Federal Court DQs Law Firm in Patent Infringement Case, Rejecting Advance Conflict Waiver

A federal court in Alabama yesterday disqualified a law firm from representing a new client in a patent infringement case against a current firm client. In Southern Visions, LLP v. Red Diamond, Inc. (N.D. Ala. Feb. 26, 2019), the court held that Bradley Arant Boult Cummings (“Bradley”) was ethically barred from representing one client (Southern Visions) against another client (Red Diamond).  The court found that disqualification was required because the law firm had a present client relationship with Red Diamond and the firm’s withdrawal from representing Red Diamond so that it could then represent Southern Visions was unethical.  

The court rejected the firm’s argument that it was permitted to undertake the representation because its client had agreed in advance to waive any concurrent conflict–at least to the extent the conflicting matter was unrelated to the firm’s representation of that client. The court held that the advance waiver was unenforceable because the waiver was overbroad, failed to provide Red Diamond with adequate information to “inform” its consent, and was revoked by the client before the firm started representing Southern Visions.


Red Diamond Representation

From 2009 until 2018, Bradley represented Red Diamond in “various small matters from time to time.”  The firm’s engagement agreement stated that Bradly was to serve “as legal counsel to provide general representation.”  Over the years, the firm’s legal work for Red Diamond was “light and sporadic.” 

In 2014, for example, Red Diamond engaged Bradley to advise it on employee benefit matters, billing only 26 hours over a four-year period. The firm also represented Red Diamond for advice on tax matters, one of which involved 13 hours of billed time in 2017 and another matter, in 2018, which involved 15 minutes of billings.  In still another matter, the firm represented Red Diamond for various debt collection matters, and some of those debt collection matters remained pending in December 2018 when the patent infringement litigation started.

The Advance Waiver

Red Diamond signed an engagement letter purporting to provide Red Diamond’s advance consent to the firm to undertake future representations of other clients “in any matter that is not substantially related” to the firm’s work for Red Diamond, “even if the interests of such clients in those other matters are directly adverse” to Red Diamond, and “even if such representations would be simultaneous.”

The firm did not advise Red Diamond to seek independent legal counsel about these advance conflict waivers, and Red Diamond did not obtain the advice of independent counsel before signing the waivers.

Firm’s Representation of Southern Vision

In December 2018, Southern Visions approached a firm attorney (Lembke) about representing it in an infringement case against Red Diamond.  A conflict check confirmed that Red Diamond was a current client.

On December 21, 2018, Lembke met with Southern Visions personnel about possible representation in the patent action. 

Red Diamond became aware that the firm was considering representing Southern Visions, and its CEO sent the firm an email on December 21 expressing dismay that Bradley was considering representation of its counterpart in the litigation. Red Diamond’s email expressly revoked its prior advanced waiver of conflicts. 

On December 23, 2018, Bradley began representing Southern Visions in its patent infringement suit against Red Diamond. 

On December 26, 2018, Bradley emailed Red Diamond and withdrew from its current representation, effective immediately.  The email stated that the firm believed it could represent Southern Visions adverse to Red Diamond based upon the advanced conflict waiver.


The Court Rejects Overbroad Advance Waiver

Red Diamond moved to disqualify Bradley from representing Southern Visions in the patent case.  It argued that the law firm violated Alabama Rule of Professional Conduct 1.7(a), which prohibits a lawyer from concurrently representing one client in a matter directly adverse to another client without both clients’ informed consent.  

The court found that as of December 23, 2018, the firm was representing both Southern Visions and Red Diamond.  “Thus, Bradley was representing two clients directly opposed to one another in pending litigation for three days.”

The court rejected the advanced waivers for two reasons:

(1) Red Diamond never gave its consent “after consultation” to the Southern Visions representation, through the advance waivers or otherwise; and (2) even if Red Diamond had consented to Bradley’s representation of Southern Visions, it unequivocally revoked that consent before Bradley began representing Southern Visions.

