Opinion ID: 385705
Heading Depth: 1
Heading Rank: 2

Heading: prohibition against attorney-client relationships

Text: 1. Preliminary Considerations 32 Exxon most vigorously contests that aspect of the June 25 Order that prohibits both in-house and retained counsel for Exxon from maintaining an attorney-client relationship with the Drives Group during the pendency of the FTC administrative proceeding. Essentially, Exxon objects to this provision on the ground that the Drives Group is a wholly owned segment of Exxon, and that this prohibition against representation of the Drives Group interferes with Exxon's statutory and constitutional right to be represented by counsel of its choice in the administrative litigation. 22 Exxon contends that this right to counsel may be impaired only for the weightiest of justifications, and that no such justification exists in this case. Brief of Appellant, p. 17. 33 In resolving this claim, we note at the outset two special circumstances in this case that we believe temper Exxon's right to counsel argument. First, we emphasize that in the FTC proceeding challenging the acquisition of Reliance, Exxon's interests will be represented by counsel of Exxon's choice. Exxon has retained counsel for that proceeding. Moreover, as a result of the modification requested by Exxon and incorporated in the June 25 Order, that counsel has access to all information of the Drives Group that is necessary to defend the acquisition. Exxon admits in its brief that (t)he only additional information that would come to counsel as a result of there being an ordinary attorney-client relationship would be irrelevant or privileged information. Brief of Appellant, p. 25. Exxon has not claimed that it is in any way prejudiced by its inability to secure such information. 23 34 Second, we note that the only way that Exxon was able to acquire Reliance, and thus make the Drives Group a wholly owned segment of Exxon, was through the imposition of protective measures designed to ensure that any divestiture later ordered would not be a hollow remedy. These protective measures, embodied in the October 26 Order, were not challenged on any appeal by Exxon. In the June 25 Order, the District Court interpreted the necessary protective measures to include a prohibition against joint representation of Exxon and the Drives Group in both the FTC litigation and in compliance proceedings. Exxon's alleged statutory and constitutional rights as owner of the Drives Group must be viewed with these facts in mind. 35 2. The Legality of the Hold Separate Order 36 We turn then to consider the prohibition imposed by the District Court. It has long been recognized that in order for the Government to monitor and implement effectively the antitrust laws, and thus protect the public interest in the vigorous enforcement of those laws, it is essential that some mechanism exist by which the Government may prevent the consummation of a merger or acquisition that it believes to be unlawful. Mergers and acquisitions are often followed by a commingling of assets and other substantial changes in the structures of the enterprises involved. Once those changes occur, it is often impossible for the Government to compel a return to the status quo, and the legality of the challenged merger or acquisition may become essentially a moot question. 37 In FTC v. Dean Foods Co., 384 U.S. 597, 86 S.Ct. 1738, 16 L.Ed.2d 802 (1966), the Supreme Court considered the power of a Court of Appeals to enjoin a proposed merger under the All Writs Act, 28 U.S.C. § 1651(a), and the ability of the FTC to petition the appellate court to exercise that power. The Court held that power to enjoin the merger did exist, and that, although not conferred by statute, the FTC had the power to petition the court for such relief. In so holding, the Court expressly recognized the importance of preliminary injunctive relief to the effective enforcement of the antitrust laws: 38 (W)ithout standing to secure injunctive relief, and thereby safeguard its ability to order an effective divestiture of acquired properties, the Commission's efforts would be frustrated .... If consummation of the merger is not restrained, the restoration of (the acquired company) as an effective and viable competitor will obviously be impossible by the time a final order is entered. This is not unusual. Administrative experience shows that the Commission's inability to unscramble merged assets frequently prevents entry of an effective order of divestiture. 39 384 U.S. at 606 n.5, 86 S.Ct. 1744 n.5. 40 These concerns later motivated Congress to grant the FTC, in 15 U.S.C. § 53(b), express statutory authority to petition in District Court for a temporary restraining order or preliminary injunction. 