Gotham City Online, LLC v. Art.com, Inc.

Filing 48

ORDER by Judge Jeffrey S. White GRANTING, IN PART, 20 Motion to Disqualify Counsel. (jswlc3, COURT STAFF) (Filed on 3/13/2014)

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NOT FOR PUBLICATION

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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GOTHAM CITY ONLINE, LLC,

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For the Northern District of California

United States District Court

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No. C 14-00991 JSW

Plaintiff,

ORDER GRANTING, IN PART,
MOTION TO DISQUALIFY
COUNSEL

v.
ART.COM, INC.,

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(Docket No. 20.)

Defendant.
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Now before the Court for consideration is the motion to disqualify counsel, filed by

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Defendant, Art.com. The Court has considered the parties’ papers, relevant legal authority, and

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has had the benefit of oral argument. The Court HEREBY GRANTS, IN PART, Art.com’s

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motion.

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BACKGROUND

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This case arises out of a business relationship gone bad. In 2012, the principals of

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Plaintiff, Gotham City Online, LLC (“Gotham City”), Adam Hersh, David Topkins, and

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Jonathan Garriss (the “Principals”) sold an internet based poster business, Poster Revolution, to

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Art.com. (Compl. ¶¶ 2, 16-17; Docket No. 26-2, Declaration of Chuck Kurth (“Kurth Decl.”),

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¶¶ 5-7, Ex. A (“Bill of Sale”); Docket No. 20-2, Declaration of Evette Pennypacker

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(“Pennypacker Decl.”), ¶ 2 (identifying Principals).).) As part of this sale, the Principals

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became employees of Art.com and continued to operate Gotham City as a separate business.

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However, the websites for Gotham City and Poster Revolution were stored in separate locations

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“on the same two servers, leased from third-party Rackspace (the “Gotham Servers”).” (Compl.

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¶ 16.)

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On January 27, 2014, Art.com suspended the Principals and requested that they return

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all Art.com information in their possession by 5:00 p.m. on January 28, 2014. (Id. ¶ 23;

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Pennypacker Decl., ¶ 2.) On January 28, 2014, Art.com terminated the Principals. (Id. ¶ 23;

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Docket No. 20-1, Declaration of Kevin Lucas (“Lucas Decl.”), ¶ 5.) On January 29, 2014,

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Gotham City gave Art.com notice that it was terminating “any and all contracts, agreements,

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and arrangements” between them and demanded that Art.com migrate all Art.com property off

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of the Gotham Servers. (Id. ¶ 24.)

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On January 30, 2014, Gotham City’s counsel, who also serves as counsel for the

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Principals, Noah Hagey of BraunHagey & Bolden LLP (“BraunHagey”) sent Art.com a letter,
in which the Principals claimed that Art.com wrongfully terminated them in retaliation for

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For the Northern District of California

United States District Court

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whistleblowing activity. (Lucas Decl., ¶ 6.) BraunHagey also sent Art.com a “Proffer of

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Evidence” and copies of documents, which include e-mails that Art.com claim are subject to the

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attorney-client privilege. According to Art.com, the Proffer contains facts that are substantially

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similar to the allegations set forth in paragraphs 32-53 of the Complaint.1 (Id., ¶¶ 7-13, 15-16;

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Pennypacker Decl., ¶¶ 4, 6, 7 Exs. 1, 3.) BraunHagey denies using the Proffer or the exhibits to

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draft the Complaint, and it has attested that the facts set forth therein were based on interviews

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with the Principals and publicly available information. (See, e.g.,Docket No. 32-1, Declaration

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of J. Noah Hagey (“Hagey Decl.”), ¶ 33.)

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On February 4, 2014, counsel for Art.com advised BraunHagey that the documents

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attached to the Proffer were privileged and that BraunHagey’s use of those documents

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warranted disqualification. (Pennypacker Decl., ¶ 7.) Art.com attests that it demanded that

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BraunHagey return the privileged documents and that BraunHagey refused. (Id., ¶ 15.) Mr.

