior to the petition date. (DLA Piper’s Resp. to possibility of seeking chapter 11 protection. Id. at U.S. Trustee’s Obj. at ¶ 10.) DLA Piper’s distinctions fail. 1011–12. When restructuring talks began counsel for a As an initial matter, proposed counsel in Git–N–Go only committee of ad hoc bondholders began investigating represented two parties in interest in the case prior to the causes of action related to the LBO. Cleary counseled petition date, the Holding Company and Citgo. In re Salomon to seek other attorneys to represent it with Git–N–Go, Inc., 321 B.R. at 56–58. The court found that regards to these possible claims. Id. at 1012. Cleary, both of these relationships created conflicts. Id. at 60–62. however, continued to represent Salomon in unrelated The conflict with the Holding Company could not be matters. Id. at 1013. Cleary argued that it could represent resolved by having the creditors’ committee investigate the debtor because it would not pursue an action against potential claims against a creditor. Id. at 60–61. Nor could Salomon for claims arising out of the LBO and noted that the conflict with Citgo be resolved through the use of any such action was a “remote contingency.” Id. at 1019. conflicts counsel. Id. at 61–62. DLA Piper misreads The court rejected *379 Cleary’s position, stating that Git–N–Go, implying that the fact that proposed counsel Cleary had an “affirmative duty to investigate potential represented Citgo with regards to matters pending in the claims” and that its characterization of a potential lawsuit bankruptcy before the petition date was dispositive to the as “remote” revealed that Cleary had already made a court’s decision. (DLA Piper’s Resp. to U.S. Trustee’s determination regarding the pursuit of claims against Obj. at ¶ 10 (“unlike the firm involved in Git–N–Go, prior Salomon. Id. to the Petition Date, the only party in interest that DLA represented in matters involving the Debtor was the DLA Piper’s retention application suffers from the same Debtor”).) Rather, the court found that it was proposed issues faced by Cleary in In re Envirodyne. Like Cleary, counsel’s unwillingness to represent the debtor in its DLA Piper argues it is “disinterested” for purposes of the © 2015 Thomson Reuters. No claim to original U.S. Government Works. 12

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Bankruptcy Code because it will not bring litigation conflicted counsel. against GE and because the Stipulation has allegedly resolved all disputes between the Debtor and GE. (See DLA Piper’s Resp. to U.S. Trustee’s Obj. at ¶ 7; see also DLA Supplemental Brief at 2.) Also like Cleary, DLA Piper seemingly assumes that developing and negotiating CONCLUSION a plan of reorganization will not make it directly adverse to GE. (See DLA Piper’s Resp. to U.S. Trustee’s Obj. at ¶ DLA Piper’s representation of GE creates a conflict of 7; see also DLA Supplemental Brief at 2.) And just like interest with the Debtor. GE is the largest creditor in this Cleary, DLA Piper’s assumption that it is not conflicted in case, has been highly active in the proceedings, and is developing a plan reveals that it has already made a certain to play a key role in any plan negotiations or determination regarding the status of matters with GE, confirmation hearing. Here, given DLA Piper’s admitted specifically with regards to the Stipulation and the conflict of interest with GE and GE’s central role in this resolution of GE’s unsecured claim. Prejudging the status case, the Court does not believe that the use of conflicts of matters with a debtor’s largest unsecured creditor, as counsel warrants DLA Piper’s retention in this matter. the Envirodyne court noted, is not consistent with the Thus, the DLA Employment Application is DENIED. Debtor’s duty to investigate all possible claims. IT IS SO ORDERED. On the facts of this case, as DLA Piper’s conflict is with the Debtor’s largest unsecured creditor that is central to the issues in this case, the Court concludes that it is All Citations inappropriate to approve the retention application. It is not a sufficient answer, as DLA Piper posits, that the firm has 431 B.R. 363, 53 Bankr.Ct.Dec. 114 had a long-standing relationship with the Debtor. Conflicts rules do not apply only when application of the rules will not inconvenience the party seeking to retain

Footnotes

1 Debtor’s cogeneration facility was built on property owned by Syracuse University. The Debtor and Syracuse University are parties to a written lease that by its terms is scheduled to expire in 2032. Syracuse University argues, however, and the parties have litigated in state court for several years, that the lease terminated prepetition because of Project Orange’s defaults in the lease and other agreements between them. The details of the dispute are omitted from this Opinion. Suffice it to say, however, that if the lease terminated prepetition, the Debtor is unlikely to be able to reorganize as an operating business. Syracuse University has filed a motion to lift the automatic stay to permit it to proceed with the state court litigation. A separate opinion or order will be entered concerning that motion.

2 A Swiss verein is essentially an incorporated membership association, but has no precise counterpart in the United States. In re Lernout & Hauspie Secs. Litig., 230 F.Supp.2d 152, 171 (D.Mass.2002); Megan E. Vetula, From the Big Four to Big Law: The Swiss Verein and the Global Law Firm, 22 GEO. J. LEGAL ETHICS 1177, 1180 (2009).

3 Since DLA Piper dealt with itself and its affiliates as one entity in negotiating a conflict waiver with GE entities (likewise treated as one entity), the Court does not need to consider whether different conflicts rules might apply in some circumstances where international law firms share a relationship through a Swiss verein. DLA Piper’s website proclaims that “DLA Piper became one of the largest legal service providers in the world in 2005 through a merger of unprecedented scope in the legal sector. While large in scale, the merger strategy was simple—to create an international legal practice capable of taking care of the most important legal needs of clients wherever they do business.... DLA Piper today has 3,500 lawyers in offices throughout Asia, Europe, the Middle East and the United States. We represent more clients in a broader range of geographies and practice disciplines than virtually any other law firm in the world.” See http://www.dlapiper.com/global/about/overview/ (last visited June 23, 2010). DLA Piper holds itself out to the world as one firm, although it now tries to separate itself into separate firms for conflicts purposes. Followed to its logical conclusion, this would lead to the anomalous result that DLA Piper, on behalf of one client, could be adverse to DLA Piper International, on behalf of one of its clients, without violating ethical standards.

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In re Project Orange Associates, LLC, 431 B.R. 363 (2010) 53 Bankr.Ct.Dec. 114

4 DLA Piper’s attorneys have also shown that they are tone-deaf when it comes to conflicts issues. During the June 7, 2010 hearing, counsel presented a proposed settlement between the Debtor and BP regarding the delivery of natural gas needed to operate the Debtor’s Turbines. No objections were filed to the proposed settlement. The Court indicated that it would approve the settlement. Later in the hearing, however, almost in passing, counsel acknowledged that it could not be adverse to BP, an existing client of DLA Piper. The U.S. Trustee then questioned how DLA Piper could negotiate and present the settlement if it cannot be adverse to BP. Counsel then responded that it had identified BP as a conflict party in exhibits to its retention application, as if the disclosure could cure the conflict. The Court withdrew its approval of the settlement, which has since been resubmitted by Golenbock, Debtor’s conflict counsel. Identifying conflicts does not involve a game of “gotcha,” where disclosure of a conflict party in one schedule excuses counsel from the consequences of a conflict if no one finds the earlier disclosure and objects.

5 The Court is surprised at the dearth of precedent on this point. In addition to the case law discussed in this Opinion, at least one commentator concurs with the Court’s assessment in an analogous setting. See Susan M. Freeman, Are DIP and Committee Counsel Fiduciaries for their Clients’ Constituents or the Bankruptcy Estate? What is a Fiduciary Anyway?, 17 AM. BANKR.INST. L. REV. 291, 367 (2009) (“Courts have allowed ... counsel to avoid the lack of disinterestedness or existence of an adverse interest caused by the role of other firm clients in the bankruptcy case by appointing special counsel to deal with all matters adverse to the other clients. If a creditor client’s role is central to the case, such as carve-out of ... representation may be infeasible.”) (footnotes omitted).

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98 F.Supp.3d 1074 West Headnotes (25) United States District Court, C.D. California. [1] Federal Courts WESTERN SUGAR COOP., et al., Plaintiffs, Counsel v. ARCHER–DANIELS–MIDLAND CO., et al., Motions to disqualify counsel are governed by Defendants. state law.

No. CV 11–3473 CBM (MANx). | Signed Feb. 13, 2015. Cases that cite this headnote

Synopsis Background: Sugar industry manufacturers, trade [2] Attorney and Client groups, and associations filed lawsuit asserting one cause Disqualification in general of action for false advertising under Lanham Act. Two defendants moved to disqualify plaintiffs’ counsel on Decision to disqualify counsel is within trial ground that they were longstanding clients of legacy firm court’s discretion limited by applicable legal from merger of law firms that formed plaintiffs’ counsel principles. of record.