24 See 119 Cong.Rec. 36595-619 (1973). In enacting this law, Congress further demonstrated its concern that injunctive relief be broadly available to the FTC by incorporating a unique public interest standard in 15 U.S.C. § 53(b), rather than the more stringent, traditional equity standard for injunctive relief. 25 As explained in the Conference Report: 41 The intent is to maintain the statutory or public interest standard which is now applicable, and not to impose the traditional equity standard of irreparable damage, probability of success on the merits, and that the balance of equities favors the petitioner. This latter standard derives from common law and is appropriate for litigation between private parties. It is not, however, appropriate for the implementation of a Federal statute by an independent regulatory agency where the standards of the public interest measure the propriety and need for injunctive relief .... The conferees did not intend, nor do they consider it appropriate, to burden the Commission with the requirements imposed by the traditional equity standard which the common law applies to private litigants. 42 H.R.Rep.No.624, 93d Cong., 1st Sess. 31 (1973) U.S.Code Cong. & Admin.News 1973, pp. 2417, 2533. (emphasis in original). 43 Courts thus possess broad authority to enjoin the consummation of a contested acquisition or merger if such action would serve the public interest in the effective enforcement of the antitrust laws. At the same time, it is well recognized that the issuance of a preliminary injunction prior to a full trial on the merits is an extraordinary and drastic remedy. Medical Society v. Toia, 560 F.2d 535, 538 (2d Cir. 1977). This is particularly true in the acquisition and merger context, because, as a result of the short life-span of most tender offers, the issuance of a preliminary injunction blocking an acquisition or merger may prevent the transaction from ever being consummated. United States v. Culbro Corp., 436 F.Supp. 746, 757-58 (S.D.N.Y.1977); United States v. Northwest Industries, Inc., 301 F.Supp. 1066, 1095-97 (N.D.Ill.1969). Courts have particularly expressed concern when the grant of a preliminary injunction may cause shareholders of the acquired company to bear any loss resulting from the antitrust litigation. 26 See Carrier Corp. v. United Technologies Corp., 1978-2 Trade Cas. (CCH) P 62,393 at 76,378 (N.D.N.Y.), aff'd, 1978-2 Trade Cas. (CCH) P 62,405 (2d Cir. 1978); United States v. Culbro Corp., supra. 44 As a result of the tension between these conflicting interests, courts have often denied requests for a preliminary injunction if some less extreme means exist to safeguard the public interest. Perhaps the most common of such means is an order that permits the transaction to go forward, but requires the acquiring company to hold the acquired company as a separate entity during the course of subsequent antitrust litigation. 27 In many cases, such a hold separate order is a fully effective means of ensuring that divestiture, if ordered, will be a viable remedy; at the same time, in permitting the transaction to go forward, a hold separate order is less drastic than a preliminary injunction. Indeed, one court has expressly stated that, as a condition for granting a preliminary injunction, a court must first consider whether there is an effective but less drastic preliminary remedy, such as a hold separate order, which will prevent this probable interim harm to the public. United States v. Culbro Corp., 436 F.Supp. 746, 750 (S.D.N.Y.1977). 45 In cases where authority has been given, the issuance of a hold separate order has been based upon a court's inherent equitable powers. See United States v. United Technologies Corp., 466 F.Supp. 196, 200 (N.D.N.Y.1979); United States v. International Telephone & Telegraph Corp., 306 F.Supp. 766, 797 (D.Conn.1969), appeal dismissed, 404 U.S. 801, 92 S.Ct. 20, 30 L.Ed.2d 34 (1971). The Third Circuit has expressly left open the question whether such relief may be issued pursuant to 15 U.S.C. § 53(b), 28 or whether that provision may only be used to completely block a transaction believed to violate a statute enforced by the Federal Trade Commission. FTC v. British Oxygen Co., 529 F.2d 196, 199 (3d Cir. 1976). 46 Exxon has never contested the entry of a hold separate order in this case. Exxon did not appeal the October 26 Order of the District Court, and does not here challenge the authority of the court to impose such an Order. Exxon contends, however, that the hold separate order entered here may not include a prohibition against the maintenance of an attorney-client relationship between counsel for Exxon and the held separate entity. 