Mega Firm Withdraws From Patent Infringement Suit After Former Client Alleges Conflict of Interest

got ethicsOn September 29, 2014, K&L Gates voluntarily withdrew as defendant’s counsel in a patent infringement action after the plaintiff asked a California federal district court to disqualify the Am Law 100 firm for a conflict of interest because the firm had previously represented the plaintiff regarding the same patents at issue in the litigation. See Cyber Switching Patents, LLC v. Eaton Corp., No. 4:14-cv-02862 (N.D. Cal.)

The litigation commenced on June 10, 2014, when Cyber Switching Patents, LLC (“Cyber”) filed suit against Eaton Corp. (“Eaton”) in the Northern District of California. The complaint accused Eaton of infringing three patents relating to power distribution technologies for data centers. On August 18, 2014, Eaton’s counsel, K&L Gates, filed an answer denying infringement and asserting counterclaims of non-infringement and invalidity.

On September 17, 2014, Cyber filed a motion to disqualify K&L Gates as counsel for Eaton. In its motion, Cyber alleged that it engaged K&L Gates in November 2013 about representing Cyber in enforcing the very same patents that were the subject of the lawsuit. According to the motion:

“Cyber Switching specifically asked for help to develop a plan to enforce these patents. Over the next two months, K&L Gates attorneys and Cyber Switching personnel engaged in face-to-face meetings and other privileged communications. Cyber Switching provided confidential information and work product analysis of the patents to K&L Gates, and K&L Gates provided advice. K&L Gates billed Cyber Switching for the time its attorneys spent on this matter, and Cyber Switching paid those bills.”

Cyber’s motion was based on California Rule of Professional Conduct 3-310, which in relevant part prohibits a lawyer from representing a client in a matter adverse to a former client if the subject matter of the prior representation was “substantially related” to that of the new representation. In substance California’s conflicts rule tracks ABA Model Rule 1.9(a), which states:

“A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client consents after consultation.”

Since its May 2013 rules changes, the USPTO has adopted a conflicts rule modeled after the ABA Model Rules. See 37 C.F.R. § 11.109(a) (substantially the same although requiring written consent).

On September 29, 2009, K&L Gates filed a 3-page response to the motion to disqualify. The firm argued (a) Cyber “never retained K&L Gates to represent it in this litigation or in any other matter that would give rise to a disabling conflict;” (b) it never received any “confidential information that could be used to the detriment of Cyber Switching in this litigation;” and (c) it had erected an “ethical wall” which would have avoided the conflict. K&L Gates failed to submit any evidence or legal authority in support of its response.

Notwithstanding its denial of wrongdoing, K&L Gates agreed to withdraw as counsel for Eaton. The firm stated the reason for its decision was that, “it would be fundamentally unfair to subject Eaton to a protracted distraction” in litigating the disqualification motion. Substitute counsel will be replacing K&L Gates to represent Eaton.

conflict meterLitigating disqualification motions relating to successive patent representations can be a challenging, costly, and time-consuming endeavor. Indeed, many courts struggle with the issue of how “related” is “substantially” related. Unfortunately for intellectual property practitioners, the issue is often fact intensive, and judges can vary widely in their views of how close is “too close.” Moreover, since decisions to disqualify counsel are not immediately appealable, most disqualification matter never receive appellate review, which can lead to greater uncertainty. William Freivogel provides an excellent overview of cases (not specifically IP related) addressing some of the differing views on the meaning of “substantially related” in Freivogel on Conflicts – A Guide to Conflicts of Interest for Lawyers

One way to reduce the risk that a firm will be disqualified from an intellectual property engagement is to obtain conflict waivers from the clients involved. It is not clear whether K&L Gates ever obtained any such advanced waiver from Cyber. Once an actual conflict has developed and two clients are in an adversarial position, obtaining a conflict waiver can be difficult, if not impossible.

Consequently, many large firms have adopted the practice of including advance conflict waivers in their engagement agreements. Whether such advance waivers are enforceable is far from certain. The difficulty with most advanced waivers lies in the fact that an effective waiver requires “informed” consent. Informed consent requires sufficient disclosure by the lawyer, who “must explain the risks and advantages, if any, of representation burdened with a conflict of interest, as well as reasonably available alternatives. . . .” Model Rule 1.7, comment [20]. But in many advanced waiver cases, the potentially conflicting representation has not yet arisen, thus “informed” consent may not be possible under such circumstances.

Whether a court will enforce an advanced waiver also may depend on the relative sophistication of the waiving client, including whether the client executing the advanced waiver had its own counsel to advise it on whether to agree to such a term in an engagement agreement. Indeed, some courts have denied motions to disqualify counsel in patent actions based upon the former client’s execution of an advanced conflicts waiver. See Galderma Laboratories, L.P. v. Actavis Mid Atlantic LLC, 927 F. Supp. 2d 390 (N.D. Tex. 2013). The district court in Galderma, for example, denied a motion to disqualify counsel based on an advanced waiver because the waiver-signing client was highly sophisticated in both legal matters generally and in making decisions to retain large, national firms and had signed advance conflict waivers with respect to other engagements. The district court also noted that when a client is represented by independent counsel, it requires less information and explanation in order to give informed consent.

Although cases such as Galderma lend legitimacy to a general advance waiver, a law firm may obtain greater protection by tailoring the waiver, to the extent possible, to the specific client and the specific potential conflicts. Moreover, a firm should not assume that advanced waivers of conflicts in patent cases will be enforced, even if the party executing the advanced waiver is “sophisticated.” Still further, some analysts criticize the practice of requiring clients to waive conflicts in advance of an actual conflict as bad business. See IP 360, Advanced Conflict Waivers Send the Wrong Message (July 15, 2014).

Advanced waiver or not, certain conflicts may not be waived as a matter of law. Most prominent of these are litigation matters, where the same lawyer or law firm could end up representing parties on both sides with adverse interests. According to Cyber’s motion, even though it was not technically representing both plaintiff and defendant in the same case, K&L Gate’s prior and subsequent representations were effectively identical since they involved the same patents and similar issues.

Some jurisdictions also permit the erection of an ethical “wall” as a tool to manage conflicts. K&L Gates asserted in its response to the motion to disqualify that it had put in place an ethical walll. Such ethical walls, however, normally are only effective when the conflict arises from a lawyer’s association with a prior law firm or prior government service. See Model Rule 1.10. ABA Model Rule 1.10, as well as USPTO Rule 11.110, also contain a number of conditions for a screen to be effective, including that the disqualified lawyer must be timely screened, must not share in any apportionment of the fee to be earned from the new matter, and must provide written notice to the former client. Model Rule 1.10(a)(2)(ii) and (iii). Notably, no states expressly allow the use of an ethical screen to cure a concurrent conflict.

A disqualification motion can be a time-consuming affair that delays the commencement of a litigation and could potentially cause the law firm much embarrasment. Law firms faced with such motions, or considering filing suit against a former client, need to consider the ethical implications of their actions. As Shakespeare once wrote: “The better part of valor is discretion . . . .” Henry The Fourth, Part 1, Act 5, scene 4, 115-121. In other words, sometimes it is better to be careful than it is to take risks. Based on the substance of the motion to disqualify, and the response filed by K&L Gates, the firm evidently came to the conclusion that the risk of losing the disqualification motion was simply too great.

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