Cases that cite this headnote

Holdings: The District Court, Consuelo B. Marshall, J., held that:

[1] plaintiffs’ firm was subject to disqualification due to its [3] Attorney and Client simultaneous representation of one defendant and Disqualification in general plaintiffs, as the simultaneously represented defendant did not make informed waiver of concurrent representation Because of the potential for abuse, attorney and the firm’s withdrawal did not cure the conflict; disqualification motions are subject to strict judicial scrutiny. [2] plaintiffs’ firm was subject to automatic disqualification because it previously represented another defendant in matters substantially related to present action Cases that cite this headnote and was thus conclusively presumed to possess client confidences revealed in prior representations; and

[3] proposed alternatives to disqualification did not [4] sufficiently mitigate conflicts and ethical violations to Attorney and Client avoid disqualification, and there were no viable Disqualification in general alternatives short of disqualification. Court should examine the implications of disqualification, including client’s right to Motion granted. chosen counsel, attorney’s interest in representing a client, financial burden on client to replace disqualified counsel, and the possibility that tactical abuse underlies the © 2015 Thomson Reuters. No claim to original U.S. Government Works. 1

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disqualification motion. [7] Attorney and Client Interests of former clients Cases that cite this headnote In determining whether there is a “substantial relationship” between subjects of the prior and current representations for disqualification

[5] purposes, court should first analyze whether Attorney and Client there was a direct relationship with the former Representing Adverse Interests client and whether the relationship touched on Attorney and Client issues related to the present litigation; Interests of former clients substantial relationship test requires evidence supporting a rational conclusion that information Motions to disqualify generally arise in one of material to the evaluation, prosecution, two contexts, in cases of successive settlement or accomplishment of the former representation where attorney seeks to represent representation given its factual and legal issues client with interests that are potentially adverse is material to the evaluation, prosecution, to former client, and in cases of simultaneous settlement or accomplishment of the current representation where attorney seeks to represent representation given its factual and legal issues. in a single action multiple parties with Cal.Prof.Conduct Rule 3–310(E). potentially adverse interests; primary fiduciary duty at stake in each of these contexts differs, and applicable disqualification standards vary Cases that cite this headnote accordingly. Cal.Prof.Conduct Rule 3–310.

Cases that cite this headnote [8] Attorney and Client Disqualification proceedings; standing

[6] If former representation involved a direct Attorney and Client relationship with client and matters are Interests of former clients substantially related, then former client seeking to disqualify counsel from successive Rules regarding successive representation of representation need not prove that the attorney clients with adverse interests focus on attorney’s possesses actual confidential information and duty of confidentiality, and if attorney instead attorney is presumed to have access to undertakes to represent client adverse to former confidential information; that presumption is client without obtaining informed consent, then relevant to subsequent representation and former client may disqualify attorney by resulting disqualification extends vicariously to showing a substantial relationship between the entire firm. Cal.Prof.Conduct Rule subjects of prior and current representation; 3–310(E). when a substantial relationship between representations is established, attorney is automatically disqualified from representing the Cases that cite this headnote second client. Cal.Prof.Conduct Rule 3–310(E).

1 Cases that cite this headnote [9] Attorney and Client Representing Adverse Interests

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Because waiver of conflict must be informed, a Attorneys owe current clients a duty of second waiver may be required if the original undivided loyalty to avoid undermining public waiver insufficiently disclosed the nature of a confidence in the legal profession and the subsequent conflict. Cal.Prof.Conduct Rule judicial process. Cal.Prof.Conduct Rule 3–310. 3–310(C). Cases that cite this headnote Cases that cite this headnote

[13] Attorney and Client [10] Attorney and Client Disclosure, waiver, or consent Representing Adverse Interests California law does not require that every When a law firm simultaneously represents possible consequence of a conflict be disclosed clients who have conflicting interests, with few for consent to be valid; the inquiry is whether exceptions, disqualification follows the waiver was fully informed. Cal.Prof.Conduct automatically, regardless of whether the Rule 3–310. simultaneous representations have anything in common or present any risk that confidences obtained in one matter would be used in the Cases that cite this headnote other. Cal.Prof.Conduct Rule 3–310(C).

Cases that cite this headnote [14] Attorney and Client Disclosure, waiver, or consent

Whether full disclosure of conflict was made [11] Attorney and Client and client made informed waiver is fact-specific Disqualification proceedings; standing inquiry that considers the following factors: (1) breadth of waiver, (2) temporal scope of waiver, When evaluating whether a law firm may i.e., whether it waived current conflict or concurrently represent two clients, even on whether it was intended to waive all conflicts in unrelated matters, it is presumed that the duty of future, (3) quality of conflicts discussion loyalty has been breached and counsel is between attorney and client, (4) specificity of automatically disqualified, unless full reasonable waiver, (5) nature of actual conflict, i.e., disclosure is made and both clients knowingly whether attorney sought to represent both sides agree in writing to waive the conflict. in the same dispute or in unrelated disputes, (6) Cal.Prof.Conduct Rule 3–310. sophistication of client, and (7) interests of justice.

Cases that cite this headnote 1 Cases that cite this headnote

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Rule 3–310(C). For purposes of determining whether plaintiffs’ firm in false advertising suit was subject to disqualification due to its simultaneous Cases that cite this headnote representation of one defendant and plaintiffs, the represented defendant did not make informed waiver of concurrent representation;

advanced waiver did not amount to full and [18] reasonable disclosure of potential conflict, and Attorney and Client second, more specific waiver was required Representing Adverse Interests because advanced waiver did not sufficiently disclose nature of conflict and material risks The “hot potato rule” barring attorney and law thereof. Cal.Prof.Conduct Rule 3–310(C). firm from curing dual representation of clients by expediently severing relationship with preexisting client applies regardless of 1 Cases that cite this headnote attorney’s reasons for terminating relationship with preexisting client.

Cases that cite this headnote [16] Attorney and Client Representing Adverse Interests

The “hot potato rule” bars an attorney and law [19] firm from curing the dual representation of Attorney and Client clients by expediently severing the relationship Particular Cases and Problems with the preexisting client. Company that refined corn to produce high fructose corn syrup (HFCS) and was named as Cases that cite this headnote defendant in false advertising suit relating to the marketing of HFCS was a former client of plaintiffs’ law firm, for purposes of determining whether that firm was subject to disqualification due to its prior representation of defendant in [17] Attorney and Client another matter; company first retained legacy Particular Cases and Problems firm ten years prior to firm’s merger, and that firm had continued to perform work for it over For purposes of determining whether plaintiffs’ the years and last performed work for it eight firm in false advertising suit was subject to months prior to merger. Cal.Prof.Conduct Rule disqualification due to its simultaneous 3–310(E). representation of one defendant, firm’s severance of relationship with defendant after it concurrently represented parties for more than Cases that cite this headnote two and one half months and defendant would not agree to waive the conflict did not cure the dual representation; engagement letter provision

did not authorize firm to cure conflict of interest [20] by its withdrawal, which also could not be Attorney and Client accomplished without material adverse effect on Particular Cases and Problems client, who was forced to find replacement counsel after sixteen years. Cal.Prof.Conduct Prior and current representations were substantially related, for purposes of © 2015 Thomson Reuters. No claim to original U.S. Government Works. 4

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determining whether plaintiffs’ firm in false syrup (HFCS), plaintiffs’ agreement to stipulate advertising suit relating to the marketing of high that all defendants but one manufactured various fructose corn syrup (HFCS) was subject to formulations of HFCS, consistent with disqualification due to its prior representation of description in letter, did not mitigate its law current defendant in another matter; firm’s firm’s breach of confidentiality to defendant attorneys previously advised current defendant, which law firm previously advised regarding which refined corn to produce HFCS, regarding that letter or firm’s breach of duty of loyalty to permissible, common or unusual names for simultaneously represented defendant in current HFCS. Cal.Prof.Conduct Rule 3–310(E). matter.

Cases that cite this headnote Cases that cite this headnote

[21] Attorney and Client [24] Attorney and Client Disqualification proceedings; standing Disqualification in general

Law firm’s evidence did not overcome Disqualification motion may involve presumption it possessed confidential considerations such as a client’s right to chosen information of former client’s, and firm was counsel and the possibility that tactical abuse thus subject to automatic disqualification from underlies the disqualification motions. current representation of plaintiff suing that former client. Cal.Prof.Conduct Rule 3–310(E). Cases that cite this headnote

Cases that cite this headnote

[25] Attorney and Client Disqualification in general [22] Attorney and Client Interests of former clients In considering alternatives to disqualification, court balances the need to maintain ethical Imposition of formal ethical walls and removal standards of professional responsibility, of law firm’s records to third party could not preservation of public trust in the scrupulous mitigate firm’s breach of its duty of administration of justice, and the integrity of the confidentiality to former client in substantially bar against a client’s right to chosen counsel, related matter. and the burden on the client if its counsel were disqualified. Cases that cite this headnote Cases that cite this headnote

[23] Attorney and Client Particular Cases and Problems Attorneys and Law Firms In suit arising from false advertising claims relating to the marketing of high fructose corn *1077 Adam R. Fox, Squire Patton Boggs US LLP, Marc © 2015 Thomson Reuters. No claim to original U.S. Government Works. 5

