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In-House Counsel Can Inadvertently Waive ConflictsIn certain jurisdictions, sophistication of the client and a waiver in a retainer agreement can make a later motion to disqualify challenging.
2013-06-26 04:47:22 PM
A recent decision in Galderma Labs v. Actavis Mid Atlantic, concerning the breadth of an advance waiver between a sophisticated client and law firm, should be reviewed very carefully by in-house and outside counsel. The Northern District of Texas court held that a few sentences of an engagement letter provided sufficient advance waiver notice of an unforeseen future conflict, and distinguished a 2008 New Jersey decision with similar facts (Celgene v. KV Pharmaceutical). Counsel should note the language used to balance a client's relative sophistication with a law firm's ethical duty to provide reasonably adequate disclosure for the client to provide informed consent for such advance waivers.
The court's decision arose from Galderma's motion to disqualify Actavis' counsel because that same counsel had represented Galderma for almost a decade. Galderma had retained Vinson & Elkins in 2003 to handle employment matters, its general counsel signing that he understood and agreed to the terms of Vinson's engagement letter which contained a broad waiver of future conflicts of interest, and which specifically stated:
"We understand and agree that this is not an exclusive agreement, and you are free to retain any other counsel of your choosing. We recognize that we shall be disqualified from representing any other client with interest materially and directly adverse to yours (i) in any matter which is substantially related to our representation of you and (ii) with respect to any matter where there is a reasonable probability that confidential information you furnished to us could be used to your disadvantage. You understand and agree that, with those exceptions, we are free to represent other clients, including clients whose interests may conflict with yours in litigation, business transactions, or other legal matters. You agree that our representing you in this matter will not prevent or disqualify us from representing clients adverse to you in other matters and that you consent in advance to our undertaking such adverse representations."
Galderma used Vinson through July 2012. In June 2012 Galderma filed a patent lawsuit against Actavis. Vinson represented Actavis in intellectual property matters, and began working on the matter, filing Actavis' answer and counterclaims in July 2012. Galderma asked Vinson to withdraw, but Vinson instead terminated its relationship with Galderma, stating that Galderma had consented to Vinson's representation of adverse parties in litigation by agreeing to the waiver provision of the engagement letter. Galderma subsequently brought its motion to disqualify.
The court used the ABA Model Rules to determine whether there had been an ethical violation because those rules contained a requirement of informed consent, a central issue in the matter. While the Model Rules were unclear as to what constitutes sufficiently adequate disclosure by a law firm for informed consent for a particular party, the court found that the 2002 amendments to the Model Rules resulted in open-ended, general informed consent being likely valid if the client is an experienced user of legal services. Prior to the 2002 Amendments, informed consent required the lawyer seeking waiver to identify the party or class of parties to be represented in the future matter.
Because Vinson's defense raised the particular issue, it had the burden of showing that Galderma had provided informed consent. The court's analysis asked two questions: (1) whether the disclosure was reasonably adequate for a client to form informed consent; and (2) whether the disclosure was reasonably adequate for specific client to form informed consent — here, Galderma.
For the first prong, the court looked at three factors provided in Model Rule 1.0(e), which states that informed consent is characterized by (1) agreement to a proposed course of conduct; (2) after the lawyer has communicated adequate information and explanation about material risks; and (3) the lawyer has proposed reasonably available alternatives to the proposed course of conduct. The court found that Vinson's engagement letter satisfied the three factors: It identified a course of conduct regarding concurrent conflicts of interest; it included an explanation of the material risk in waiving future conflicts of interest, and it explained an alternative course of conduct for Galderma, thus favoring a finding of informed consent.
The principal considerations applicable to the second prong were the sophistication of the parties and whether the client was represented by counsel independent of the law firm seeking waiver. Galderma argued that the client's sophistication was not relevant, but the court disagreed, finding that a sophisticated client need not be provided as much information for a disclosure to be reasonably adequate. The court found Galderma to be a highly sophisticated client, both in its business and in legal experience, and noted that Galderma's general counsel had signed the Vinson engagement letter as well as other engagement letters that contained future conflict waiver provisions. The general counsel's intent in signing the engagement letter was irrelevant because the Model Rules make clear that informed consent turns on an objective standard of reasonable disclosure and understanding.
Galderma relied in part on Celgene, which held that general, open-ended waiver language was not sufficient to show informed consent. The court disagreed, finding Celgene to be predicated on New Jersey's more stringent rules, under which informed consent required "full disclosure and consultation" by the lawyer. Under the Model Rules, the test for informed consent is whether the client understands the material risks involved in waiving the future conflict, so specific disclosure of a particular future client or area of litigation is not required. Under the national standard, additional consultation is not required for informed consent if the client is aware of sufficient information which is reasonably adequate to make an informed decision. The court also disagreed with Celgene's finding that using independent counsel was not relevant to whether a client's consent was informed, holding that several sources, including the Model Rules, incorporate independent counsel as an important factor in determining whether informed consent was given.
Whether or not it is a "game-changer" regarding advance waivers, Galderma provides cautionary advice to in-house counsel when executing seemingly benign engagement letters.
Ian Scott is a partner in Cozen O'Connor's intellectual property practice group, where he concentrates his practice on patent litigation, focusing on representing generic pharmaceutical companies in litigation under the Hatch-Waxman Act. Richard T. Ruzich, a former trial attorney for the U.S. Department of Justice, is chair of Cozen O'Connor's ANDA and biologics practice group, focusing his practice on complex patent litigation including representing generic pharmaceutical companies in Abbreviated New Drug Application litigation and follow-on biologics efforts.
This article originally appeared in The Recorder.