California
Partner Departure Law

July 17, 2015

Departing Partners And Potential Conflicts With Current And Former Clients: The Featured Role Of The “Substantially Related” Test In Two Recent Disqualification Decisions

In the space of fifteen months, the Northern District of Texas and the District Court of Delaware have each issued significant attorney disqualification orders. In both cases, the “substantially related” test regarding past and present representations had a featured role in the courts’ decisions to disqualify the same California law firm from significant patent cases. For departed partners and their new firms, these decisions serve as important reminders about the key factors to analyze before becoming adverse to former clients.

Matthew Powers and Steven Cherensky were formerly at Weil, Gotshal & Manges LLP (“Weil”). They left Weil in 2011 to form Tensegrity Law Group LLP (“Tensegrity”). While at Weil, both attorneys represented Samsung in several lawsuits over a ten-year period and also over the course of several years represented, in multiple matters, Micron Technology, Inc. (“Micron”) and a company that Micron had acquired. These departed Weil partners also continued to represent Samsung for a while at their new firm. In 2013, Micrografx, LLC (“Micrografx”), represented by Tensegrity, filed suit against Samsung. In 2014, Innovative Memory Solutions, Inc., represented by Tensegrity filed suit against Micron. Both Samsung and Micron prevailed on disqualification motions, and the Courts’ decisions are summarized below.

Micrografx, LLC, v. Samsung Telecommunications America, LLC, United States District Court, Northern District of Texas, Case No. 3:13-CV-3599-N (the “Samsung Case”)

In the Samsung Case, the Court focused on certain prior litigation when analyzing the relevant history of the prior representations:

In particular, Samsung retained Powers and Cherensky to represent it in Samsung Elecs. Co. v. Vertical Computer Sys., Inc., No. 3:11-CV-189 (N.D. Cal. 2011) and Vertical Computer Sys., Inc. v. Interwoven, Inc., No. 2:10-CV-490 (E.D. Tex. 2010) (collectively, “Vertical Computer”). Vertical Computer involved patents relating to software on Samsung’s Galaxy smartphones and tablets. Powers and Cherensky oversaw, filed, and signed a complaint on behalf of Samsung in the California action and also responded to Vertical Computer’s complaint in the Texas action.

Powers and Cherensky left Weil in 2011 to form Tensegrity. At Tensegrity, they continued to represent Samsung. In 2013, Micrografx filed the instant suit against Samsung. Micrografx alleges that Samsung’s Galaxy smartphones and tablets infringe three patents directed to graphical libraries and operations and vector graphics. Tensegrity, Powers, and Cherensky are attorneys of record for Micrografx in the instant case. Tensegrity did not notify Samsung of the potential conflict, nor did they seek a conflict waiver. [citation omitted].

The Court analyzed the relevant ethical obligations under the Texas Disciplinary Rules of Professional Conduct and the American Bar Association Model Rules. Because Samsung was indisputably a former client, the Court decided that the only question before it was whether there was a substantial relationship between the subject matter of the prior representations of Samsung and the present case. The Court explained that if so, it would “irrebuttably presume that relevant confidential information was disclosed during the former period of representation.” Although most of the interesting evidence in connection with this disqualification appears to have been part of the extensive record filed under seal, it is clear, from the decision, that the Court was not convinced by attempts to distinguish the present case from the prior representations:

[T]here is more than a superficial resemblance between the two cases. Even though Vertical Computer may not have focused on precisely the same aspect of Google Maps and the Chrome Browser at issue here, the patented technology in both cases is sufficiently similar that certain legal issues and evidence relating to Samsung Galaxy graphic libraries, software, and operating system may be relevant in both litigations . . . .Thus, the legal and factual issues in Vertical Computer are “akin to the present action in a way reasonable persons would understand as important to the issues involved.” [citation omitted].

