Opinion ID: 173577
Heading Depth: 1
Heading Rank: 6

Heading: The Corporate Affiliate Conflict

Text: In deciding whether to disqualify an attorney, a district court must balance a client's right freely to choose his counsel against the need to maintain the highest standards of the profession. Hempstead Video, Inc. v. Inc. Vill. of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005). Although the American Bar Association (ABA) and state disciplinary codes provide valuable guidance, a violation of those rules may not warrant disqualification. See id. Instead, disqualification is warranted only if an attorney's conduct tends to taint the underlying trial. Bd. of Educ. v. Nyquist, 590 F.2d 1241, 1246 (2d Cir.1979) (internal quotation marks and citations omitted). One established ground for disqualification is concurrent representation, an attorney's simultaneous representation of one existing client in a matter adverse to another existing client. Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1387 (2d Cir.1976). Because concurrent representation is prima facie improper, it is incumbent upon the attorney to show, at the very least, that there will be no actual or apparent conflict in loyalties or diminution in the vigor of his representation. Id. at 1387. We have noted that this is a burden so heavy that it will rarely be met. Glueck, 653 F.2d at 749. In this respect, it will not suffice to show that the two matters upon which an attorney represents existing clients are unrelated. The lawyer who would sue his own client, asserting in justification the lack of `substantial relationship' between the litigation and the work he has undertaken to perform for that client, is leaning on a slender reed indeed. Cinema 5, 528 F.2d at 1386. We have not previously considered whether, and under what circumstances, representation adverse to a client's corporate affiliate implicates the duty of loyalty owed to the client. However, the issue has been addressed by the ABA and also has been discussed extensively in other courts. The ABA's Model Rules of Professional Conduct 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 a 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. See Charles W. Wolfram, Legal Ethics: Corporate-Family Conflicts, 2 J. Inst. Study Legal Ethics 295, 307 (1999). However, 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.... ABA Model Rule of Prof'l Conduct 1.7 cmt. 34 (2006). The ABA discussed this subject further in a 1995 Opinion Letter, concluding that whether a lawyer represents a corporate affiliate of his client... depends not upon any clearcut per se rule but rather upon the particular circumstances. Am. Bar Ass'n Comm. on Prof'l. Ethics, Formal Opinion 95-390 (1995), reprinted in ABA/BNA Lawyers Manual on Prof'l. Conduct Ethics Opinions 1991-95, pp. 1001:262 (1996). Many courts have reached the conclusion that the bar to concurrent representation applies if a firm's representation adverse to a client's corporate affiliate reasonably diminishes the level of confidence and trust in counsel held by [the client]. Certain Underwriters at Lloyd's, London v. Argonaut Ins. Co., 264 F.Supp.2d 914, 922 (N.D.Cal.2003) (internal quotation marks omitted); see also Discotrade Ltd. v. Wyeth-Ayerst Int'l, Inc., 200 F.Supp.2d 355, 358-59 (S.D.N.Y. 2002); Hartford Accident & Indem. Co. v. RJR Nabisco, Inc., 721 F.Supp. 534, 540-41 (S.D.N.Y.1989); John Steele, Corporate-Affiliate Conflicts: A Reasonable Expectations Test, 29 W. St. U.L.Rev. 283, 311-13 (2002). Put another way, these courts focus on the reasonableness of the client's belief that counsel cannot maintain the duty of undivided loyalty it owes a client in one matter while simultaneously opposing that client's corporate affiliate in another. See, e.g., Certain Underwriters at Lloyd's, London, 264 F.Supp.2d at 922; Discotrade Ltd., 200 F.Supp.2d at 358-59. We agree that representation adverse to a client's affiliate can, in certain circumstances, conflict with the lawyer's duty of loyalty owed to a client, a situation that we shall refer to as a corporate affiliate conflict. The factors relevant to whether a corporate affiliate conflict exists are of a general nature. Courts have generally focused on: (i) the degree of operational commonality between affiliated entities, and (ii) the extent to which one depends financially on the other. As to operational commonality, courts have considered the extent to which entities rely on a common