disqualifying plaintiff's counsel because the specific information they had obtained from defendant constituted the "central components" of the complaintSummary of this case from In re Polaroid Erisa Litigation
00 Civ. 1338 (GBD)
November 7, 2002
MEMORANDUM OPINION AND ORDER
Plaintiffs ("UCAR") bring this action seeking to recover money extracted from it by defendants during a recapitalization. UCAR claims that Union Carbide and Mitsubishi looted over $750 million from UCAR through illegal dividends and stock repurchases at a time when they knew or should have known that UCAR's capital surplus was illusory and based on artificially inflated price-fixing profits without any reserve against its inevitable antitrust law liabilities. Defendant Union Carbide Corporation ("Union Carbide") has moved to disqualify counsel for UCAR based on the prior representation of Union Carbide by a member of UCAR's counsel's law firm. Plaintiffs oppose this motion. For the reasons set forth below, Union Carbide's motion is granted.
Union Carbide asserts several other bases for disqualification. It asserts that counsel's collaboration with a former member of its law department and a lawyer who provided an opinion in connection with UCAR's 1995 recapitalization provides an additional independent basis for disqualification. This Court does not reach those arguments as they are unnecessary to resolve this motion.
Prior to 1989, the entity now known as UCAR was wholly owned and operated by Union Carbide as the Carbon Products Division of its business. (Complaint ¶ 4). In 1989, Union Carbide separated the Carbon Products Division from Union Carbide's other businesses and the division became UCAR Carbon Company, Inc., a wholly owned subsidiary of Union Carbide. Id. In late 1989, Union Carbide and Mitsubishi began discussing the possibility of Mitsubishi purchasing a fifty percent interest in UCAR. (Complaint ¶ 25.) Attorney William Blumenthal ("Blumenthal"), then of Sutherland, Asbill, Brennan, advised Union Carbide on legal issues relating to the transaction. He had previously advised Union Carbide on unrelated antitrust matters as its long-time antitrust lawyer. (Pls.' Mem. at 6; Defs.' Mem. at 4.) On November 19, 1990, Union Carbide and Mitsubishi signed the Stock Purchase and Sale Agreement. (Complaint ¶ 32.) The transaction was approved by United States and European regulatory agencies and closed on February 25, 1991. (Complaint ¶ 34.) From February 25, 1991 to January 1995, UCAR was operated as a joint venture by Union Carbide and Mitsubishi. (Complaint ¶ 4.) Blumenthal joined the law firm of King Spalding on March 1, 1995 and is currently still a partner in the firm. (Blumenthal Dep. at 12.) UCAR commenced the present action against defendants on February 23, 2000 and is represented by King Spalding. King Spalding has taken no action to screen Blumenthal from contact with either the litigation itself or other lawyers in the firm as they worked on the case. Union Carbide moves to disqualify King Spalding due to Blumenthal's prior representation of Union Carbide during the structuring of the joint venture with Mitsubishi.
Union Carbide brings this motion to disqualify counsel under New York's Disciplinary Rules for attorneys. Under New York Disciplinary Rule 5-108(B),
[e]xcept with the consent of the affected client after full disclosure, a lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client:
1. whose interests are materially adverse to that person, and
2. about whom the lawyer had acquired information protected by DR 4-101 [1200.19] (B) that is material to the matter.
N.Y. ST CPR DR 5-108, 22 NYCRR § 1200.27. Disciplinary Rule 4-101 prohibits attorney's from revealing client confidences and secrets. N.Y.S.T CPR DR 4-101, 22 NYCRR § 1200.19. Under the statute, confidence is defined as "information protected by the attorney-client privilege under applicable law," and secret is defined as "other information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client." Id.