47 3. The Legality of the Prohibition Against Attorney-Client Relationships 48 In resolving the primary issue in this case, both parties have recognized that we are standing on new territory in the law. The question of whether or not a presumptively valid hold separate order may include a prohibition against the maintenance of an attorney-client relationship with the held separate entity has rarely been addressed by the courts. It is for this reason that we have set forth at length the relevant considerations in determining whether or not preliminary injunctive relief should be issued prior to the consummation of a challenged acquisition or merger. From that discussion, we believe that it is evident that Congress has expressed a strong concern that preliminary relief be available to protect the public interest in the effective enforcement of the antitrust laws. At the same time, courts have wisely relied upon inherent equitable powers to fashion alternative remedies that protect this vital public interest with as little damage as possible to private interests involved in the transaction. In so doing, courts have often been able to protect both public and private interests pending an expedited resolution of the underlying substantive controversy. 49 For the reasons set forth below, we hold that the prohibition against representation contained in the June 25 Order was a proper exercise of the inherent equitable power of the District Court. We believe that this prohibition was necessary to fully effectuate the hold separate order imposed by the District Court to protect the public interest. In reaching this conclusion, we are heavily influenced by the fact that this aspect of the June 25 Order imposes no hardship upon Exxon in its defense of the acquisition before the FTC. 50 As stated at the outset, Exxon asserts that the prohibition against representation is invalid because no reason exists in this case to interfere with Exxon's right to be represented by counsel of its choice, a right that would normally entitle attorneys for Exxon to deal freely as counsel with all segments of the corporation. In the course of proceedings before the District Court, it became evident that whether a reason existed for the interference depended largely upon whether or not conflicts existed between the interests of Exxon and those of the Drives Group. 29 We agree that this is the critical issue that must be addressed in this appeal. 51 Exxon argues that no conflict exists, between the interests of Exxon and those of the Drives Group, that warrants the retention of separate counsel. Exxon primarily contends that since the Drives Group is now solely owned by Exxon, the Drives Group has no independent corporate interest in remaining a separate entity as a result of divestiture obtained through the FTC litigation. Apart from this corporate identity between Exxon and the Drives Group, Exxon asserts that it is in the independent interest of the Drives Group to have the acquisition validated and to be spared the uncertainties and risks of divestiture. In short, Exxon argues that Exxon and the Drives Group share a common interest in the successful defense of the acquisition before the FTC, and that there is thus no reason to interfere with Exxon's ordinary right to maintain an attorney-client relationship with all segments of the corporation. 52 We agree that Exxon, Reliance, and the Drives Group share a common interest in obtaining approval of the acquisition. Now owned by Exxon, neither Reliance as a whole, nor the Drives Group segment, have any discernible interest in being divested from Exxon and reestablished as independent entities. There is thus no conflict concerning the primary issue that will be litigated before the Federal Trade Commission. We believe that another significant conflict does exist, however, that is sufficiently related to that proceeding to warrant the prohibition against joint representation. 53 Central to the existence of this conflict is the fact that while Exxon and the Drives Group now share a corporate identity, that identity might be shattered as a result of the challenge mounted by the FTC to the acquisition of Reliance by Exxon. Should divestiture be ordered by the FTC, Exxon and the Drives Group will become competitors. This possibility, which would result directly from the proceeding at which Exxon seeks joint representation, gives rise to a fundamental conflict between Exxon and the Drives Group. 54 It is inevitable that, due to the possibility that divestiture may be ordered and Exxon forced to compete with the Drives Group, the interests of Exxon differ from those of the Drives Group. On the one hand, the Drives Group has a strong interest in remaining a competitively independent and fully viable enterprise during the pendency of the administrative proceeding challenging the legality of the acquisition so that it may survive in the marketplace in the event of divestiture. On the other hand, Exxon has an interest in ensuring that the competitive strength of Exxon will be at a maximum in the event that divestiture is ordered. It is axiomatic that Exxon has little or no interest in preserving the Drives Group as a viable entity capable of competing with Exxon in the marketplace. There is thus a fear, expressed by the District Court below, that Exxon may allow the Drives Group to wither on the vine. A. 1393. 