infrastructure. See, e.g., Discotrade Ltd., 200 F.Supp.2d at 359 (corporate affiliates deemed single entity where each used the same computer network, e-mail system, travel department, and health benefit plan); Eastman Kodak Co. v. Sony Corp., Nos. 04-CV-6095, 04-CV-6098, 2004 WL 2984297, at -4 (W.D.N.Y. Dec. 27, 2004) (corporate affiliates deemed single entity based on, inter alia, integration of technology systems). Courts have also focused on the extent to which the affiliated entities rely on or otherwise share common personnel such as managers, officers, and directors. See, e.g., Certain Underwriters at Lloyd's, London, 264 F.Supp.2d at 923 (substantial overlap in management); Eastman Kodak, 2004 WL 2984297, at  (shared directors, officers and legal department); Discotrade Ltd., 200 F.Supp.2d at 359 (same board, directors and President). In this respect, courts have emphasized the extent to which affiliated entities share responsibility for both the provision and management of legal services. See Eastman Kodak, 2004 WL 2984297, at ; Certain Underwriters at Lloyd's, London, 264 F.Supp.2d at 923-24; Discotrade Ltd., 200 F.Supp.2d at 357; Hartford Accident and Indem. Co., 721 F.Supp. at 540; Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, 69 Cal.App.4th 223, 231, 81 Cal.Rptr.2d 425 (1999). This focus on shared or dependent control over legal and management issues reflects the view that neither management nor in-house legal counsel should, without their consent, have to place their trust in outside counsel in one matter while opposing the same counsel in another. As to financial interdependence, several courts have considered the extent to which an adverse outcome in the matter at issue would result in substantial and measurable loss to the client or its affiliate. See Hartford Accident and Indem. Co., 721 F.Supp. at 540; Wolfram, 2 J. Inst. Study Legal Ethics at 357-58. Courts have also inquired into the entities' ownership structure. See Discotrade Ltd., 200 F.Supp.2d at 358-59. Some have even suggested that an affiliate's status as a wholly-owned subsidiary of the client may suffice to establish a corporate affiliate conflict. Carlyle Towers Condo. Ass'n, Inc. v. Crossland Sav., FSB, 944 F.Supp. 341, 346 (D.N.J.1996) ([T]here is sufficient case law which supports the proposition that, for conflict purposes, representation of a subsidiary corporation is equivalent to representation of its parent, and vice-versa....); Stratagem Dev. Corp. v. Heron Int'l N.V., 756 F.Supp. 789, 792 (S.D.N.Y. 1991) (treating the entities as one client because the liabilities of a [wholly-owned] subsidiary corporation directly affect the bottom line of the corporate parent). However, we agree with the ABA that affiliates should not be considered a single entity for conflicts purposes based solely on the fact that one entity is a wholly-owned subsidiary of the other, at least when the subsidiary is not otherwise operationally integrated with the parent company. See American Bar Ass'n Comm. on Prof'l. Ethics, Formal Opinion 95-390 at 1001:261-62. However, the record here establishes such substantial operational commonalty between BabyCenter and J&J that the district court's decision to treat the two entities as one client was easily within its ample discretion. First, Babycenter substantially relies on J&J for accounting, audit, cash management, employee benefits, finance, human resources, information technology, insurance, payroll, and travel services and systems. Second, both entities rely on the same in-house legal department to handle their legal affairs. The member of J&J's in-house legal department who serves as board lawyer for BabyCenter helped to negotiate the E-Commerce Agreement between BabyCenter and GSI that is the subject of the present dispute. Moreover, J&J's legal department has been involved in the dispute between GSI and BabyCenter since it first arose, participating in mediation efforts and securing outside counsel for BabyCenter. Finally, BabyCenter is a wholly-owned subsidiary of J&J, and there is at least some overlap in management control. When considered together, these factors show that the relationship between the two entities is exceedingly close. That showing in turn substantiates the view that Blank Rome, by representing GSI in this matter, reasonably diminishes the level of confidence and trust in counsel held by J&J. Certain Underwriters at Lloyd's, London, 264 F.Supp.2d at 922 (internal quotation marks omitted). [1]