Disqualification motions are generally disfavored in this circuit and should be granted only where an attorney's representation of a client would tend to taint the trial. Bd. of Educ. of City of New York v. Nyquist, 590 F.2d 1241, 1246 (2d Cir. 1979). A high standard of proof is required because such motions are "often interposed for tactical reasons . . . [a]nd even when made in the best of faith, such motions inevitably cause delay." Id. (internal citations omitted). An attorney may be disqualified from representing a client if
(1) the moving party is a former client of the adverse party's counsel;
(2) there is a substantial relationship between the subject matter of the counsel's prior representation of the moving party and the issues in the present lawsuit; and
(3) the attorney whose disqualification is sought had access to, or was likely to have had access to, relevant privileged information in the course of his prior representation of the client.Evans v. Artek Systems Corp., 715 F.2d 788, 791 (2d Cir. 1983) (citations omitted). The substantial relationship test is strictly applied and the moving party must demonstrate that the relationship between the two actions is "patently clear" or the issues involved are "identical" or essentially the same[.]" Gov't of India v. Cook Indus., 569 F.2d 737, 740 (2d Cir. 1978) (citations omitted).
Before invoking the substantial relationship test, "it must be shown that the attorney was in a position where he could have received information which his former client might reasonably have assumed the attorney would withhold from his present client." Allegaert v. Perot, 565 F.2d 246, 249 (2d Cir. 1977). In Allegaert, appellant, the trustee in bankruptcy of a corporation, moved to disqualify appellees' counsel based on the law firms' prior representation of the corporation in another matter. Appellant's corporation had previously participated in a realignment agreement with appellees similar to a joint venture. The law firms sought to be disqualified were counsel for the appellees prior to and during the course of the realignment agreement. However, during the course of the realignment agreement, those same law firms also represented appellant's corporation on alleged substantially related matters. The Court of Appeals held that the substantial relationship test was inapposite because appellant's corporation "necessarily knew" that information given to the law firms sought to be disqualified would "certainly be conveyed to [appellees,] their primary clients[.]" 565 F.2d at 250. The court further stated that appellant's corporation could not have possibly thought that the law firms sought to be disqualified were representing the corporation without appellees' "knowledge and approval" or that "any information given to the law firms conceivably would have been held confidential from the primary clients of the firms." Id. The court emphasized that "integral" to its holding was the law firms' "continuous and unbroken legal relationship with [appellees,] their primary clients" and that this was not a situation where the attorneys sought to be disqualified had "changed sides from a former client to a current, adverse client." Id. at 251.
UCAR argues that Blumenthal represented both Union Carbide and UCAR during the structuring of the joint venture and therefore Union Carbide had no expectation that information communicated to Blumenthal would be kept confidential from UCAR. UCAR points to Blumenthal's contact during the transaction with UCAR General Counsel, Peter Mancino, as evidence of Blumenthal's joint representation of UCAR and Union Carbide. However, the joint venture transaction was a sale by Union Carbide to Mitsubishi of fifty percent of UCAR. immediately prior to the transaction, UCAR was a wholly owned subsidiary of Union Carbide. To the extent that there was a joint representation, UCAR was a secondary client. In his capacity at various law firms, Blumenthal had represented Union Carbide from as early as 1980, before UCAR existed as a separate entity. (Blumenthal Dep. at 11-14.) While UCAR may have expected that Blumenthal would protect its interests during the transaction, Blumenthal's primary client was Union Carbide, the seller Cf., International Electronics Corp. v. Flanzer, 527 F.2d 1288, 1292 (2d Cir. 1975) (noting that a merger transaction operates, in a practical sense, as a sale, and that counsel's only client in such a sale is the selling party). Thus, Union Carbide had a reasonable expectation that certain information that it conveyed to Blumenthal would be kept confidential from UCAR. This Court cannot conclude that, because some information relating to the transaction was shared with UCAR, all Union Carbide information relating to the transaction was necessarily shared with the secondary client, UCAR. In fact, Blumenthal acknowledges that confidential information concerning Union Carbide would not have been fully shared with UCAR during the transaction. (Blumenthal Dep. at 186-87.) He "would have been much more guarded about who within UCAR Carbon was receiving that information."Id. at 187. He also "would have been more cautious about sharing it on a need to know basis." Id. This was not full joint representation. Moreover, joint representation does not contemplate later disclosure of confidences, during litigation of a substantially related matter, to the prior client's detriment. Accordingly, Union Carbide has met its threshold burden in order to invoke the substantial relationship test.