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Hagey attests that as soon as Art.com’s counsel claimed privilege, he “ceased further review of

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those documents, instructed all personnel in [his] firm to do the same, and began the process of

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removing access by [his] firm to any such materials pending guidance from the Court.” (Hagey

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Gotham City argues that their whistleblower claims are unrelated to this case.
(Opp. Br. at iv:25-26, 3:16-20.) At the same time, Gotham City has relied on the facts that
support the whistleblower claims to assert Art.com has caused it irreparable harm in this
case. (Compl. ¶¶ 31-53.)

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Decl., ¶ 24; see also Docket No. 32-12, Declaration of Alfredo W. Amoedo (“Ameodo Decl.”),

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¶¶ 15-16 (noting that emails were “quarantined”).) The BraunHagey firm did, however, provide

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the documents to Loren Kieve, Esq. in order to obtain an ethics opinion on its conduct. (Hagey

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Decl., ¶ 30.)

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The Principals retained BraunHagey in May 2013. (Id., ¶ 4.) Mr. Hagey attests that “in

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or around late October 2013,” the Principals began providing him with emails, including the

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emails that gave rise to this motion. (Id. ¶¶ 6-8; see also Ameodo Decl., ¶¶ 4, 7-9.)

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On March 4, 2014, Gotham City filed the complaint in this case, in which it asserts

18 U.S.C. section 1030, violations of the Stored Communications Act, 18 U.S.C. section 2701,

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For the Northern District of California

claims for misappropriation of trade secrets, violations of the Computer Fraud and Abuse Act,

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United States District Court

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negligent interference with prospective and existing economic advantage, conversion, and

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trespass to chattels. In brief, Gotham City alleges that Art.com altered the security and

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administrative credentials for the Gotham Servers and improperly accessed Gotham City’s

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portion of the Gotham Servers. (Compl. ¶ 24.) Gotham City also alleges that Art.com

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intentionally accessed Gotham City’s codes and database, and copied and moved Gotham City

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trade secrets and intellectual property from the Gotham Servers to another location. (Id. ¶¶ 26-

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28.)

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On that same day, Art.com initiated a separate arbitration proceeding against the

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Principals asserting claims for, inter alia, fraud, breach of fiduciary duty, breach of contract,

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and declaratory relief. (Pennypacker Decl., ¶ 14.)2
On March 5, 2014, Art.com filed this motion, in which it asks the Court to disqualify

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BraunHagey from serving as counsel for Gotham City, the Principals, or any of Gotham City’s

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employees in this matter. Art.com also asks the Court to disqualify BraunHagey from

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representing Gotham City, its Principals or its employees in “any dispute between Gotham, its

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Principals and/or employees and Art.com stemming from Art.com’s acquisition of Consolidated

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Consignment Company or the Principal’s former Art.com employment.” (Mot. at 2:5-11.)

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Art.com contends that this action also is subject to arbitration filed a motion
to compel arbitration on March 5, 2014. The Court stayed briefing on that motion pending
resolution of this motion.
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ANALYSIS
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Applicable Legal Standards.

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A district court has the inherent authority to disqualify counsel. See United States v.

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Wunsch, 84 F.3d 1110, 1114 (9th Cir. 1996). Lawyers who appear before the United States

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District for the Northern District of California are required to comply with the California Rules

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of Professional Conduct. See Civ. L.R. 11-4(a)(1) (requiring that all members of the bar of this

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Court and attorneys permitted to practice before the Court pro hac vice must be “familiar and

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comply with the standards of professional conduct required of members of the State Bar of

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California”). In order to determine whether to disqualify counsel, the Court applies California
law. See In re County of Los Angeles, 223 F.3d 990, 995 (9th Cir. 2000); Hitachi, Ltd. v.

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For the Northern District of California

United States District Court

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Tatung Co., 419 F. Supp. 2d 1158, 1160 (N.D. Cal. 2006).