30 55 We note that this conflict is neither intangible nor unrelated to the current proceeding. Rather, we believe that this conflict could manifest itself in several ways during the course of the litigation. 56 Several examples have been cited by the FTC. For instance, the Drives Group has an interest in minimizing the risk of inadvertent disclosure of competitively sensitive information to employees of Exxon by limiting access to information that is relevant to the litigation. Exxon does not share this interest. Similarly, the Drives Group has an interest in having the litigation resolved as quickly as possible. It may be in Exxon's interest, on the other hand, to delay the proceeding. The longer the Drives Group is held in its current limbo status, the less likely it will be able to offer effective competition to Exxon in the event of divestiture. The interests of the parties also differ in terms of settlement negotiation. In the event that divestiture is accepted through settlement, a question will remain as to how much to divest. The Drives Group has an interest in divesting as large an entity as possible in order to establish a broad capital foundation from which to compete; however, Exxon may benefit from divestiture of as small a unit as possible. 57 Most critically, the conflict described above clearly requires that separate counsel appear in proceedings conducted to ensure compliance with the October 26 and June 25 Orders. 31 As a result of the possibility of divestiture, it is essential to the Drives Group that the October 26 hold separate order be rigorously enforced. Since Exxon would be better served in the event of divestiture by severance of a withered Drives Group, Exxon does not share this concern, and may instead be better served by loose compliance with the hold separate order. 58 Although somewhat anomalous, we are constrained to uphold the Order of the District Court for the very reason asserted by Exxon in support of its petition opposing the Order. As asserted by appellant, the Drives Group is now part of Exxon. It has no independent corporate existence. Exxon thus argues that its counsel have no ethical obligation to do anything other than to serve the interests of its client, Exxon. 32 However, since the Drives Group is now subsumed by Exxon, there is no party to represent the significant interests of the Drives Group that exist due to the possibility that the Drives Group may at some point be separated from Exxon. The possible future owner of the Drives Group does not now exist to protect certain interests that are very much involved in the current proceedings. While that future potential owner cannot here protect those interests, it is possible to prevent Exxon, a future potential competitor, from representing those interests. In other words, it is not the Drives Group as part of Exxon that Exxon may not represent; it is the Drives Group as potentially separate from Exxon that Exxon is prohibited from representing. The June 25 Order is thus plainly designed to effectuate the provisions of the October 26 Order establishing the Drives Group as potentially separate from Exxon. 59 For these reasons, we believe that the public interest is served by the prohibition preventing counsel for Exxon from representing the Drives Group during the course of the FTC litigation and related compliance proceedings. To ensure that divestiture remains as a meaningful potential remedy in the FTC proceeding, it is essential that the Drives Group remains a healthy and strong entity. In the circumstances of this case, we believe that the prohibition against representation is a reasonable extension of the hold separate order imposed by the District Court as a condition for the acquisition of Reliance by Exxon. 33 60 We wish to emphasize again that we foresee no significant prejudice to Exxon as a result of this ruling. 34 The June 25 Order of the District Court grants retained counsel for Exxon nearly complete access to Drives Group information and personnel for purposes of the FTC litigation. As a result, Exxon should not be hampered in any way in its ability to defend the acquisition before the Federal Trade Commission. 61 On the facts of this case, we are unable to find any violation of statutory or constitutional rights. We thus affirm that portion of the June 25 Order that prohibits counsel for Exxon from maintaining an attorney-client relationship with the Drives Group for purposes of the FTC litigation and for purposes of ensuring compliance with the Orders of the District Court. 62