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E. Masters, Mark T. Drooks, A. Howard Matz, Bird (“HFCS”), pitting the sugar industry against the Marella Boxer Wolpert Nessim Drooks Lincenberg & corn-refining industry. Plaintiffs are sugar industry Rhow, Los Angeles, CA, Stacie D. Yee, David S. Elkins, manufacturers, trade groups, and associations: Western Squire Patton Boggs US LLP, Palo Alto, CA, Eugene R. Sugar Cooperative; Michigan Sugar Co.; C & H Sugar Egdorf, W. Mark Lanier, The Lanier Law Firm PC, Co., Inc.; United States Sugar Corporation; American Houston, TX, John A. Burlingame, Squire Patton Boggs Sugar Refining, Inc.; The Amalgamated Sugar Co., US LLP, Washington, DC, for Plaintiffs. LLC; Imperial Sugar Corp.; Minn–Dak Farmers Cooperative; The American Sugar Cane League U.S.A., Bryce A. Cooper, Bryna J. Dahlin, Cornelius M. Murphy, Inc.; and The Sugar Association, Inc. (“Sugar Dan K. Webb, Stephen V. D’Amore, Steven Grimes, Association”) (collectively the “Sugar Plaintiffs”). Winston and Strawn LLP, Chicago, IL, Erin R. Ranahan, (Second Am. Compl. (“SAC”) ¶¶ 12–21 (Dkt. No. 55).) Gail Jeanne Standish, Winston and Strawn LLP, Joan Defendants are manufacturers and trade groups and Mack, Julia Jill Bredrup, Lennette W. Lee, Michael J. associations active in the corn and HFCS industry: Proctor, Caldwell Leslie and Proctor PC, Los Angeles, Archer–Daniels–Midland Company (“ADM”); Cargill, CA, for Defendants. Incorporated (“Cargill”); Ingredion Inc., formerly called Corn Products International, Inc. (“Ingredion”); Tate & Lyle Ingredients Americas, Inc. (“Tate & Lyle”); and The Corn Refiners Association (“CRA”) (collectively “Defendants”).1 (Id., ¶¶ 22–27.)

ORDER GRANTING INGREDION Plaintiffs, represented by the legacy law firm of Squire INCORPORATED’S AND TATE & LYLE Sanders & Dempsey, LLP (“Squire Sanders”), filed the INGREDIENTS AMERICAS, INC.’S MOTION TO instant lawsuit on April 22, 2011, and the SAC on DISQUALIFY SQUIRE PATTON BOGGS LLP November 21, 2011. (Dkt. No. 55.) The SAC asserts one cause of action for false advertising under the Lanham CONSUELO B. MARSHALL, District Judge. Act, alleging that Defendants misled consumers by use of the term “corn sugar.” (SAC ¶¶ 65–75.) Before the Court is Defendant/Counterclaimant Ingredion Incorporated’s and Tate & Lyle Ingredients Americas, On September 4, 2012, Defendants ADM, Cargill, Inc.’s Motions to Disqualify Plaintiffs’ counsel, Squire Ingredion, and Tate & Lyle each filed a counterclaim Patton Boggs LLP (collectively the “Motions”). (Dkt. against Plaintiff the Sugar Association. (Dkt. Nos. Nos. 232, 233.) Squire Patton Boggs LLP and Plaintiff 85–88.) Defendants’ counterclaim asserts one cause of Sugar Association oppose the Motions. (Dkt. Nos. 250, action for false advertising in violation of the Lanham 249, 252.) Act, alleging that the Sugar Association misrepresented HFCS as unhealthy. (Id. ¶¶ 68–95.)

*1078 I. JURISDICTION A. The Patton Boggs and Squire Sanders Merger On June 1, 2014, the law firms of Patton Boggs LLP This Court has jurisdiction over this matter pursuant to 28 (“Patton Boggs”) and Squire Sanders combined to form U.S.C. §§ 1331, 1338. Squire Patton Boggs (“SPB”). SPB remains the Sugar Plaintiffs’ counsel of record. Ingredion and Tate & Lyle each filed motions to disqualify SPB from representing the Sugar Plaintiffs in this action because SPB is now adverse to both Ingredion and Tate & II. PROCEDURAL AND FACTUAL Lyle—long-standing clients of the legacy firm Patton BACKGROUND Boggs. The underlying case arises from false advertising claims relating to the marketing of high-fructose corn syrup

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B. Patton Boggs’ and SPB’s Representation of Tate & 2. Tate & Lyle Does Not Agree to Waive the Conflict Lyle During another call on August 4, 2014, Tate & Lyle’s Tate & Lyle is a global provider of food products that counsel, Mr. Castelli, informed Mr. Talisman and Ms. specializes in processing corn-based products, including Ballin that because the instant litigation was not “ordinary HFCS. (Castelli Decl. ¶ 2.) Tate & Lyle entered into an commercial litigation, but rather a contentious battle attorney-client relationship with Patton Boggs in or about between two competing industries,” Tate & Lyle would February 1998, as documented in a letter dated February not waive the conflict. (Id. ¶ 13.) Mr. Castelli requested 11, 1998, signed by Stuart Pape of Patton Boggs (the that SPB withdraw from its representation of the Sugar “1998 Engagement Letter”). (Id. ¶ 3, Ex. 1.) Plaintiffs. (See id.)

Tate & Lyle has relied on multiple lawyers at Patton Thereafter on August 10, 2014, SPB’s counsel sent a Boggs for legal advice on a wide range of matters since letter to Tate & Lyle’s counsel, enclosing a copy of the 1998 and through the merger in June 2014. (Castelli Decl. 1998 Engagement Letter. (Castelli Decl. ¶ 16, Ex. 1.) The ¶ 4.) Patton Boggs has represented Tate & Lyle before letter states, “the terms of Tate & Lyle’s engagement of international regulatory bodies and federal agencies, such Patton Boggs ... provided us with Tate & Lyle’s advance as the *1079 Food and Drug Administration (“FDA”), the consent that we would represent other clients on matters United States Department of Agriculture, and the United adverse to Tate & Lyle so long as those matters were States Customs Service. (Id.) Tate & Lyle’s counsel unrelated to our work for Tate & Lyle.” (Id.) In the letter, declares that Patton Boggs’ lawyers advised Tate & Lyle SPB proposed to carry forward the simultaneous on matters that required a thorough understanding of its representations of the Sugar Plaintiffs and Tate & Lyle business operations, including its operations and on other matters with two distinct teams of lawyers and an processing of ingredients such as HFCS. (Id.) ethical wall. (Id., Ex. 1.)

1. Tate & Lyle Bring the Conflict to SPB’s Attention 3. SPB Withdraws from Its Representation of Tate & In late July 2014, Tate & Lyle’s counsel, Heidi Balsley, Lyle contacted SPB attorney, who was formerly a Patton On August 18, 2014, SPB sent a letter to Tate & Lyle’s Boggs attorney, Dan Waltz, inquiring whether he knew of counsel terminating its relationship with Tate & Lyle. the pending lawsuit, which he did not. (Balsley Decl. ¶ 6.) (Id., ¶ 22, Ex. 8.) Dan Waltz and other lawyers at SPB Thereafter, on July 28, 2014, SPB attorneys, Stacy Ballin were actively providing services to Tate & Lyle up until (former partner and general counsel at Squire Sanders) SPB’s termination on August 18, 2014. (Castelli Decl. ¶ and Charles Talisman (former assistant general counsel at 23.) Patton Boggs) spoke with Tate & Lyle’s vice president and general counsel, Peter Castelli, and Ms. Balsley. (Id. ¶ 7; Castelli Decl. ¶ 10.) During that call, Ms. Ballin and Mr. Talisman stated that SPB failed to identify the C. Patton Boggs’ Representation of Ingredion conflict, despite Tate & Lyle appearing as a current client Defendant Ingredion provides ingredients to food and in Patton Boggs’ database. (Castelli Decl. ¶ 11.) They beverage companies and refines corn to produce HFCS. explained that a paralegal at Patton Boggs had prepared a (Levy Decl. ¶ 2.) Ingredion first retained Patton Boggs in list of clients with conflicts for considerations as part of May 2004, and Patton Boggs continued to perform work the pre-merger conflicts diligence, and Tate & Lyle had for Ingredion over the years and last performed work for been inexplicably omitted from the list. (Id.) During that Ingredion in September 2013. (Talisman Decl. ¶ 3.) call, they asked Tate & Lyle for a conflict waiver. (Id. ¶ Patton Boggs has provided legal services to Ingredion on 12.) They explained that, as a practical matter, a de facto at least fifty-six different *1080 occasions, and since ethical wall was in place because the two firms’ computer 2004, Ingredion has paid Patton Boggs over $230,000 in systems had not been integrated and documents were in legal fees. (Levy Decl. ¶ 3.) different offices. (Id.) Shortly after Tate & Lyle’s counsel raised the conflict, SPB sent Ingredion’s counsel a letter dated July 31, 2014, advising it of the merger and that Squire Sanders had been

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representing the Sugar Plaintiffs and SPB would continue at stake in each of these contexts differs, and the to do so going forward. (Id. ¶ 7, Ex. 1.) The letter stated applicable disqualification standards vary accordingly. that if Ingredion wanted to have its lawyers from Patton Boggs do any new work, it would be necessary to obtain a waiver from Ingredion due to the conflict presented by SPB’s role in the present case. (Id.) A. Successive Representation of Adverse Clients [6] The rules regarding successive representation of clients Ingredion and Tate & Lyle each move to disqualify SPB with adverse interests focus on an attorney’s duty of from representing the Sugar Plaintiffs in this action, confidentiality.2 If an attorney undertakes to represent a contending that the merger resulted in SPB client adverse to a former client without obtaining simultaneously representing adverse clients. informed consent, the former client may disqualify the attorney by showing a “substantial relationship” between the subjects of the prior and current representations. Flatt v. Super. Ct., 9 Cal.4th 275, 283, 36 Cal.Rptr.2d 537, 885 P.2d 950 (1994); *1081 In re Charlisse C., 45 Cal.4th III. LEGAL STANDARD 145, 166 n. 11, 84 Cal.Rptr.3d 597, 194 P.3d 330 (2008).

