Conflicts Of Interest Involving Corporate Affiliates

In GSI Commerce Solutions, Inc. v. BabyCenter LLC, No. 09-2790, the Second Circuit affirmed the ruling of SDNY Judge Jed S. Rakoff, who disqualified the Blank Rome law firm from representing a company adverse to a subsidiary of Johnson & Johnson, which was a client of Blank Rome.

The Second Circuit’s ruling is noteworthy because it addressed for the first time whether a law firm infringed on its duty of loyalty by taking on a representation adverse to an existing client’s corporate affiliate. In disqualifying Blank Rome, Judge Rakoff found that the overlap between BabyCenter LLC and Johnson & Johnson in effect made them a single company for various purposes. Judge Rakoff observed that BabyCenter LLC did not have a separate in-house legal department, but instead relied exclusively upon the in-house lawyers at Johnson & Johnson for legal advice.  Drawing upon extensive discussion by other courts as well as the ABA, the Second Circuit held that a law firm cannot take on a matter adverse to an affiliate if it diminishes the parent client’s level of confidence in its lawyers.

The Court first examined the ABA’s Model Rules of Professional Conduct, which provide that a “lawyer who represents a corporation or other organization does not, by virtue of that representation, necessarily represent any constituent or affiliated organization, such as parent or subsidiary.” ABA Model Rule of Prof’l Conduct 1.7 cmt. 34 (2006). This statement embodies what is often termed the “entity theory” of representation. However, the exception to this rule is that an attorney may not accept representation adverse to a client affiliate if “circumstances are such that the affiliate should also be considered a client of the lawyer.”

For its own part, Blank Rome argued that no conflict existed because: (1) the dispute between GSI and BabyCenter involved matters unrelated to Blank Rome’s Johnson & Johnson matters; and (2) Johnson & Johnson had waived any conflict by signing Blank Rome’s engagement letter. Both of these arguments proved unpersuasive to the unanimous appeals court. In particular, the Second Circuit observed that Blank Rome’s engagement letter contained provisions that might constitute a waiver by Johnson & Johnson of some, but not all, corporate affiliate conflicts. However, these conflict waivers were specifically limited to patent litigation and, even more specifically, to matters brought by generic drug manufacturers. Therefore, the Second Circuit held, Blank Rome failed to “contract around” the corporate affiliate conflict at issue. 

In a footnote, Judge Ralph K. Winter, Jr., writing for the Court, stated that the Circuit was not addressing issues that would arise if a blanket waiver had been executed and left open how it might rule in those circumstances.

When A Little Sunshine May Cause A Burn

According to Senator Herb Kohl, the intention of the "Sunshine in Litigation Act of 2009" (S. 537) is to require federal judges to perform a " simple balancing test" to ensure that in any proposed secrecy order, the defendant’s interest in secrecy truly outweighs the public interest in information related to public health and safety.  Citing court-approved confidential settlement agreements in product liability cases entered into by drug and tire manufacturers, Senator Kohl argues that federal judges must be required to consider public health and safety when deciding whether to allow a secrecy order.   Although this proposal may have a populist appeal, the  American Bar Association believes that the proposed law would make discovery more burdensome, more expensive, and more time-consuming, and would threaten important privacy interests.  The Act would change Federal Rule of Civil Procedure 26(c) by limiting a court’s ability to enter an order in a civil case: (1) restricting disclosure of information obtained through discovery; (2) approving a settlement agreement restricting the disclosure of such information; or (3) restricting access to court records in civil cases. Before entering a secrecy order, a court would first have to perform the balancing test discussed by Senator Kohl or reach a determination that the order would not restrict the disclosure of information relevant to the protection of public health or safety.  I concur with the ABA that the Sunshine Act is a bad idea; its adoption would not serve the public interest.

The Committee on Rules of Practice and Procedure of the Judicial Conference of the United States reported last year that empirical studies demonstrate that there is no evidence that protective orders create a significant problem of concealing information about public hazards.  The Judicial Conference Advisory Committee on Civil Rules strongly opposes the measure as unnecessary legislation that will burden the courts and have significant adverse consequences for civil litigation.  Moreover, the ABA already has adopted policy that encourages courts to permit disclosure of information relevant to potential hazards.  Typically, in cases involving a sealed settlement agreement, there is sufficient information available to the public providing details of a potential public health or safety hazard. As product liability litigators are well aware, protective orders serve to facilitate the timely production of documents. Requiring that a court hearing be conducted before such an order is entered into in every civil case would consume precious judicial resources and further delay litigants’ day in court.