DENNIS WORLEY, STERLING KOONCE, FLYING A LIMITED PARTNERSHIP L.P., JOSEPH W. FORBES JR., KENNETH CLARK, JAMES BOGGESS, JOEL WEBB, JAIMIE LIVINGSTON, JAMES E. BENNETT JR., DAVID MINER, RONALD ENGLISH, and MDF, LLC v. ROY J. MOORE, PIERCE J. ROBERTS, DAVID BROWN, MICHAEL ADAMS, CHRISTOPHER BAKER, JAMES KERR, FRANK McCAMANT, NEIL KELLEN, GINI COYLE, JOSEPH MOWERY, TOSHIBA CORPORATION, ALAMO ACQUISITION CORP., and STEPHENS, INC.
No. 310A16
IN THE SUPREME COURT OF NORTH CAROLINA
Filed 8 December 2017
NEWBY, Justice.
Appeal pursuant to
Nexsen Pruet, PLLC, by R. Daniel Boyce and David S. Pokela; and Ganzfried Law, by Jerrold J. Ganzfried, pro hac vice, for plaintiff-appellees.
Kilpatrick Townsend & Stockton LLP, by Adam H. Charnes and John M. Moye, for defendant-appellants.
In this case we consider whether the trial court properly disqualified defendants’ counsel under North Carolina Rule of Professional Conduct 1.9(a). This rule balances an attorney‘s ethical duties of confidentiality and loyalty to a former client with a party‘s right to its chosen counsel. The rule permits disqualification of an attorney from representing a new client if there is a substantial risk that the attorney could use confidential information shared by the client in the former matter against that same client in the current matter. This analysis requires the trial court to determine whether confidential information that would normally have been shared in the former matter is also material to the current matter. To do so, the trial court must objectively assess the scope of the representation and whether the matters are substantially related. Rather than applying an objective test, here the trial court disqualified defendants’ counsel based on the former client‘s subjective perception of the past representation as well as the now replaced “appearance of impropriety” test. As a result, we reverse the trial court‘s decision and remand this matter to that court for application of the appropriate legal standard.
The factual background leading to the instant litigation involves three other disputes, all relating to plaintiff Joseph W. Forbes‘s former employer Consert, Inc. (Consert): a patent dispute between Forbes and Consert (the patent dispute), Forbes‘s 220 shareholder inspection rights action against Consert (the 220 action), and a contract dispute between Itron, Inc. (Itron) and Consert (the Itron litigation).
Plaintiff Forbes is one of thirteen named plaintiffs in the present action, all former shareholders of Consert. Beginning in 2008, Forbes was a shareholder and member of the Board of Directors of Consert and served as Chief Operating Officer. In the fall of 2011, Forbes was removed as an officer and director but remained a significant shareholder. Soon after his removal, Forbes and Consert disagreed about Forbes‘s unpaid compensation and ownership of certain patents (the patent dispute), but the dispute never resulted in direct litigation even though Forbes was represented by counsel.
Sometime in 2012, Toshiba, a technology company, expressed interest in purchasing Consert. Concerned about the proposed sale, Forbes sued Consert in December 2012 under Section 220 of the Delaware General Corporation statutes (the 220 action), asserting his shareholder rights and requesting certain corporate records regarding the sale. In the 220 action, Forbes referenced, inter alia, the ongoing patent dispute in his allegations concerning Consert‘s mismanagement.
At the same time, Consert was also defending a lawsuit filed by Itron, a licensee and successor in interest to a development agreement with Consert, over certain payment terms under that agreement (the Itron litigation). Based on Forbes‘s allegations in the 220 action, Itron amended its complaint to include claims based on Consert‘s failure to disclose the ongoing patent dispute with Forbes.