[1] This protects the enduring duty to preserve client Motions to disqualify counsel are governed by state confidences that survives the termination of the attorney’s law. See Rodriguez v. W. Publ’g Corp., 563 F.3d 948, 967 representation. City & Cnty. of San Francisco v. Cobra (9th Cir.2009) (“By virtue of the district court’s local Solutions, Inc., 38 Cal.4th 839, 846, 43 Cal.Rptr.3d 771, rules, California law controls whether an ethical violation 135 P.3d 20 (2006). When a substantial relationship occurred.”) The Central District applies the California between the representations is established, the attorney is State Bar Act, the California Rules of Professional automatically disqualified from representing the second Conduct, and the related judicial decisions in assessing client. Id. at 847, 43 Cal.Rptr.3d 771, 135 P.3d 20. the standards of professional conduct. See C.D. Cal. L.R. 83–3.1.2. [7] In determining whether there is a “substantial

[2] [3] [4] relationship,” a court should first analyze whether there The decision to disqualify counsel is within the was a direct relationship with the former client and trial court’s discretion limited by applicable legal whether the relationship touched on issues related to the principles. See Trone v. Smith, 621 F.2d 994, 999 (9th present litigation. Id.; Advanced Messaging Tech., Inc. v. Cir.1980); People ex rel. Dep’t of Corp. v. SpeeDee Oil, EasyLink, 913 F.Supp.2d 900, 907 (C.D.Cal.2012) 20 Cal.4th 1135, 1143, 86 Cal.Rptr.2d 816, 980 P.2d 371 (Pregerson, J.). The substantial relationship test requires (1999). Because of the potential for abuse, evidence supporting a rational conclusion that disqualification motions are subject to strict judicial “information material to the evaluation, prosecution, scrutiny. Optyl Eyewear Fashion Int’l Corp. v. Style Cos., settlement or accomplishment of the former Ltd., 760 F.2d 1045, 1050 (9th Cir.1985). A court should representation given its factual and legal issues is material examine the implications of disqualification, including “a to the evaluation, prosecution, settlement or client’s right to chosen counsel, an attorney’s interest in accomplishment of the current representation given its representing a client, the financial burden on a client to factual and legal issues.” Khani v. Ford Motor Co., 215 replace disqualified counsel, and the possibility that Cal.App.4th 916, 921, 155 Cal.Rptr.3d 532 (2013) tactical abuse underlies the disqualification motion.” (citations omitted); see also Farris v. Fireman’s Fund Ins. SpeeDee Oil, 20 Cal.4th at 1145, 86 Cal.Rptr.2d 816, 980 Co., 119 Cal.App.4th 671, 679, 14 Cal.Rptr.3d 618 (2004) P.2d 371. (evaluating whether the two representations are

[5] substantially related centers upon the factual and legal Motions to disqualify generally arise in one of two similarities of the two representations). contexts: (1) in cases of successive representation, where an attorney seeks to represent a client with interests that [8] If the former representation involved a direct are potentially adverse to a former client; and (2) in cases relationship with the client and the matters are of simultaneous representation, where an attorney seeks to substantially related, the former client need not prove that represent in a single action multiple parties with the attorney possesses actual confidential information; potentially adverse interests. The primary fiduciary duty instead, the attorney is presumed to possess confidential © 2015 Thomson Reuters. No claim to original U.S. Government Works. 8

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information.3 Cobra Solutions, 38 Cal.4th at 847, 43 The parties do not dispute that at the time of the merger, Cal.Rptr.3d 771, 135 P.3d 20. The presumption that an Tate & Lyle was a current client of SPB. SPB contends attorney has access to confidential information relevant to that Tate & Lyle consented to SPB’s concurrent the subsequent representation and resulting representation of the Sugar Plaintiffs by agreeing to a disqualification extends vicariously to the entire firm. In general advanced waiver set forth in Patton Boggs’ re Charlisse, 45 Cal.4th at 161, 84 Cal.Rptr.3d 597, 194 Standard Engagement Terms enclosed in the 1998 P.3d 330; Flatt, 9 Cal.4th at 283, 36 Cal.Rptr.2d 537, 885 Engagement Letter.5 (See Castelli Decl., Ex. 1.) P.2d 950.

1. Waiver Principles B. Concurrent Representation of Adverse Clients [11] When evaluating whether a law firm may concurrently [9] [10] Attorneys owe current clients a duty of undivided represent two clients, even on unrelated matters, it is loyalty to avoid undermining public confidence in the presumed that the duty of loyalty has been breached and legal profession and the judicial process.4 Flatt, 9 Cal.4th counsel is automatically disqualified, unless full at 284, 36 Cal.Rptr.2d 537, 885 P.2d 950; SpeeDee Oil, reasonable disclosure is made and both clients knowingly 20 Cal.4th at 1146, 86 Cal.Rptr.2d 816, 980 P.2d 371. agree in writing to waive the conflict. See Visa U.S.A., When a law firm simultaneously represents clients who Inc. v. First Data Corp., 241 F.Supp.2d 1100, 1104 have conflicting interests, with few exceptions, (N.D.Cal.2003) (Hamilton, J.) (citation omitted); Concat “disqualification follows automatically, regardless of LP v. Unilever, PLC, 350 F.Supp.2d 796, 819 whether the simultaneous representations have anything (N.D.Cal.2004) (Illston, J.) (citation omitted). in common or present any risk that confidences obtained in one matter would be *1082 used in the other.” SpeeDee [12] [13] [14] Because the waiver must be informed, a second Oil, 20 Cal.4th at 1147, 86 Cal.Rptr.2d 816, 980 P.2d 371 waiver may be required if the original waiver (citation omitted); White v. Experian Info. Solutions, 993 insufficiently disclosed the nature of a subsequent F.Supp.2d 1154, 1166 (C.D.Cal.2014) (Carter, J.) (“The conflict. Concat, 350 F.Supp.2d at 820. But an advanced default rule for a concurrent conflict in California is waiver of potential conflicts need not specify the exact automatic disqualification in all but a small number of nature of the future conflict. Visa, 241 F.Supp.2d at 1105. cases.”) This is because the “primary value at stake in California law does not require that every possible cases of simultaneous or dual representation is the consequence of a conflict be disclosed for consent to be attorney’s duty—and the client’s legitimate valid; the inquiry is “whether the waiver was fully expectations—of loyalty, rather than confidentiality.” informed.” Id. Whether full disclosure was made and the Pour Le Bebe, Inc. v. Guess? Inc., 112 Cal.App.4th 810, client made an informed waiver is a fact-specific inquiry 822, 5 Cal.Rptr.3d 442 (2003) (citations and quotations that considers the following factors: (1) the breadth of the omitted) (emphasis in original). This strict per se rule waiver; (2) the temporal scope of the waiver (whether it recognizes that a client cannot be expected to sustain trust waived a current conflict or whether it was intended to and confidence in his or her counsel who is also waive all conflicts in the future); (3) the quality of the representing the client’s adversary in litigation. See In re conflicts discussion between the attorney and the client; Charlisse, 45 Cal.4th at 160, 84 Cal.Rptr.3d 597, 194 (4) the specificity of the waiver; (5) the nature of the P.3d 330. An attorney’s conflict is imputed to the law actual conflict (whether the attorney sought to represent firm as a whole. Advanced Mess., 913 F.Supp.2d at 906. both sides in the same dispute or in unrelated disputes); (6) the sophistication of the client; and (7) the *1083 interests of justice. Id. at 1106 (citations omitted).