At issue in this matter are the second and third prongs of the substantial relationship test. The parties do not dispute that Union Carbide is a former client of Blumenthal. However, the parties strenuously disagree on whether there is a substantial relationship between Blumenthal's prior representation of Union Carbide in the joint venture and the issues relevant to this action. UCAR argues that Blumenthal's representation during the joint venture merely involved an analysis of the legal ramifications of the transaction, while the present action involves the defendants' knowledge of the financial impact on UCAR of the price-fixing conspiracy in which the defendants are alleged to have participated. Union Carbide argues that the complaint in this action alleges that, based on prior dealings and statements made by Mitsubishi during the negotiations for the joint venture, Union Carbide knew or should have known of the intent to fix prices at the time that it entered into the transaction. They argue that the prior attorney-client relationship and the confidential information that Blumenthal was privy to while representing Union Carbide during the joint venture negotiations are integral to this action. This Court agrees with Union Carbide.
The complaint alleges, among other things, that during the negotiations for the joint venture transaction, "Mitsubishi personnel repeatedly used phrases such as `synergies,' `harmonization,' and `orderly market,' and stated that Mitsubishi's ownership of UCAR Carbon Company would allow Mitsubishi to control the graphite electrode industry and raise prices." (Complaint ¶ 26.) The complaint further alleges that Mitsubishi paid an amount for its fifty percent interest in UCAR "far in excess of Union Carbide's own valuations of UCAR, as well as those done by third parties" and that "Union Carbide knew that Mitsubishi's purchase price was premised not on Union Carbide's and UCAR's existing projections, but rather on the achievement of Mitsubishi's anticipated `synergies'" (Complaint ¶¶ 27-28.) The complaint goes on to allege that Union Carbide's chief executive officer approved, and Union Carbide received, UCAR's payment of an illegal dividend to Union Carbide during the recapitalization of UCAR even though Union Carbide knew or should have known that UCAR's value was overstated because of the price-fixing scheme. Furthermore, the complaint alleges that Union Carbide and Mitsubishi aided and abetted UCAR officers in breaching their fiduciary duties, via the price fixing scheme, in order to accomplish their plan to "drain UCAR of its assets and to laden UCAR with the contingent antitrust liability." (Complaint ¶ 67.)
Union Carbide's purposes for entering into the joint venture, interpretations of the statements made by Mitsubishi during the joint venture negotiations, and knowledge of Mitsubishi's intentions with respect to the joint venture are central components of UCAR's complaint. As Union Carbide's prior antitrust lawyer and counsel during the joint venture negotiations, Blumenthal provided related antitrust advice and was privy to this type of information (Blumenthal Dep. 97-98, 138-39). By the very nature of the allegations in the complaint, this is the type of information that Blumenthal would not have been expected to share, and did not share, with UCAR during any period of joint representation. Therefore, the relationship between Blumenthal's prior representation and the present action is "patently clear." Gov't of India v. Cook Indus., 569 F.2d 737, 740.
Once the substantial relationship between the two actions has been proven, a presumption arises that the former client revealed confidential information relevant to the present action to the attorney sought to be disqualified. See, e.g., Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562, 571 (2d Cir. 1973). UCAR asserts that this presumption is rebuttable and argues that Union Carbide could not have disclosed any relevant confidences or secrets to Blumenthal since the antitrust scheme alleged in the complaint occurred after his representation of Union Carbide on the joint venture ended. Even if the presumption is rebuttable, UCAR has not met that burden. The complaint contains allegations regarding what Union Carbide knew about the intent to fix prices during the joint venture negotiations and at the time that it entered into the joint venture. That time period was contemporaneous with Blumenthal's representation of Union Carbide on the joint venture. Furthermore, Blumenthal has acknowledged having discussions with Union Carbide about its purpose in entering into the joint venture with Mitsubishi. (Blumenthal Dep. 97-98, 138-39). Therefore, his involvement in the present action would tend to taint the trial.