In October 2013, counsel from Winston & Strawn, LLP, who represented Forbes at the time, communicated with Joe Bush of Kilpatrick (Bush),2 counsel to Consert, about Forbes‘s deposition. Bush disclosed to Forbes‘s counsel that, in addition to his primary representation of Consert, he also represented former employees and shareholders of Consert in the Itron litigation. Bush later offered limited representation to Forbes at Consert‘s expense as long as Forbes agreed to the proposed engagement terms. Forbes eventually agreed that Bush would represent him in the Itron litigation regarding his role as a former Officer and Director of Consert.
On 23 January 2014, Forbes signed an engagement letter that outlined the terms of Bush‘s limited representation of Forbes (the engagement letter), which began by stating, “As you are aware, this firm is outside litigation counsel to [Consert] in connection with the [Itron litigation].” The engagement letter then explained that the representation of Forbes would “be limited to legal services associated with discovery efforts (such as depositions, witness statements, factual development, and document analysis), [Forbes‘s] potential testimony at trial, and specifically in connection with [Forbes‘s] former role as Chief Operating Officer of Consert.” Forbes agreed that he would be “willing to permit Kilpatrick Townsend to disclose to Consert, to any related entities, and to the employees of these entities, any of the information it learns in its communications with [him] if, in [counsel‘s] discretion, it becomes necessary or appropriate to the defense of this lawsuit.” Forbes also agreed that he would “not object to Kilpatrick Townsend continuing to represent Consert and its related entities in this lawsuit” should a conflict of interest arise. Winston & Strawn negotiated the terms of the limited representation on behalf of Forbes.
Forbes‘s counsel from Winston & Strawn initially prepared him for his deposition and communicated with Forbes via teleconference two to three times for approximately an hour on each occasion. In final preparation, Forbes met with Bush once for approximately two to three hours the night before the deposition. Forbes‘s privately retained counsel from Winston & Strawn attended approximately an hour of that meeting.
During the deposition the next day, Itron‘s counsel asked Forbes about his relationship with Consert, the 220 action, the Consert-Toshiba merger, and primarily the patent dispute. Twice during the deposition, Forbes requested a break and spoke with his privately retained counsel from Winston & Strawn, even though Bush was present at the deposition. When asked about the Consert-Toshiba merger, Forbes stated, “I have not read the agreement of the merger between [Toshiba] and Consert. That might come as a surprise to you, but I have not read it.” The Itron litigation settled on 1 February 2015.
At some point on or before 5 February 2015, Forbes and counsel at Winston & Strawn recognized Forbes‘s potential claims at issue in the present action. As a result, on 5 February 2015, Winston & Strawn sent a litigation hold letter to Bush, based on his representation of Toshiba affiliates, informing him that Forbes and other former Consert shareholders were considering filing the present action. On 9 November 2015, Forbes and other former Consert shareholders filed the present action against Toshiba (as the
Before the trial court, plaintiffs moved to disqualify Bush from the present action based on his past representation of Forbes during the Itron litigation. In support of the motion, Forbes filed a declaration stating his views of the prior relationship and outlining his communications with Bush. Defendants responded that the communications between Forbes and Bush were not confidential because the engagement letter expressly limited the nature of Bush‘s representation of Forbes and specifically authorized Bush to disclose, in his discretion, “any of the information” he learned in his communications with Forbes to “Consert,” “any related entities,” and their “employees” during the Itron litigation.
Recognizing that the facts here presented a “close case,” the trial court noted:
In considering a motion to disqualify counsel, the Court considers the professional obligations imposed on attorneys by the North Carolina Rules of Professional Conduct . . . , as well as the goal of preventing the appearance of impropriety in the profession. Disqualification of counsel is a serious matter . . . and the moving party has a high standard of proof to meet in order to prove that counsel should be disqualified. Nevertheless, a motion to disqualify counsel . . . should succeed or fail on the reasonableness of a client‘s perception that confidences it once shared with its lawyer are potentially available to its adversary.
(Second ellipsis in original) (internal citations and quotation marks omitted).