IV. DISCUSSION 2. Tate & Lyle Did Not Make an Informed Waiver of SPB’s Concurrent Representation A. SPB Is Subject to Disqualification Due to Its [15] The prospective waiver in the Standard Engagement Concurrent Representation of Tate & Lyle and the Terms provides in relevant part: Sugar Plaintiffs

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“It is possible that some of our waive actual future conflicts without further disclosure current or future clients will have and consent by Tate & Lyle, I never would have signed disputes with you during the time the agreement.” (Mohan Decl. ¶ 5.) Mr. Mohan further we are representing you. We declares, “I did not understand or intend Tate & Lyle to therefore also ask each of our be agreeing to waive future conflicts that would include clients to agree that we may having Patton Boggs adverse to Tate & Lyle in litigation continue to represent or may while it was still actively representing Tate & Lyle on undertake in the future to represent other matters without a further, specific disclosure and existing or new clients in any request for a waiver from Tate & Lyle.” (Id. ¶ 4.) matter that is not substantially related to our work for you, even if Moreover, the Model Rules are merely persuasive the interest of such clients in those authority, and in any event, they embrace a consideration unrelated matters are directly of all of the Visa factors—not just a select few. See, e.g., adverse to yours....” ABA Model Rules of Prof’l Conduct R. 1.7 cmt. 22 (2011). Furthermore, in Visa, the court upheld the (Castelli Decl., Ex. 1.) prospective waiver that identified the adverse client by name, it disclosed as fully as possible the nature of any The breadth and temporal scope of Patton Boggs’ potential conflict that could arise between the parties, and advanced waiver is open-ended. It purports to waive it specifically contemplated the firm’s representation of conflicts in any matter not substantially related Visa against First Data in litigation matters. See Visa, 241 indefinitely. The waiver also lacks specificity. It does not F.Supp.2d at 1107; see also *1084 Zador Corp. v. Kwan, identify a potentially adverse client, the types of potential 31 Cal.App.4th 1285, 1302, 37 Cal.Rptr.2d 754 (1995) conflicts, or the nature of the representative matters. (upholding an advanced waiver in which the prospective, adverse client was specifically named). SPB argues that like in Visa, the Court should enforce the advanced waiver, finding Ingredion’s “level of experience The advanced waiver here did not identify potential with legal services” crucial in determining that Ingredion adverse clients or the nature of any potential conflicts gave informed consent. See Visa, 241 F.Supp.2d at covered by the waiver. It is difficult to imagine that in 1109–10 (finding the client gave informed consent, 1998, Patton Boggs contemplated potential conflicts that reasoning, in part, that the client was a Fortune 500 could surface 16 years later and disclosed them to Tate & company; it had its own legal department; it routinely Lyle, and that Tate & Lyle—as sophisticated as it hired national law firms to handle its more complex legal is—fully appreciated the risks and made an informed matters, and accordingly, it was “expected to understand waiver. the full extent of what it waived....”). SPB contends that Tate & Lyle’s own highly experienced counsel signed the The Court finds that the advanced waiver did not amount 1998 Engagement Letter on behalf of Tate & Lyle, and it to a full and reasonable disclosure of the potential is undisputed that Tate & Lyle is a sophisticated client. conflict; accordingly, Tate & Lyle did not knowingly (Opp’n at 13:16–14:16.) SPB further contends that other waive the conflict.6 Visa, 241 F.Supp.2d at 1106–07. A jurisdictions and the ABA Model Rules and opinions second more specific waiver was required because the recognize that the most important factors in evaluating advanced waiver did not sufficiently disclose the nature of informed consent are the involvement of independent the conflict and the material risks of SPB’s ongoing counsel; the sophistication of the client; and the exclusion representation of Tate & Lyle and the adverse Sugar of conflicts in substantially related matters. (Opp’n at Plaintiffs. See Concat, 350 F.Supp.2d at 820–21. 10:1–19.)

Tate & Lyle’s former Executive Vice President and General Counsel who signed the 1998 Engagement Letter, 3. SPB’s Withdrawal Did Not Cure the Conflict Patrick Mohan, declares, “I am certain that no one from On August 18, 2014, after SPB concurrently represented Patton Boggs discussed the advanced waiver with me at Tate & Lyle and the Sugar Plaintiffs for more than two the time that I executed the 1998 Engagement Letter ... and a half months, SPB terminated its relationship with [i]f they had and I had understood that it was meant to Tate & Lyle after it would not agree to waive the conflict. © 2015 Thomson Reuters. No claim to original U.S. Government Works. 10

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(See Castelli Decl. ¶ 22, Ex. 8.) disqualification. SPB is therefore subject to disqualification from the present action. [16] [17] The “hot potato rule” bars an attorney and law firm from curing the dual representation of clients by expediently severing the relationship with the preexisting client. See Flatt, 9 Cal.4th at 288, 36 Cal.Rptr.2d 537, 885 B. SPB is Subject to Disqualification Due to its Prior P.2d 950. Accordingly, the automatic disqualification rule Representation of Ingredion in Matters Substantially applicable to concurrent representations cannot be Related to the Present Action avoided by unilaterally converting a present client into a 1. Ingredion was a Former Client of SPB former client. Id. [19] Ingredion first retained Patton Boggs in May 2004, SPB argues that the “hot potato doctrine” does not apply and Patton Boggs has continued to perform work for and it was permitted to withdraw: (1) pursuant to the Ingredion over the years and last performed work for terms of the 1998 Engagement Letter; (2) because the Ingredion in September 2013. (Talisman Decl. ¶ 3.) withdrawal could be accomplished without material adverse effect and was permitted under the District of Ingredion contends that it was an existing client at the Columbia and California Rules of Professional time of the merger because during the firm’s decade-long Responsibility; and (3) because it is not a situation in representation, Ingredion reached out to Patton Boggs on which SPB dropped a client “like a hot potato” to take on an as-needed basis, but time gaps never resulted in a 8 a new client. (Opp’n at 15:20–19:26.) termination of the attorney-client relationship. (Levy Decl. ¶ 5.) Ingredion contends that it was treated as an The 1998 Engagement Letter provides, “[i]f either you or existing client and was not asked to enter into a new fee we conclude that our representation should or must be agreement when it approached Patton Boggs in February terminated, we will do our best to protect your interests in 2009, May 2013, or on other occasions following time providing a smooth transition to new counsel.” (Castelli gaps. (Id.) All work was billed to Ingredion’s existing Decl., Ex. 1.) That provision does not authorize SPB to account with Patton Boggs. (Id.) cure a conflict of interest by its withdrawal. Moreover, at the time of SPB’s withdrawal, it was representing Tate & An engagement letter dated December 14, 2005 (the Lyle in a project involving a 90–day response deadline. “2005 Engagement Letter”) from Patton Boggs’ attorney, (Proctor Decl. ¶ 6.) Tate & Lyle’s counsel declares that Stuart Pape, enclosed Patton Boggs’ Standard Terms of the company is now forced to find new counsel to replace Engagement. The Standard Terms of Engagement its counsel of sixteen years and bring that new counsel up provides, “[i]t is our policy that the attorney-client to speed. (Castelli Decl. ¶ 23; Balsley Decl. ¶ 11.) relationship will terminate upon our completion of any service that you have retained us to perform.” (Talisman [18] Additionally, the “hot potato rule” applies regardless Decl., Ex. 2.) Patton Boggs completed services for of the attorney’s reasons for terminating the relationship.7 Ingredion in September 2013, eight months prior to the See *1085 Flatt, 9 Cal.4th at 289, 36 Cal.Rptr.2d 537, merger in June 2014, and under the terms of the 2005 885 P.2d 950. The “hot potato rule” does not distinguish Engagement Letter, its attorney-client relationship with circumstances in which counsel drops a client to represent Ingredion ended. a new client, from the circumstances present here. Rather, the doctrine is grounded in an attorney’s undivided duty Ingredion contends that it was not rendered a former of loyalty, which was unquestionably breached by SPB client by the statements in Patton Boggs’ Standard Terms simultaneously representing adverse clients. See id. at of Engagement because (1) it did not expressly agree to 284, 36 Cal.Rptr.2d 537, 885 P.2d 950. those terms; and (2) the 2005 Engagement Letter that accompanied the Standard Terms of Engagement shows In sum, SPB concurrently represented Tate & Lyle in that Ingredion retained Patton Boggs not for a discrete regulatory matters and the adverse Sugar Plaintiffs in this issue or litigation, but to provide ongoing representation action. Tate & Lyle did not consent to the concurrent in connection with FDA regulation of Ingredion’s representation, and SPB’s withdrawal from its products. (See Proctor Decl. ¶ 6, Ex. 10.) representation of Tate & Lyle did not cure the conflict or convert Tate & Lyle into a former client for purposes of Ingredion was not required to take any action to show its © 2015 Thomson Reuters. No claim to original U.S. Government Works. 11