The court held that “broad, open-ended advance waivers like those Red Diamond signed are ineffective to provide consent to future conflicts.”  The court stated that it would not “lightly conclude” that a client’s open-ended consent was “truly” intended to permit the law firm to later sue that client on behalf of another, absent “clear evidence of such intent.”

The firm argued that Red Diamond should be held to the language of its advanced waiver because it is a sophisticated client of legal services.  The court rejected this argument:  

[W]hatever else sophisticated parties may provide advance consent to . . . they cannot consent in advance—or ever—to their own lawyers suing them on behalf of another client.

The court held that the law firm had a duty, once it knew the specifics of the patent matter, to seek specific consent to represent the adverse party in that proceeding.  Since the firm failed to do so, the general advance waiver language was legally ineffective. 

The court further held that even if the advance waiver language was effective, Red Diamond had revoked its consent on December 21, 2018—two days before the firm began representing Southern Visions.  Once that consent was revoked, there was “absolutely no doubt” that Bradley was prohibited from representing Southern Visions. 

Furthermore, apart from the advance waiver, the court held that a law firm must, pursuant to Rule 1.7(a)(1), “reasonably believe the new representation will not adversely affect is relationship with its existing client.”  The court found that no lawyer reasonably would believe that representing Southern Visions in a patent infringement case against its current client would not “adversely affect” the firm’s relationship with that current client. 

Disqualification as Appropriate Sanction

Finally, the court grappled with the proper standard for determining whether the conflict necessitated disqualification of the law firm.  The court noted that there were two lines of analysis, but that disqualification was appropriate under either standard.

Under the first standard, a firm that violates Rule 1.7(a) by suing a current client is automatically disqualified.  While not adopting this rule, the court stated that the per se line of authority was at least persuasive support for disqualification. 

The second standard is a “rule of reason” whereby courts balance the costs of disqualification against the interest sought to be protected by Rule 1.7.  The court found, applying a rule of reason, that disqualification was warranted in part because the representation had just recently commenced.  In addition, the court faulted the law firm for, in effect, causing the conflict itself by bringing in the adverse party to a litigation over the strong objections of its current client. 


Takeaways

This case illustrates the dangers of relying upon an advance waiver of conflicts that fails to disclose specific matters. Of course, in most representations, a law firm is not aware of what eventual conflicts might arise at the time it is engaged by a client. Nevertheless, if the firm wants to rely upon an advance waiver, at least according to this decision, the plain language of the waiver may not be enough–lawyers must consider if it is necessary to go back to the client, provide specific details about the specific matter, and seek specific consent to that conflict.

Of course, taking those extra steps essentially renders the “advance” waiver nugatory. If a lawyer is required to go back to the client and seek specific consent to waive a conflict notwithstanding an “advance waiver” signed by the client, then it would seem it matters not whether the engagement agreement included the advanced waiver at all.

For law firms that wish to rely upon advance waivers, cases such as this demonstrate that advance waivers are subject to a broad array of legal attacks. Lawyers who believe they should be able to rely upon the language of their client contracts will need to think twice, at least when such language constitutes an advance waiver.

Counsel seeking an enforceable advance waiver may be wise to add as much detail as possible about the specifics of possible future representations. The more open-ended an advance waiver, the more likely it will be invalidated. In addition, lawyers who want their clients to agree to advance waivers should advise the client to seek independent legal advice before they agree to an advance waiver.

While the relative sophistication of the client granting the advance waiver is ordinarily a factor court’s consider, it is by no means a dispositive factor. Indeed, as the court found in this case, even a sophisticated consumer of legal services would not have “reasonably” agreed in advance to be sued by its current counsel. The decision suggests that a lawyer may never be able to get an enforceable advance waiver that extends so far as to allow the lawyer to sue his own client.

As cases such as this illustrate, an advance conflict waiver may not be worth the paper it is written on. At the very least, advance waivers will continue to be subject to very close scrutiny.

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