Acacia Patent Acquisition, LLC v. Superior Court of Orange County

Opinion

Petitioners seek the disqualification of the law firm of AlvaradoSmith, which (1) previously represented another law firm in an attorney fee dispute and (2) in this case, represents an expert seeking consulting fees arising out of the same underlying litigation as the attorney fee dispute. We issued a stay order and order to show cause. We now conclude AlvaradoSmith’s wide-ranging access to privileged information in the first representation and the substantial relationship between the two matters requires the disqualification of AlvaradoSmith. We therefore grant writ relief countermanding the respondent court’s contrary order.

FACTS

Matter No. 1: Petitioner Shared Memory Graphics LLC (SM Graphics) hired the law firm of Floyd & Buss in May 2009 to pursue patent infringement litigation against a list of leading electronics firms. Matter No. 1 commenced in July 2009 in Arkansas, but was subsequently transferred to the United States District Court for the Northern District of California. The SM Graphics retention agreement covered “litigation activities with respect to” 14 patents. The record is unclear, however, as to whether all 14 of these patents were actually at issue in Matter No. 1, or if only two of the 14 patents were the focus of Matter No. I.^[1] In March 2011, SM Graphics and related entities obtained a cash settlement (totaling approximately $45 million) from Samsung (one of the defendants in Matter No. 1) as part of a combined licensing and settlement agreement encompassing not only the patents at issue in Matter No. 1, but also numerous other patents owned by SM Graphics’s affiliates. Floyd & Buss acted as counsel for SM Graphics until at least May 2011, logging more than 8,000 billable hours. The record is silent as to what role, if any, Floyd & Buss actually played in the settlement negotiations with Samsung.

Matter No. 3 (the instant action): Plaintiff (and real party in interest to this proceeding) Chitranjan N. Reddy sued defendants (and petitioners in this proceeding) SM Graphics and Acacia Patent Acquisition, LLC (Acacia Patent). Reddy claims defendants are alter egos of each other with regard to the allegations at issue. Reddy’s allegations are similar to those made by Floyd & Buss in Matter No. 2. Reddy was retained in March 2009 by Acacia Patent to perform expert consulting work relating to United States Patents Nos. 5,712,664 and 6,081,279, i.e., two of the patents owned by SM Graphics that were ultimately made the subject of the litigation in Matter No. I.^[2] The agreement (styled a “Consulting Expert and Common Interest Agreement”) stated Reddy was entitled to 11 percent of the “Net Proceeds” of the “licensing, enforcement or sale” of the two patents. Reddy claims Acacia Patent and SM Graphics manipulated the settlement from Samsung to allocate an artificially low amount to the patents upon which Reddy provided his services. This resulted in a lower proposed payout to Reddy pursuant to his contingency agreement. Specifically, defendants allotted $1.5 million out of the $45 million to SM Graphics, resulting in $93,289.59 being offered as payment to Reddy after the deduction of alleged expenses.^[3]

Reddy’s operative complaint includes causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, quantum meruit, an accounting, and violation of Business and Professions Code section 17200 et seq. Reddy asserts that defendants “acted with an intent to defraud Plaintiff when they entered into the contingency Consulting .. . Agreement. On information and belief, Defendants intended from the very beginning, but did not disclose to Plaintiff, that they would allocate the proceeds of any global settlement in a manner that favored Acacia [Patent’s] and its other affiliates’ interests to the detriment of Plaintiff by allocating settlement funds to multiple . . . related entities to avoid payment of the full

The court’s explicit factual findings are supported by substantial evidence and the court’s chain of legal reasoning is largely sound. But we conclude the court erred and AlvaradoSmith must be disqualified based on the unique circumstances inherent to the representation of attorneys against their former clients (such as occurred here in Matter No. 2) and the substantial relationship between Matters Nos. 2 and 3.