The trial court found that an attorney-client relationship existed between Bush and Forbes in the past representation and that defendants’ position is materially adverse to Forbes‘s position in the present action, thus leaving unresolved only whether the current matter is “substantially related to the matter in which Bush and Kilpatrick previously represented Forbes.” In particular, quoting Plant Genetic Systems, N.V. v. Ciba Seeds, 933 F. Supp. 514, 518 (M.D.N.C. 1996), the trial court sought to answer whether “there is a reasonable probability that confidences were disclosed in the prior representation which could be used against the former client in the current litigation.”
In its analysis the trial court resolved this issue by trying to discern what actually occurred during the past representation as stated by Forbes and Bush. The trial court relied on Forbes‘s declaration, which included his characterizations of the attorney-client relationship. The trial court quoted portions of the declaration detailing Forbes‘s impressions of the nature of his communications with Bush and conversely observed that Bush had not refuted Forbes‘s “descriptions or characterizations of the information he shared with Bush during the prior representation.”
Notably, the trial court determined, “Even if the matters are not substantially related within the strict meaning of Rule 1.9(a), however, the Court would nonetheless conclude, in its discretion, that Bush and Kilpatrick should be disqualified in order to avoid the appearance of impropriety.” As a result, the trial court disqualified Bush because his “continued representation of Defendants in this matter creates an appearance of impropriety that the Court cannot allow.” Defendants appealed.
“Decisions regarding whether to disqualify counsel are within the discretion of the trial judge,” Travco Hotels, Inc. v. Piedmont Nat. Gas Co., 332 N.C. 288, 295, 420 S.E.2d 426, 430 (1992), but a trial court‘s exercise of discretion is subject to reversal when the court orders disqualification based on a misunderstanding of the law, see In re Estate of Skinner, N.C. , 804 S.E.2d 449, 457 (2017); see also Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S. Ct. 2447, 2461, 110 L. Ed. 2d 359, 382 (1990) (noting that the “[trial] court would necessarily abuse its discretion [in deciding a Rule 11 motion] if it based its ruling on an erroneous view of the law“). The movant seeking to disqualify his former counsel must meet a particularly high burden of proof. See Gov‘t of India v. Cook Indus., 569 F.2d 737, 739 (2d Cir. 1978) (“[T]here is a particularly trenchant reason for requiring a high standard of proof on the part of one who seeks to disqualify his former counsel . . . .“).
Rule 1.9(a), governing the disqualification of counsel for a conflict of interest relating to a former client, balances the prevented use of confidential information against a former client with a current client‘s right to choose his counsel freely. See, e.g., N.C. St. B. Ethics Op. RPC 48 (Oct. 28, 1988), reprinted in North Carolina State Bar Lawyer‘s Handbook 2016, at 217 (2016) (recognizing, inter alia, “the right of clients to counsel of their choice“). The rule prevents an attorney from using confidential material information received from a former client against that client in current litigation. See
Rule 1.9(a) provides:
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 gives informed consent, confirmed in writing.
In applying Rule 1.9(a), the trial court considers the circumstances surrounding each representation to objectively assess what would “normally” have occurred within the scope of that representation.6 See
about the possession of such information may be based on the nature of the services the lawyer provided the former client and information that would in ordinary practice be learned by a lawyer providing such services.“). The test is whether, objectively speaking, “a substantial risk” exists “that the lawyer has information to use in the subsequent matter.” Id.; see
Here it is undisputed that the third prong of the test under Rule 1.9(a) is satisfied: the interests of Forbes and defendants in the present action are “materially adverse.” For the two remaining prongs, the trial court must consider the scope of the past representation to determine whether the former client would normally have shared confidential information in the course of that representation and, if so, whether that information is material to the present action. See
The first prong of Rule 1.9(a) explores the existence and scope of an attorney-client relationship between the attorney and the former client. “[A]n attorney-client relationship is formed when a client communicates with an attorney in confidence seeking legal advice regarding a specific claim and with an intent to form an attorney-client relationship.” Raymond v. N.C. Police Benevolent Ass‘n, 365 N.C. 94, 98, 721 S.E.2d 923, 926 (2011) (emphasis added) (citation omitted). The scope of such a relationship, however, is a matter of contract, and a lawyer may reasonably limit the scope and expectations of the representation “by agreement with the client or by the terms under which the lawyer‘s services are made available to the client.”