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assent to the Standard Terms of Engagement. The 2005 Engagement Letter from Mr. Pape provides, “[t]his letter Patton Boggs’ attorneys also advised Ingredion regarding supplements and modifies the enclosed terms of FDA statements and enforcement actions following a engagement ... [i]f you agree with these terms and letter issued from the FDA dated July 3, 2008, signed by conditions, including those set forth in the [Standard Geraldine June (the “Geraldine June Letter”). (Levy Decl. Terms of Engagement], no further action is required....” ¶ 11, Ex. 4.) The Geraldine June Letter describes aspects (Id.) of manufacturing HFCS and whether a resulting product could be considered “natural.” (Id. ¶ 10.) Ingredion *1086 The 2005 Engagement Letter also provides that received advice from Patton Boggs regarding Patton Boggs was retained to “represent [Ingredion] in interpretation of the Geraldine June Letter, including connection with FDA regulation of the Company’s advice concerning a key aspect of the HFCS Products.” (Id., Ex. 10.) It does not specify that Patton manufacturing process and how that might affect whether Boggs’ representation is ongoing, continuing or the resulting HFCS product could be described as open-ended. The Standard Terms of Engagement provides “natural.” (Id. ¶ 11.) Patton Boggs’ lawyers billed time in that the attorney-client relationship would end upon 2009 for researching and discussing FDA statements and completion of Patton Boggs’ services and states that natural claims internally and with Ingredion. (In Camera should Ingredion continue to retain Patton Boggs, the Proctor Decl., Ex. 5.) attorney-client relationship would be re-established at that time. (Id.) Once Patton Boggs completed its Ingredion contends that in the Geraldine June Letter, the representation of Ingredion in September 2013, the FDA concluded that HFCS qualifies as “natural.” (Id.; attorney-client relationship terminated. See, e.g., Banning Mot. at 7:20–22.) Counsel for Ingredion declares that it Ranch Conservancy v. Super. Ct., 193 Cal.App.4th 903, and other Defendants are relying on the Geraldine June 913–14, 123 Cal.Rptr.3d 348 (2011). Letter in this action in support of their position that it is not a *1087 misrepresentation to claim that HFCS is Accordingly, Ingredion was a former client of Patton “natural.” (Id.) Boggs at the time of the June 2014 merger.9 Whether SPB can represent the Sugar Plaintiffs in this action after SPB represents Plaintiffs in this lawsuit against previously representing Ingredion depends on whether Defendants, alleging that they engaged in false SPB can do so while maintaining its duty of advertising of HFCS. Plaintiffs allege that this lawsuit is a confidentiality it owes to Ingredion. That, in turn, depends response to an educational campaign initiated by on whether the former and current matters are Defendant CRA in 2008 that sought to educate the public “substantially related.” about HFCS and to address the Sugar Plaintiffs’ purported vilification and myths about HFCS with facts and scientific studies. (See SAC ¶ 46; Ingredion’s Am. Ans., Counterclaims (Dkt. No. 91) at ¶ 46.) Sugar 2. The Prior and Current Representations are Plaintiffs allege that Defendant CRA’s campaign “Substantially Related” constitutes false advertising under the Lanham Act, identifying two categories of false and/or misleading representations: the first category is Defendants’ use of a. Patton Boggs’ Prior Work for Ingredion vs. Its Work the term “corn sugar,” and the second category is in the Present Action Defendants’ statements that HFCS is a “natural” product. (SAC ¶¶ 68, 69.) [20] Patton Boggs’ attorneys advised Ingredion regarding permissible, common or unusual names for HFCS. (Levy Defendants, including Ingredion, defend that the term Decl. ¶ 10.) Evidence filed in camera shows lawyers “corn sugar” accurately depicts HFCS and that the FDA billed time in 2006 for researching regulations on has confirmed methods of producing HFCS that qualifies advertising products with HFCS; reviewing FDA and as “natural.” (See Mot. (Dkt. No. 24) at 7:8–22, 5:12–15.) Department of Agriculture rules and regulations on Ingredion’s defense relies, in part, on the Geraldine June HFCS, and discussing research and common or unusual Letter. (See id.; Levy Decl., ¶ 11.) The Geraldine June names for HFCS with each other and Ingredion. (Levy Letter has been explored in multiple depositions, it is Decl. ¶ 10; In Camera Proctor Decl., Exs. 3, 5.) expected to be discussed in motions for summary © 2015 Thomson Reuters. No claim to original U.S. Government Works. 12

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judgment, and it will likely be addressed at trial. (See representation of the Sugar Plaintiffs was likely imparted Levy Decl. ¶ 11; Proctor Decl. ¶ 8.) to counsel. See *1088 Cobra Solutions, 38 Cal.4th at 847, 43 Cal.Rptr.3d 771, 135 P.3d 20. Moreover, the fact that former Patton Boggs attorneys Smitha Stansbury and Paul Rubin are no longer at SPB does not change the outcome, particularly since Ms. Stansbury left SPB after b. Legal and Factual Similarities the merger. See, e.g., Elan Transdermal Ltd. v. Cygnus Therapeutic Sys., 809 F.Supp. 1383, 1390–91 The evaluation of whether the two representations are (N.D.Cal.1992) (Orrick, J.). substantially related centers upon the factual and legal similarities of the representations. See Farris, 119 Ingredion has established that there is a “substantial Cal.App.4th at 679, 14 Cal.Rptr.3d 618 (citations relationship” between the prior and current omitted). representations, and the attorneys at Patton Boggs, now SPB, are presumed to possess confidential information. SPB contends that none of the four billing entries from SPB is thus subject to automatic disqualification from this August 2006 relating to HFCS, concern the use of the action.10 See Farris, 119 Cal.App.4th at 679, 14 word “sugar” or any other term at issue in this litigation. Cal.Rptr.3d 618; Cobra Solutions, 38 Cal.4th at 847, 43 (Opp’n at 16:2–10.) SPB further argues that there was no Cal.Rptr.3d 771, 135 P.3d 20. question related to whether the word “sugar” could be used for HFCS in labeling, or any question regarding the relative benefits of sugar versus HFCS, and the inquiry did not relate to advertising. (Id.) 3. SPB’s Evidence Does Not Overcome the Presumption SPB contends that the Geraldine June Letter is only at [21] SPB provides declarations from attorneys that have issue in this litigation regarding whether Defendants can worked on the instant lawsuit on behalf of the Sugar rely on it as an FDA endorsement of marketing HFCS as Plaintiffs. These attorneys declare that they have never “natural.” (Id. at 16:20–22.) SPB further contends that received any information from any lawyer who was with work performed in August 2009, was performed by Patton Boggs about either Ingredion or Tate & Lyle, and attorneys Paul Rubin, who left Patton Boggs in August they have not performed work on any matter for Tate & 2012 (two years before the merger) and Smitha Lyle after the merger. (See gen. SPB’s Omnibus Stansbury, who left SPB in July 2014 (almost two months Compendium of Declarations (Dkt. No. 262).) SPB’s after the merger). (Id. at 16:16.) counsel declares that the only lawyers who remain at SPB who have worked on Ingredion matters after 2010 are A “substantial relationship” does not necessarily mean an Stuart Pape, Carey Nuttall, and Ann Spiggle. (Talisman exact match between the facts and issues involved in the Decl., Ex. 39 at ¶ 6.) These lawyers declare that they have two representations. See Farris, 119 Cal.App.4th at 688, never provided any information to any lawyer who was at 14 Cal.Rptr.3d 618; see also Trone, 621 F.2d at 1000 Squire Sanders about Ingredion, and after the firms (explaining that the substantial relationship test does not merged, they did not work on any matter for the Sugar require that the issues in the two representations be Plaintiffs.11 (See Nuttall Decl., Ex. 28; Pape Decl., Ex. 29; identical); see also Flatt, 9 Cal.4th 275, 283, 36 Spiggle Decl., Ex. 38.) Cal.Rptr.2d 537, 885 P.2d 950; Jessen v. Hartford Cas. Ins. Co., 111 Cal.App.4th 698, 712–13, 3 Cal.Rptr.3d 877 Shortly after the merger in July 2014, Stuart Pape—the (2003). The work Patton Boggs performed for Ingredion Patton Boggs attorney who signed the engagement letters in 2006 and 2009 relates to the propriety of characterizing for both Ingredion and Tate & Lyle—consulted with the HFCS as “natural” under FDA policy—advice that is Sugar Plaintiffs’ expert witness, David Kessler, and the germane to issues concerning marketing and advertising former Squire Sanders attorney, John Burlingame, who is HFCS as natural and whether such claims could be false co-lead attorney for the Sugar Plaintiffs in this action. or misleading. Accordingly, the similarities of the legal (See Pape Decl. ¶¶ 12–16; Burlingame Decl. ¶ 9.) This and factual issues of Patton Boggs’ prior representation of consultation occurred prior to any formal ethical walls Ingredion put Patton Boggs, now SPB, in a position being in place. There is a real risk that confidential where confidential information material to its current information was in fact compromised. © 2015 Thomson Reuters. No claim to original U.S. Government Works. 13

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records without written permission from Tate & In any event, whether the attorneys actually possessed or Lyle, Ingredion or court order; conveyed confidential information is not the test. Rather, because Ingredion has met its burden showing that a (4) SPB offered to provide its attorney Dan Waltz’s “substantial relationship” exists between the two services without charge to Tate & Lyle to ease its representations, SPB is conclusively presumed to possess transition with new counsel and agrees to reimburse confidential information material to the present action. it for reasonable transition expenses incurred; See Jessen, 111 Cal.App.4th at 709, 3 Cal.Rptr.3d 877 (emphasis in original); Flatt, 9 Cal.4th at 283, 36 (5) Plaintiffs will stipulate in this case that all Cal.Rptr.2d 537, 885 P.2d 950. The “substantial Defendants (other than CRA) manufacture various relationship” test ensures that clients are not forced to formulations of HFCS, consistent with the reveal the confidences the rule is intended to protect. description set forth in the Geraldine June Letter *1089 Trone, 621 F.2d at 999 (“It is the possibility of the (“HFCS Manufacturing Stipulation”); and breach of confidence, not the fact of the breach, that triggers disqualification”); Adams v. Aerojet Gen. Corp., (6) SPB agrees that at trial, no SPB lawyer will 86 Cal.App.4th 1324, 1331–32, 104 Cal.Rptr.2d 116 examine any Tate & Lyle or Ingredion witnesses or (2001); see also Jessen, 111 Cal.App.4th at 710, 3 make arguments or address documents that came Cal.Rptr.3d 877. from Tate & Lyle or Ingredion.