Successive Representation Conflicts Governed by “Substantially Related” Standard

“Preserving confidentiality of communications between attorney and client is fundamental to our legal system. The attorney-client privilege is a hallmark of Anglo-American jurisprudence that furthers the public policy of insuring^[1] “the right of every person to freely and fully confer and confide in one having knowledge of the law, and skilled in its practice, in order that the former may have adequate advice and a proper defense.” [Citation.]’ [Citation.] One of the basic duties of an attorney is ‘[t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.’ [Citation.] To protect the confidentiality of the attorney-client relationship, the California Rules of Professional Conduct bar an attorney from accepting ‘employment adverse to a client or former client where, by reason of the representation of the client or former client, the [attorney] has obtained confidential information material to the employment except with the informed written consent of the client or former client.’ ” (In re Complex Asbestos Litigation (1991) 232 Cal.App.3d 572 , 586-587 [ 283 Cal.Rptr. 732 ].)

“For these reasons, an attorney will be disqualified from representing a client against a former client when there is a substantial relationship between the two representations. [Citations.] When a substantial relationship exists, the courts presume the attorney possesses confidential information of the former client material to the present representation.” (In re Complex Asbestos Litigation, supra, 232 Cal.App.3d at p. 587.)

In assessing whether there is a “substantial relationship” between two matters, courts “should ‘focus on the similarities between the two factual

When do these obligations and duties to nonclients arise? Can conflicts based on duties to nonclients result in disqualification? Do courts apply the successive representation framework (i.e., the transfer of confidential information is presumed in a substantially related matter) in these special cases where lawyers have duties of confidentiality to nonclients?

We begin our inquiry into these questions with an examination of two cases highlighted by the parties. (See Kennedy v. Eldridge (2011) 201 Cal.App.4th 1197 [ 135 Cal.Rptr.3d 545 ] (Kennedy); Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft (1999) 69 Cal.App.4th 223 [ 81 Cal.Rptr.2d 425 ] (Morrison).) Neither is precisely on point. But both feature the disqualification of counsel despite the lack of an adverse representation or attorney misconduct.^[4] And both cases endorsed the use of the successive representation framework in addressing disqualification motions brought by nonclients. Morrison and Kennedy show conflicts can arise in California (and disqualification motions can be granted) based on the conjunction of (1) implicit obligations a lawyer takes on to maintain the confidences of a nonclient received in the course of representing a client, and (2) the unfair advantage that might accrue were such a lawyer to pursue substantially related litigation against the nonclient.

Kennedy involved a custody dispute in which the paternal grandfather (an attorney) sought to represent the father (i.e., the attorney’s son). (Kennedy, supra, 201 Cal.App.4th at p. 1200.) The trial court granted the mother’s motion to disqualify the paternal grandfather, even though neither he nor his wife (also an attorney) had ever represented the mother. (Id. at pp. 1201-1202.) The appellate court held that “an amalgamation of interrelated factors” supported the trial court’s exercise of discretion. (Id. at

Morrison certainly can be analogized to the facts of this case, though (unlike here) one would not say disqualified counsel in Morrison was adverse to the nonclient in both matters. Had the trial court opted to disqualify AlvaradoSmith, Morrison would provide powerful support for a conclusion that such an order was within the court’s discretion. (See Morrison, supra, 69 Cal.App.4th at p. 253 [“what may have been a difficult decision for the trial court is ultimately, by virtue of the limited scope of review, not a close one on appeal”].) Like Kennedy, however, the different procedural posture in Morrison means it cannot be taken as authority for the proposition that we must grant relief to Acacia Patent and SM Graphics. Neither of the California cases primarily relied on in the petition provides a clear answer to the question presented.

Consistent with these cases, and somewhat closer to the facts here, Burkes v. Hales (Ct.App. 1991) 165 Wis.2d 585 [ 478 N.W.2d 37 ] (Burkes) explores an attorney’s duties to the clients of the attorney’s law firm client. In Burkes, Burkes sued Hales and other members of the Wisconsin Investment Board for wrongful discharge from his position as executive director. (Id., 478 N.W.2d at p. 38.) The Fox firm represented Burkes and the state Attorney General represented Hales. (Id. at p. 39.) While the litigation was pending, a contingent of lawyers at the Fox firm departed, taking Burkes’s file with them. (Ibid.) The remaining Fox firm partners hired Attorney Hurley to represent them in a lawsuit concerning the Fox firm’s breakup. (Ibid.) The Fox firm dispute settled, with the Fox firm retaining a financial interest in Burkes’s action as part of the settlement. (Ibid.) “At about the same time, the attorney general . . . withdrew . . . and the governor appointed Hurley as special counsel to represent Hales.” (Ibid.) The trial court granted Burkes’s disqualification motion and the appellate court affirmed the court’s exercise of discretion. (Id. at pp. 39, 43.)