Blumenthal would therefore be precluded from representing UCAR in an action adverse to his prior client Union Carbide. Because Blumenthal would be prohibited from representing UCAR in the present action, King Spalding must be disqualified. Under New York Disciplinary Rule 5-105(D),
While lawyers are associated in a law firm, none of them shall knowingly accept or continue employment when any one of them practicing alone would be prohibited from doing so under . . . DR-108 . . . except as otherwise provided therein.
N.Y. ST CPR DR 5-105(D), 22 NYCRR § 1200.24. Under DR-108, Blumenthal and/or King Spalding would be able to represent UCAR only with Union Carbide's consent after full disclosure. N.Y. ST CPR DR 5-108, 22 NYCRR § 1200.27. As Union Carbide has brought this motion, clearly it does not consent. Thus, King and Spalding must be disqualified.
UCAR argues that Union Carbide's motion to disqualify should be denied because of Union Carbide's delay in asserting its position. This argument is unpersuasive. Union Carbide filed its motion to disqualify immediately after the complaint was filed in this action and nothing has occurred in the action beyond the discovery necessary for this motion. Furthermore, in 1999 before the complaint was filed, when UCAR informed Union Carbide of UCAR's claims against Union Carbide, Union Carbide then objected to King and Spalding representing UCAR in the threatened action. (Eimer Dep. at 120; Solberg Aff. ¶ 5.)
UCAR argues that Union Carbide should have raised its objection by June of 1998, when UCAR informed Union Carbide that UCAR was considering filing claims against Union Carbide. However, UCAR has not pointed to any authority, nor is this Court aware of any authority, which would require Union Carbide to go to such extraordinary measures. See Emle, 478 F.2d at 574 (holding three year delay from filing of complaint to filing of motion to disqualify was not so extraordinary as to justify denial of motion and stating that "[s]ince . . . disqualification is in the public interest, the court cannot act contrary to that interest by permitting a party's delay in moving for disqualification to justify the continuance of a breach of the Code of Professional Responsibility"). See also Ullrich v. Hearst Corp., 809 F. Supp. 229, 237 (S.D.N.Y. 1992) (granting defendant's motion to disqualify plaintiff's counsel although defendant "removed the case from state to federal court, filed an answer, and responded to certain discovery requests, and did not raise the question of disqualification with the court until [plaintiff's counsel] requested a conference to discuss discovery"). Indeed, Union Carbide "had no practical forum in which to assert [King and Spalding's] conflict of interest before [it] became the target of plaintiff[s'] lawsuit." See Montgomery Academy v. Kohn, 82 F. Supp.2d 312, 319 (D.N.J. 1999) (rejecting plaintiff's argument that defendant waived the right to disqualify plaintiff's counsel by waiting for two years to assert its position because no lawsuit was filed in that two year period). Accordingly, Union Carbide has not waived its right to bring a motion to disqualify because of unreasonable delay.
Union Carbide seeks several forms of relief in addition to the disqualification of King and Spalding. Union Carbide request that this Court strike the complaint, prohibit co-counsel and/or UCAR successor counsel from communicating with King and Spalding, order an inquiry regarding whether any privileged information was disclosed to co-counsel, and prohibit co-counsel or successor counsel from receiving or using King and Spalding's work product. This Court finds that Union Carbide has not offered a sufficient basis to warrant such extreme relief, nor is it necessary for this Court to conduct any further hearing.
Accordingly, King and Spalding is disqualified as counsel for UCAR in this lawsuit. It is hereby ordered that Blumenthal is prohibited from communicating with co-counsel or successor counsel. King and Spalding must provide their files regarding this action to successor counsel. No information is to be provided to, or utilized by, successor counsel where the sole source or basis for such information arises out of Blumenthal's legal representation of Union Carbide as a client.
Given the disqualification of King and Spalding, the Court will not entertain Union Carbide's outstanding motion to dismiss until successor counsel appears and either adopts the pending response or independently responds to the motion.