The Court finds that SPB is subject to automatic disqualification because it previously represented 1. Whether the Proposed Alternatives Sufficiently Ingredion in matters substantially related to the present Mitigate the Conflicts and Ethical Violations to Avoid action, and SPB is thus presumed to possess client Disqualification confidences revealed in the prior representations. See Mindful of the late stage of this case and potential Flatt, 9 Cal.4th at 283, 36 Cal.Rptr.2d 537, 885 P.2d 950; prejudice that the Sugar Plaintiffs could suffer if their Trone, 621 F.2d at 999. Evidence showing that the Patton counsel is disqualified, the Court considers whether the it Boggs attorney who signed the engagement letters for could adopt some or all of SPB’s proposed alternatives to Ingredion and Tate & Lyle actually consulted with Sugar mitigate the impact of its ethical violations without Plaintiffs’ counsel and expert witness following the prejudicing Ingredion or Tate & Lyle. merger reinforces the Court’s finding.

SPB’s offer to reimburse Ingredion and Tate & Lyle for

their fees incurred in the instant Motions and SPB’s offer C. Proposed Alternatives to Disqualification to reimburse Tate & Lyle reasonable transition expenses SPB and Plaintiff Sugar Association propose the are offers that would help mitigate the admitted errors following remedial measures, which they contend made by SPB during the merger. Those offers, however, sufficiently address the concerns raised in the Motions as do not cure SPB’s breach of its ethical duties. follows:

(1) SPB agrees to reimburse Tate & Lyle and Ingredion for fees incurred in connection with the a. SPB’s Breached Duty of Confidentiality instant Motions; [22] The Court first considers whether the imposition of (2) SPB implemented formal ethical walls by the formal ethical walls and the removal of Patton Boggs’ time of the November 2014 hearing but after the records to a third party could help mitigate SPB’s *1090 Motions to Disqualify were filed; breach of its duty of confidentiality to Ingredion. (3) SPB will deposit all physical and electronic Patton Boggs’ records to a third party for safekeeping, and no legacy Squire Sanders lawyer or legacy Patton Boggs lawyer would have access to the i. Ethical Walls and Removal of Records © 2015 Thomson Reuters. No claim to original U.S. Government Works. 14

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Because SPB formerly represented Ingredion on matters implemented until three months after the dispute was that are “substantially related” to the present lawsuit, SPB initiated, and was thus, too late to be effective). is presumed to possess confidential information material to the present action, and under California law, SPB is Accordingly, although erecting an ethical wall after the subject to automatic disqualification. Cobra Solutions, 38 fact can prevent future breaches of confidence, it cannot Cal.4th at 847, 43 Cal.Rptr.3d 771, 135 P.3d 20. rebut the presumption of shared confidences here, particularly where a conflicted SPB attorney consulted The California Supreme Court noted that it “need not with an another SPB attorney representing the adverse consider whether an attorney can rebut a presumption of parties about this case prior to the implementation of shared confidences, and avoid disqualification by formal ethical screens. See, e.g., j2 Global Comm’n, Inc. establishing that the firm imposed effective screening v. EasyLink Servs. Int’l, No. 09–04189, 2012 WL measures.” See SpeeDee Oil, 20 Cal.4th at 1151, 86 6618609, at *10 (C.D.Cal. Dec. 19, 2012) (Pregerson, J.) Cal.Rptr.2d 816, 980 P.2d 371; see also In re Cnty. of Los (concluding the presumption of shared confidences was Angeles, 223 F.3d 990, 995 (9th Cir.2000) (interpreting irrebuttable, and thus disqualification was mandatory, SpeeDee Oil as a signal that the California Supreme Court where the conflicted attorney was not timely screened). may adopt a more flexible approach to vicarious disqualification in the future). Moreover, belated ethical walls and separation of documents cannot restore Tate *1091 & Lyle’s legitimate The Ninth Circuit in In re Cnty. of Los Angeles assumed expectation of loyalty, which is the “essential basis for that the former and current matters were substantially trust and security in the attorney-client relationship.” related, but concluded that disqualification of the law firm SpeeDee Oil, 20 Cal.4th at 1147, 86 Cal.Rptr.2d 816, 980 was not warranted because a timely, effective ethical wall P.2d 371; see also Concat, 350 F.Supp.2d at 822 (finding had been imposed, thereby rebutting the presumption that an ethical wall could do nothing to mitigate or cure a the lawyer and new law firm had confidential information conflict arising from the concurrent representation of relevant to the current action. 223 F.3d at 997. Similarly, adverse clients because the purpose of the prohibition at least one California appellate court found that a law against such relationship is to preserve the attorney’s firm could rebut the presumption of shared client paramount duty of loyalty, not confidentiality). confidences if it imposed ethical screening when the conflict arose. See Kirk v. First Am. Title Ins. Co., 183 Cal.App.4th 776, 801, 108 Cal.Rptr.3d 620 (2010).

SPB contends that following the merger a de facto ethical ii. HFCS Manufacturing Stipulation wall was in place because Patton Boggs’ lawyers did not [23] have access to Squire Sanders’ computer systems and vice Plaintiffs agree to stipulate that all Defendants (other versa, and at the November 2014 hearing, SPB’s counsel than CRA) manufacture various formulations of HFCS, stated that formal ethical walls are in place. (See Talisman consistent with the description in the Geraldine June Decl. ¶ 7; Ballin Decl. ¶ 13). But following the Letter. This stipulation does not mitigate the problem that merger—and before formal ethical walls were in Patton Boggs advised Ingredion in 2009 regarding the place—the Patton Boggs attorney who engaged Tate & Geraldine June Letter, and SPB is presumed to have Lyle and Ingredion, met with the Sugar Plaintiffs’ expert confidential information that could be used against witness and co-lead attorney. (Pape Decl. ¶¶ 12, 14–16; Ingredion in the present action. Advice rendered in Burlingame Decl. ¶ 9.) The ethical screening was thus not connection with the Geraldine June Letter certainly went “timely” imposed. Cf., In re County of Los Angeles, 223 beyond the mere manufacturing process of HFCS. This F.3d at 996–97 (finding a timely and effective ethical wall stipulation likewise does not mitigate SPB’s breach of its had been imposed where the law firm had removed all duty of loyalty to Tate & Lyle. files concerning the pending case before the conflicted lawyer joined the firm; all attorneys had been instructed not to discuss the case with him, and he did not have access to the case file); see also Concat, 350 F.Supp.2d at b. SPB’s Breached Duty of Loyalty 822 (disqualifying the law firm, explaining that even if an ethical wall could have prevented a conflict, it was not © 2015 Thomson Reuters. No claim to original U.S. Government Works. 15

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Because Tate & Lyle was a current client of SPB, and it responsibility, preservation of public trust in the simultaneously represented the adverse Sugar Plaintiffs, scrupulous administration of justice, and the integrity of SPB breached its duty of undivided loyalty to Tate & the bar against a client’s right to chosen counsel, and the Lyle. SPB offers that, at trial in this case, no SPB lawyer burden on the client if its counsel were disqualified. See will examine any Tate & Lyle or Ingredion witness. Kirk, 183 Cal.App.4th at 807–08, 108 Cal.Rptr.3d 620; Additionally, no SPB attorneys will make arguments or UMG Recordings, Inc. v. MySpace, Inc., 526 F.Supp.2d address documents that came from either Tate & Lyle or 1046, 1059 (C.D.Cal.2007) (Matz, J.). Ingredion. SPB and Plaintiff Sugar Association contend that SPB’s offer could help mitigate the impact of its breached Ingredion and Tate & Lyle filed their Motions to obtain duty of loyalty to Tate & Lyle. But while Tate & Lyle an improper tactical advantage in this litigation. The witnesses will not be examined by SPB attorneys at trial, merger was highly publicized, and counsel for Sugar its adversaries are still represented by the same law firm Plaintiffs, Mr. Burlingame, opines that the Motions have that dropped Tate & Lyle after it raised the conflict. The been filed by Defendants to “gain a tactical advantage duty of loyalty SPB owed to Tate & Lyle was both by delaying this [a]ction and by removing The compromised in favor of the duties SPB owes to the Sugar Association’s chosen and experienced counsel.” Sugar Plaintiffs. Even putting that aside, SPB would still (Burlingame Decl. ¶ 6.) At various depositions, owe a duty of confidentiality to Tate & Lyle, and as set Defendants’ counsel never raised the prospect that the forth above, ethical screens were not implemented before merger would create any conflict. (See Fox Decl. ¶ 4; the Patton Boggs attorney who signed the engagement Burlingame Decl. ¶ 10; Elkins Decl. ¶ 3.) Similarly, on letter for Tate & Lyle met with co-lead attorney and an June 2, 2014, SPB filed and served a notice, reflecting the expert witness for the Sugar Plaintiffs. firm’s name change, and no one called the legacy Squire Sanders lawyers to raise any issue upon the filing. (Dkt. Mindful that the “paramount concern must be to preserve No. 180.) It was not until July 23, 2014, that Tate & public trust in the scrupulous administration of justice and Lyle’s counsel first raised the conflict. (Waltz Decl. ¶ 7.) the integrity of the bar” and that the duty of loyalty is fundamental to the attorney-client relationship, SPB’s The Court does not conclude from the evidence provided proposal is not sufficient to overcome a rule of automatic that the Motions were brought for tactical reasons. The disqualification resulting from its concurrent Motions were filed days after Tate & Lyle’s counsel met representation of Tate & Lyle and the Sugar Plaintiffs. and conferred with SPB’s counsel and after it became See SpeeDee Oil, 20 Cal.4th at 1145, 86 Cal.Rptr.2d 816, clear that Tate & Lyle would not consent to the existing 980 P.2d 371. conflict. SPB cannot minimize its breach of ethical duties owed to its clients by placing the burden on them to In sum, the Court finds that the proposed alternatives do identify and raise the conflicts sooner. See Stanley v. not mitigate the conflicts and resulting ethical violations Richmond, 35 Cal.App.4th 1070, 1089, 41 Cal.Rptr.2d for the Court to order the proposed alternatives in lieu of 768 (1995). disqualification. Still sensitive to the hardship that would surely result if Plaintiffs lost their trusted counsel in this In UMG Recordings v. MySpace, the district court four-year litigation with trial nearing, the Court considers fashioned an alternative remedy to disqualification. The whether any other alternatives short of disqualification UMG Recordings court conditioned denial of the could suffice. plaintiff’s motion to disqualify the defendant’s counsel on reimbursement of fees and costs incurred in the disqualification dispute and preclusion of discovery or claims relating to an affirmative defense that was D. Other Alternatives to Disqualification substantially similar to a matter in which the law firm had [24] [25] A disqualification motion may involve previously represented the plaintiff. 526 F.Supp.2d at considerations such as a client’s right to chosen counsel 1065. and the possibility that tactical abuse underlies the disqualification motions. SpeeDee Oil, 20 Cal.4th at 1145, Unlike in UMG Recordings, where there was no dispute 86 Cal.Rptr.2d 816, 980 P.2d 371. The Court balances the that the affirmative defense and discovery relating to it need to maintain *1092 ethical standards of professional was a “very tiny tail on a much bigger dog....” id. at 1065, © 2015 Thomson Reuters. No claim to original U.S. Government Works. 16