As to substantial similarity, a few differences between Matter No. 2 (the Floyd & Buss arbitration) and Matter No. 3 (Reddy’s lawsuit) can be found. There are two separate contingency agreements at issue relating to two separate functions, that of attorney and that of expert consultant. Reddy’s work was clearly limited to two patents, while Floyd & Buss agreed to pursue litigation claims regarding 14. patents. Alter ego is pleaded in the instant action with regard to the relationship between Acacia Patent and SM Graphics but not in Matter No. 2. Defenses against an attorney fee collection action and a consultant’s fee collection action might differ.^[7]

But these differences pale in comparison with the essential similarities between Matters No. 2 and No. 3. Both contingency agreements pertain to the potential recovery in Matter No. 1. Both Floyd & Buss and Reddy allege that

Under these circumstances, it is unnecessary for a party seeking disqualification to pinpoint precise privileged documents as the basis for a potential unfair advantage. Like successive representation cases, the better rule here is to presume the possession of material confidential information and disqualify counsel in a substantially related action. “The conclusive presumption of knowledge of confidential information has been justified as a rule of necessity, ‘for it is not within the power of the [party seeking disqualification] to prove what is in the mind of the attorney. Nor should the attorney have to “engage in a subtle evaluation of the extent to which he acquired relevant information in the first representation and of the actual use of that knowledge and information in the subsequent representation.” ’ [Citation.] The conclusive presumption also avoids the ironic result of disclosing the former client’s confidences and secrets through an inquiry into the actual state of the lawyer’s knowledge and it makes clear the legal profession’s intent to preserve the public’s trust over its own self-interest.” (H. F. Ahmanson & Co. v. Salomon Brothers, Inc., supra, 229 Cal.App.3d at p. 1453.)

It was perfectly legitimate for Floyd & Buss, as well as AlvaradoSmith, to use every piece of information available in Matter No. 2, regardless of whether it was subject to the attorney-client privilege or work product protection. The same thing cannot be said about Matter No. 3. It is not viable to suppose AlvaradoSmith can honor its duty to maintain the confidences of

We acknowledge the downside to this result. It is possible that the privileged information to which AlvaradoSmith had access in Matter No. 2 would not provide them with any advantage in this action. It is possible that the disqualification of AlvaradoSmith will serve only as a tactical victory for defendants. It is possible an injustice is being done to both Reddy and AlvaradoSmith by disqualifying Reddy’s chosen counsel. But we must subordinate these concerns to the more serious danger of a litigant’s privileged information, disclosed to its own attorney (Floyd & Buss) in an earlier matter (Matter No. 1), being used against it. (See People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc., supra, 20 Cal.4th at p. 1145 [“The paramount concern must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar. The important right to counsel of one’s choice must yield to ethical considerations that affect the fundamental principles of our judicial process.”].)

We conclude by noting “our analysis does not mean that there is or should be any broad duty owed by an attorney to an opposing party to maintain that party’s confidences in the absence of a prior attorney-client relationship. The imposition of such a duty would be antithetical to our adversary system and would interfere with the attorney’s relationship with his or her own clients. The courts have recognized repeatedly that attorneys owe no duty of care to adversaries in litigation or to those with whom their clients deal at arm’s length. [Citations.] Instead, we deal here with a prophylactic rule necessary to protect the confidentiality of the attorney-client relationship and the integrity of the judicial system . . . .” (In re Complex Asbestos Litigation, supra, 232 Cal.App.3d at p. 588.) In the limited realm of