The commentary to Rule 1.9(a) anticipates the use of engagement letters that outline both the scope of representation and limitations on confidentiality at the time the former client engaged counsel. See
Here the trial court erred by trying to determine whether Forbes actually shared confidential information with Bush that Bush did not share with the other parties to the common representation agreement. Instead, the trial court should apply the objective test of whether a client in Forbes‘s position would normally have shared confidential information given the terms of the engagement letter and the type of disclosure that usually occurs within that common representation arrangement. Further, the trial court failed to consider the normal implications of simultaneous and ongoing representation of Forbes by other counsel. On remand, the trial court should objectively consider what confidential factual information “would normally have been obtained” within the scope of the past representation.
If the trial court determines that confidential information would normally have been shared within the scope of the past representation, it must then consider whether that information is material to the present action by deciding if the two matters are “substantially related.” A former client must objectively demonstrate “a substantial risk that [confidential] information as would normally have been obtained in the prior representation would materially advance the client‘s position in the subsequent matter.” Id. Through an objective, fact-intensive inquiry, the trial court is best suited to determine whether such a substantial risk exists. See id. (considering “the nature of the services the lawyer provided the former client and information that would in ordinary practice be learned by a lawyer providing such services“); see also Restatement (Third) of The Law Governing Lawyers § 132A cmt. d(iii) (Am. Law Inst. 2017) (“The substantial-relationship test . . . focus[es] upon the general features of the matters involved and inferences as to the likelihood that confidences were imparted by the former client that could be used to adverse effect in the subsequent representation.” (emphasis added)).
In assessing whether two matters are “substantially related,” the trial court should consider, inter alia, the following illuminative factors: (1) the initial engagement letter, including the scope of the representation and any limitations on confidentiality; (2) the factual background leading to the past representation, including common representation of others and any concurrent representation of the former client; (3) the amount of time spent with the attorney; (4) the subject matter of the two representations; and (5) all of the facts and circumstances of the current litigation, particularly as compared with those of the past representation. A former client‘s subjective perception or conclusory allegations that he shared confidential information during the past representation should not be considered. See, e.g., Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 518 F.2d 751, 756-57 (2d Cir. 1975).
Here the trial court erred by concluding that the matters appeared to be “substantially related” based on Forbes‘s conclusory belief that he had shared confidential information with Bush “directly related to the claims . . . against Defendants in this case.” Thus, the trial court improperly determined disqualification in reliance on the former client‘s subjective judgment, which Rule 1.9(a) prohibits, rather than objectively comparing the facts and circumstances of both representations.
In its final rationale, the trial court mistakenly applied the now replaced “appearance of impropriety” test as a consideration in favor of disqualification. Unlike its predecessor, the Model Code of Professional Responsibility, the Rules of Professional Conduct do not recognize “appearance of impropriety” as a basis for disqualification, having deleted any reference to this standard in the 2002 revisions.7
The tendency of the old test to lean
In sum, the trial court applied the incorrect standard under Rule 1.9(a) in disqualifying defendants’ counsel. In making its determination upon remand, the trial court must objectively assess the facts surrounding the motion to disqualify counsel without relying on the former client‘s subjective perception of his prior representation. The trial court should avoid the outmoded “appearance of impropriety” test. We reverse the trial court‘s decision and remand this case to that court for application of the correct legal test.
REVERSED AND REMANDED.
Justice ERVIN did not participate in the consideration or decision of this case.