All In The Family: The Tricky Ethics Of Corporate Affiliate Conflicts

Michael E. McCabe, Jr.Conflicts of Interest, Disqualification, IP Ethics, Litigation Ethics, Litigation Ethics, Patent Litigation EthicsLeave a Comment

If you represent a corporation, do you represent all entities in the corporate family? For example, if you represent a parent company, does that mean you also represent the parent’s subsidiaries? Does it matter if a subsidiary is wholly-owned vs. partially owned? How about if you represent a subsidiary–does that mean you also represent its parent or grandparent entity in the corporate tree?

Many corporate entities are parts of families that can include parents, subsidiaries, and other affiliated or related entities.  Some corporate families can be complex and include scores, or even hundreds, of related entities under the same “family tree.”  This arrangement can present challenges for attorneys who are asked to undertake a representation adverse to an entity that the lawyer does not consider to be her client yet is part of the same corporate family as the lawyer’s organizational client.

The question sometimes arises whether a lawyer representing one entity in a corporate family may undertake a concurrent representation directly adverse to a different family member of the lawyer’s corporate client. 

In a recent decision, the Federal Circuit disqualified a law firm from representing a client in a patent appeal because the adverse parties in the patent matter were corporate affiliates of one of the firm’s clients.  The Court’s decision in Dr. Falk Pharma GMBH v. Generico, LLC, is instructive on how corporate affiliates can morph into unintentional clients that create a conflict of interest for a lawyer who wants to take a position adverse to a different entity within the same corporate family as the lawyer’s client.


The Trademark Representation

For many years, the law firm of Katten Muchin Rosenman LLP (Katten) represented Bausch & Lomb in trademark copyright, and advertising matters.  As relevant to this matter, in May 2018, Katten was representing Bausch & Lomb in trademark litigation.

Bausch & Lomb is both an indirect subsidiary of Valeant-CA and an affiliate of Salix.  The Firm’s engagement agreement for the trademark litigation on behalf of Bausch & Lomb was executed by Valeant-CA.  As is common especially when representing large entities, the client had outside counsel guidelines (OCGs), which the engagement agreement incorporated by reference. Valeant-CA’s OCGs stated in relevant part that Katten would not represent any party in matters conflicting with any Valeant entity. 

Patent Proceedings Background

In 2015, Valeant-CA and Salix sued Mylan, alleging that Mylan’s submission of an abbreviated new drug application constituted an act of infringement under 35 U.S.C. § 271(e). Two Alston & Bird attorneys, Mukerjee and Soderstrom, represented Mylan in the litigation.  Valeant-CA and Salix moved for summary judgment of no invalidity. The district court granted the motion on May 1, 2018.

On May 3, 2018, Mylan notified the district court that Mukerjee and Soderstrom had left Alston & Bird to join Katten.

On May 25, 2018, Valeant-CA filed a motion to disqualify Katten in the district court action.

On June 22, 2018, Mylan appealed the district court’s summary judgment. Valeant-CA then filed a motion to disqualify Katten in the Federal Circuit.  The district court stayed a decision on the motion to disqualify pending before it, and the Federal Circuit stayed briefing on the merits of the appeal pending its decision on the disqualification motion.

In addition to that representation, Mukerjee and Soderstrom, while at Alston & Bird, represented Mylan against Salix in related, parallel proceedings before the PTAB and the district court.  The Salix matter wound up in a related appeal filed in the Federal Circuit, which appeal was pending when Mukerjee and Soderstrom joined Katten.  Thereafter, Salix moved to disqualify Katten from that appeal.  That motion was consolidated for decision with the Valeant-CA disqualification motion.

The Disqualification Motion

Valeant-CA and Salix argued that Katten’s concurrent representation of Bausch & Lomb in trademark infringement litigation presented a conflict of interest that required the disqualification of Katten from representing Mylan in the patent proceedings. 

First, they argued that the engagement agreement that Katten entered into for the Bausch & Lomb trademark litigation created an ongoing client relationship between Katten and Valeant-CA, including all of its subsidiaries.  Second, they argued that all Valeant-CA subsidiaries are so interrelated that the representation of one was, in effect, a representation of them all.

The Federal Circuit court applied the regional law of the Third and Fourth Circuit on the relevant rules of professional conduct.  Pursuant to Rule 1.7(a) of the Model Rules of Professional Conduct:

A lawyer shall not represent a client if the representation involves a concurrent conflict of interest.  A concurrent conflict of interest exists if:

The representation of one client will be directly adverse to another client . . .

The court noted that under the comments to Rule 1.7 pertaining to organizational clients “a lawyer for the organization is not barred from accepting representation adverse to an affiliate in an unrelated matter, unless the circumstances are such that the affiliate should also be considered a client of the lawyer . . .”  The court concluded that the “circumstances” were such that affiliates should be considered clients of Katten.

First, the engagement agreement supported the conclusion that there was an ongoing client relationship between Katten and its organizational clients, Valeant-CA and Salix.  The court held:

Because the engagement letter creates an ongoing attorney-client relationship between the law firm, Katten, and its organizational clients, Valeant-CA and Salix, Katten’s representation of Mylan adverse to movants in Valeant II gives rise to a concurrent conflict of interest under Rule 1.7. The express terms of the engagement letter and accompanying OC Guidelines indicate that Katten formed such a relationship with the movants when it signed the engagement letter for the Bausch & Lomb trademark litigation. Specifically, the engagement letter states that it “represents the general terms of engagement governing the overall relationship between [Katten] and Valeant Pharmaceuticals International, Inc.” . . . . This sentence, on its face, demonstrates that Katten’s relationship extends beyond just Bausch & Lomb to at least Valeant-CA.

Moreover, the court found that the OC Guidelines, which were incorporated by reference into the engagement agreement, extended the client relationship to any Valeant entity, including subsidiaries and affiliates. 

The court further found that even if the engagement agreement was ambiguous, there was still a conflict because Valeant-CA, Salix, and Bausch & Lomb demonstrated they “are sufficiently interrelated to give rise to a corporate affiliate conflict.”  The court noted that “shared or dependent control over operational and legal matters between the affiliates is significant to the inquiry” and that, applying that standard, “Valeant-CA, Salix, and Bausch & Lomb all share a high degree of operational commonality and are financially interdependent.”  For example, Valeant-CA and Bausch & Lomb “have a common infrastructure whereby [Valeant-CA] provides administrative and general support services to Bausch & Lomb.  The two entities also share the same in-house legal department.  

The court conclude that “Katten’s representation of Bausch & Lomb in the trademark litigation presents a concurrent conflict of interest with its representation of Mylan” in the Federal Circuit matters.  Since Katten did not receive informed written consent from both clients, its representation was a conflict in violation of Rule 1.7, warranting the firm’s disqualification. 


Takeaways

There are (at least) three takeaways from this case. 

First, this case illustrates the importance of conducting conflicts checks when bringing in a lateral attorney. Such checks should include a through vetting of all ongoing representations where the prospective new hire (or their clients they seek to bring into the firm) are adverse to a current firm client. 

Second, lawyers must be mindful of the terms of engagement, particularly where they incorporate outside counsel guidelines.  Such “guidelines” may impose significant additional terms that are not apparent from the face of the engagement agreement.

Third, engagement agreements are an important place for firms to define their clients. An overbroad client entity definition could lead to unintended “clients.” Such additional “clients” can wind up creating conflicts of interest that might have been avoided if the firm had defined their “client” relationship more narrowly.

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