Federal Circuit Disqualifies Firm for Conflict with Corporate Affiliate

A recent Federal Circuit decision, Falk Pharma GmbH v. Generico, LLC (2019), disqualified a large firm from prosecuting three appeals, because, at the same time, the firm was representing a corporate affiliate of the adversary.

Key to the decision was the fact that the firm’s retainer agreement with the affiliate specified – when read together with the General Counsel’s operating guidelines which were incorporated into the retainer agreement – that the firm had an attorney-client relationship with all of the client’s affiliates.

Apart from that, the Federal Circuit held that the two adversary affiliates were closely related to the third entity (the firm client) in terms of operations and financial dependence for the purpose of professional ethics to constitute one client.

Counsel for corporations with affiliates are well advised to consider adding language to retainer agreements that specify whether affiliates of the primary “client” also have the status of a client of the retained law firm. The Falk Pharma case indicates that such will generally be honored and if a conflict arises may result in disqualification.

Katten Muchin Rosenman LLP represented Mylan Pharmaceuticals in a series of patent disputes (one in New Jersey, one in West Virginia, and one before the PTO) against two other pharmaceutical companies, Valeant Pharmaceuticals International and Salix Pharmaceuticals. The latter two companies are corporate affiliates of Bausch & Lomb.

Two attorneys from Alston and Bird had been representing Mylan against Valeant and Salix in the three matters. At some point, they moved their practice to Katten. In the meantime, other Katten attorneys had been representing Bausch & Lomb in a trademark matter. Valeant and Salix moved to disqualify the firm in the three appeals, and the Federal Circuit granted the motions.

The retainer agreement between Bausch & Lomb and Katten, which seems to have used a Bausch & Lomb corporate form, specified that the company’s “Outside Counsel Guidelines” governed the relationship between the company and the firm. Both the retainer agreement and the guidelines indicated that the firm had formed an attorney-client relationship with Valeant and all of its subsidiaries and affiliates.

Rule 1.7 of the Model Rules bars any adversarial representation against a current client without consent. For a current client, this is an absolute rule – adversarial representation is barred no matter how unrelated the matters are. (The rule is different for former clients, which is governed by Rule 1.9) The comments to Rule 1.7 indicate that, generally, representation of one corporation in a corporate family does not automatically mean that the lawyer represents all members of the corporate family. But the comments also indicate that an affiliate may be treated as a client if “the circumstances are such that the affiliate should also be considered a client of the lawyer.” The terms of the retainer and associated Outside Counsel Guidelines made clear this was just such a circumstance.

Apart from that, the Federal Circuit relied on a Second Circuit decision that looked to two factors to determine if corporate affiliates should also be considered clients for the purpose of Rule 1.7: (1) the operational commonality of the affiliates and (2) the extent to which one depends financially on the other.

On the first factor, Valeant and Baush & Lomb share a variety of administrative and operational services and also share a legal department that makes decisions (and oversees litigation) for both companies. On the second factor, Valeant’s SEC filings indicated that Bausch & Lomb contributed over $1 Billion to Valeant’s revenues in the first quarter of 2018 alone. A similar analysis was employed as to Salix.

So, the Federal Circuit concluded that all three corporate affiliates were clients of the Katten firm, and thus Katten had to be disqualified.

The clear takeaway for both corporate counsel and outside counsel is where representation involves corporations with multiple affiliates, consideration should be given to whether the firm also has a client relationship with the affiliates. Corporate counsel will likely wish to include that in any retainer agreement.

Outside counsel needs to be aware that, apart from whatever is agreed upon in the retainer, the affiliate may be closely intertwined with the client entity sufficient to deem it a “client” for the purposes of conflicts.