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here, SPB’s representation of Ingredion regarding the of professional time, demonstrating the depth of the characterization of HFCS as “natural” is an issue that firm’s involvement. (Sugar Assoc. Inc.’s Opp’n at goes to the heart of this lawsuit. (See SAC (Dkt. No. 55) 9:6–14.) The Sugar Plaintiffs contend that no ¶¶ 30, 32; 59–61; (Dkt. No. 91) ¶ 74.) replacement firm could master these issues without near-identical effort. (Id.) Unlike in UMG Recordings, where the law firm’s representation of the defendant did not commence until Having considered the competing interests of Plaintiffs’ after its representation of the plaintiff had ended, id. at right to chosen counsel and the prejudice they would face 1065, here, SPB concurrently represented the Sugar if SPB were disqualified against the paramount concern of Plaintiffs and Tate & Lyle. Also unlike in UMG preserving public trust in the scrupulous administration of Recordings, where the law firm implemented an ethical justice and the integrity of the bar, the Court finds that no wall some seven months before the events that led alternative short of disqualification will suffice. SpeeDee plaintiff to complain of the conflict, id. at 1064, here, SPB Oil, 20 Cal.4th at 1145, 86 Cal.Rptr.2d 816, 980 P.2d 371. implemented a formal ethical wall after the motions to While the Court is mindful that this outcome imposes disqualify were filed, and after counsel for the Sugar hardship on the Sugar Plaintiffs, “the important right to Plaintiffs met with Mr. Pape, the attorney who engaged counsel of one’s choice must yield to ethical both Tate & Lyle and Ingredion. considerations that affect the fundamental principles of our judicial process.” Id. Additionally, in UMG Recordings, the law firm made “crystal clear” that it would not agree to represent the plaintiff UMG unless it agreed to waive any conflict that would prevent the law firm from representing an adverse party in cases concerning infringement of intellectual V. CONCLUSION property rights on the internet. Id. at 1065. Plaintiff UMG signed the waiver that put it on *1093 notice that its law The Court hereby GRANTS Tate & Lyle’s and firm might represent a specific party (like the defendant), Ingredion’s Motion to Disqualify Squire Patton Boggs even if UMG were still an active client of the law firm. Id. LLP. Here, the advanced waivers contained in Patton Boggs’ Standard Terms of Engagement is a generalized advanced All pending motions, including motions before Magistrate waiver with no specificity and could not have put Judge Nagle, are hereby stayed until further order from Ingredion or Tate & Lyle on notice of the conflicts it was the Court. The parties are ordered to appear for a status agreeing to waive. conference on May 5, 2015 at 10:00 a.m. The parties shall file a status report with the Court no later than April 28, The Sugar Plaintiffs have a right to their counsel of 2015. choice, and declare that they have relied on SPB as their trusted counsel, who have become “case experts” on IT IS SO ORDERED. “extraordinarily complex issues” central to this litigation. (See Briscoe Decl. ¶¶ 3, 14.) Indeed, disqualification at this late stage would undoubtedly impose hardship on All Citations Plaintiffs. The parties have engaged in extensive discovery and motion practice, and Plaintiffs have 98 F.Supp.3d 1074 incurred over $12 million in fees from Squire Sanders/SPB in this matter, reflecting over 20,000 hours

Footnotes

1 Plaintiffs’ SAC also named defendant, Roquette America, Inc. However, Plaintiffs’ claim against Roquette America, Inc. was dismissed on July 31, 2012. (Dkt. No. 76.)

2 California Rule of Professional Responsibility 3–310(E) governs successive representation of clients with adverse interests providing, “[a] member shall not, without the informed written consent of the client or former client, accept © 2015 Thomson Reuters. No claim to original U.S. Government Works. 17

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employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.”

3 When the attorney’s contact with the prior client was not direct, then the court examines both the attorney’s relationship to the prior client and the relationship between the prior and the present representation. Cobra Solutions, 38 Cal.4th at 847, 43 Cal.Rptr.3d 771, 135 P.3d 20 (citations omitted).

4 California Rule of Professional Conduct 3–310(C) provides, “a member shall not, without informed written consent of each client, (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict; or (2) Accept or continue representation of more than one client in a matter in which the interests of the clients actually conflict; or (3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.”

5 The 1998 Engagement Letter was countersigned by Executive Vice President and General Counsel of Tate & Lyle’s corporate predecessor, Patrick Mohan, and the letter referenced the Standard Terms of Engagement that were in effect at that time. (Mohan Decl., ¶ 1, 3.)

6 Because Patton Boggs’ advanced waiver does not constitute “informed consent,” the Court does not address the parties’ alternative arguments regarding whether the terms of the waiver apply, e.g., whether the waiver is inapplicable because Patton Boggs/SPB has obtained sensitive, proprietary or other confidential information of Tate & Lyle or whether the former and current representations are substantially related.

7 SPB cites the District of Columbia and California Rules of Professional Conduct, but California law applies to the Motions to Disqualify in this case. See In re Cnty. of Los Angeles, 223 F.3d 990, 995 (9th Cir.2000) (“Because we apply state law in determining matters of disqualification, we must follow the reasoned view of the state supreme court when it has spoken on the issue”).

8 For example, there were gaps of activity between July 2008 and February 2009, as well as between June 2012 and May 2013. (See Levy Decl. ¶ 5.)

9 In any event, whether Ingredion was a current or former client is a moot issue because as set forth infra, the Court finds that the former and current matters are “substantially related.” SPB is thus presumed to have confidential information, thereby subjecting it to automatic disqualification. See Flatt, 9 Cal.4th at 283, 36 Cal.Rptr.2d 537, 885 P.2d 950; Cobra Solutions, 38 Cal.4th at 847, 43 Cal.Rptr.3d 771, 135 P.3d 20. In addition, the Court need not address whether Ingredion consented to waive the conflict by the advanced waiver provision in Patton Boggs’ Standard Terms of Engagement because the advanced waiver by its terms did not waive conflicts in matters that are substantially related. (Opp’n at 9:7.)

10 The presumption that an attorney has access to confidential matters relevant to a subsequent representation extends the attorney’s disqualification vicariously to the attorney’s entire firm. See In re Charlisse, 45 Cal.4th at 161, 84 Cal.Rptr.3d 597, 194 P.3d 330; Flatt, 9 Cal.4th at 283, 36 Cal.Rptr.2d 537, 885 P.2d 950.

11 Similarly, attorneys who worked on matters for Tate & Lyle declare that they have had no contact with any lawyer formerly with Squire Sanders about the Sugar case; shall have no such contact in the future; have not had any discussion about Tate & Lyle with any lawyer formerly employed at Squire Sanders; and have never provided any information to any lawyer formerly with Squire Sanders about Tate & Lyle. (See, e.g., Mudrick Decl., Ex. 27; Randle Decl., Ex. 31; Samolis Decl., Ex. 32; Schutzer Decl., Ex. 34.)

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