In granting Samsung’s disqualification motion against the individual attorneys, the Court emphasized that there is an irrebuttable presumption that a former client in a substantially related matter disclosed confidential information to the attorney and therefore “the degree or extent of Powers and Cherensky’s involvement in the Vertical Computer Cases is irrelevant to this Court’s analysis.” When turning its attention to whether or not to disqualify the entire firm, the Court explained, “[i]f one attorney obtained confidential information during a representation, the Court presumes that he shared that information with his firm.” The presumption is rebuttable, but under the circumstances of this case, the entire firm was disqualified because, among other things, the departing partners “had an ongoing relationship with Samsung at their prior firm” and “[t]hey continued to represent Samsung after they formed their new firm.” On the facts of this case, the departed partners could not rebut the presumption that they shared client confidences with their new firm, and on March 7, 2014 ordered Powers, Cherensky, and their entire firm disqualified from the case.

Innovative Memory Solutions, Inc. v. Micron Technology, Inc., United States District Court, District of Delaware, Case No. 14-1480-RGA (the “Micron Case”)

The Micron Case involved alleged patent infringement in connection with Micron’s NAND flash products. While at Weil, Powers and Cherensky had represented Micron (and a company Micron acquired in 2006) in several patent cases and a trade secret case, one of which led to a 7-week public trial. In evaluating the disqualification motion filed by Micron, the Court posed the following questions to determine if the prior representations and the current one were “substantially related”:

To determine whether a current matter is “substantially related” to a matter involved in a former representation, and, thus, whether disqualification under Rule 1.9 is appropriate, the Court must answer the following three questions: “(1) What is the nature and scope of the prior representation at issue? (2) What is the nature of the present lawsuit against the former client? (3) In the course of the prior representation, might the client have disclosed to his attorney confidences which could be relevant to the present action? In particular, could any such confidences be detrimental to the former client in the current litigation?” [citation omitted]

The Court explained that the required inquiry involves “a painstaking analysis of the facts.” Again, most of these facts were submitted by the parties under seal so we don’t know with any specificity what the Court found most influential. But we do know that the Court took note that, while at Weil, the attorneys now adverse to Micron had previously billed Micron (and a company Micron had acquired) approximately 4,000 hours litigating cases involving NANO technology. The Court held that the factual overlap between the prior representations and Micron’s invalidity defenses in the instant patent action raised “a common-sense inference” that what the attorneys learned from their former client could be used against it, and “[t]he fact that there was a lengthy public trial does not mean that all confidences became public.” The Court was also concerned about the appearance of “switching sides” because the two attorneys “might be required to depose and cross examine the very same witnesses they previously represented . . . .” After having undertaken its analysis, in an Order dated May 15, 2015, the Court granted Micron’s disqualification motion.

……

While it may not be surprising, particularly in the field of patent litigation, that attorneys could find themselves “adverse” to clients from long ago (given the frequency with which business principals and “serial” entrepreneurs in places like Silicon Valley change companies and business models), the immediate lesson at hand is that conflicts issues do not necessarily age well. Attorneys who find themselves potentially adverse to a former client need to very carefully examine whether their prior representation would be “substantially related” as articulated by these recent disqualification decisions in the Samsung and Micron cases. Importantly, there is always a greater risk for potential conflicts when partners transition to a new firm where they are not only bringing new clients into the firm, but may likely be engaged in new matters at the firm that could be adverse to former clients.

Although these disqualification decisions came from district courts in Texas and Delaware, their analysis may be relied upon by courts in all jurisdictions applying ethical prohibitions against former client representations. For example, the California Rules of Professional Conduct do not contain the “substantially related” language, but Rule 3-310(E), states that: “A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.” Determining whether confidential information has been shared and whether it is “material” is likely to involve the same factually intensive inquiry, inferences, and analysis of presumptions found in these Texas and Delaware disqualification decisions.

Finally, these decisions are a reminder that full disclosure about disqualification risks should be made to clients whenever there is any risk of a disqualification motion. The results of a disqualification can be dire for the clients as well as the attorneys. The Court in the Samsung Case only stayed matters for 30 days to permit Micrograft to obtain substitute counsel and further prohibited the transfer of work product from anyone at the disqualified firm to new counsel.

(Editor’s note: Rebecca Epstein, a Senior Consulting Attorney in the Firm’s San Francisco office, contributed to this article.)