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A court should examine a motion to disqualify counsel carefully “to ensure that

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literalism does not deny the parties substantial justice.” People ex rel Dept. of Corporations v.

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Speedee Oil Change Systems, Inc., 20 Cal. 4th 1135, 1144 (1999) (“Speedee Oil”). Thus, a

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court must balance such varied interests as a party’s right to chosen counsel, the interest in

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representing a client, the burden placed on a client to find new counsel, and the possibility that

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“tactical abuse underlies the disqualification motion.” Id. at 1145.

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An order of disqualification of counsel is a drastic measure, which courts should hesitate

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to impose except in circumstances of absolute necessity. In re Marvel, 251 B.R. 869, 871 (N.D.

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Cal. 2000) (citing Schiessle v. Stephens, 717 F.2d 417 (7th Cir. 1983)). Motions for

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disqualification are often tactically motivated and they tend to derail the efficient progress of

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litigation. Evans v. Artek Systems Corp., 715 F.2d 788, 791 (2d Cir. 1983). The moving party,

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therefore, carries a heavy burden and must satisfy a high standard of proof. Id. Because of the

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potential for abuse, disqualification motions should be subjected to particularly strict judicial

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scrutiny. Optyl Eyewear Fashion International Corp. v. Style Companies, Ltd., 760 F.2d 1045,

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1049 (9th Cir. 1985) (citing Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 721-22

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(7th Cir. 1982)). “Ultimately, however, a court must maintain ethical standards of professional

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responsibility.” Hitachi, 419 F. Supp. 2d at 1161 (citing Speedee Oil, 20 Cal. 4th at 1145).
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The Court Disqualifies the BraunHagey Firm From Representing Gotham
City Online LLC in this matter.

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Art.com argues that BraunHagey obtained and used Art.com privileged communications

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from the Principals to develop Gotham City’s claims against Art.com in this case. Thus,

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Art.com’s motion requires the Court to evaluate the “ethical obligations of a lawyer when that

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lawyer comes into possession of privileged materials without the holder of the privilege having

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waived it.” Clark v. Superior Court, 196 Cal. App. 4th 37, 48 (2011).

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In such a situation, California law provides that an attorney “may not read a document

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any more closely than is necessary to ascertain that it is privileged. Once it becomes apparent
that the content is privileged, counsel must immediately notify opposing counsel and try to

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For the Northern District of California

United States District Court

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resolve the situation.” Rico v. Mitsubishi Motors Corp., 42 Cal. 4th 807, 810 (2007) (citing

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State Compensation Ins. Fund v. WPS, Inc., 70 Cal. App. 4th 644 (1999)); see also id. at 815-

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18; cf. Gomez v. Vernon, 255 F.3d 1118, 1134 (9th Cir. 2001) (counsel “should refrain from

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examining the materials, notify the sending lawyer and abide the instructions of the laywer who

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sent them”). Courts have applied the rule articulated in Rico to situations where the production

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of privileged information is not inadvertent. See, e.g., Clark, 196 Cal. App. 4th at 49; United

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States ex rel Hartpence v. Kinetic Concepts, Inc., 2013 WL 2278122 (C.D. Cal. May 20, 2013)

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(disqualifying counsel for relators in a qui tam action who received privileged information from

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relators, transmitted information to United States attorney, and used material in pleadings)

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(hereinafter “Hartpence”).

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Art.com “has the burden of establishing the preliminary facts necessary to support a

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prima facie claim of privilege, i.e. a communication made in the course of an attorney-client

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relationship.” Costco Wholesale Corp. v. Superior Court, 47 Cal. 4th 725, 733 (2009). The

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Costco court noted that, in order to evaluate whether the party claiming the privilege has made a

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prima facie showing, the court’s focus should be on the purpose of the relationship between the

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parties to a communication. 47 Cal. 4th at 739-40; see also Clark, 196 Cal. App. 4th at 51-52.

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If Art.com is able to establish a prima facie claim of privilege, “the communication is presumed

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to have been made in confidence and [Gotham City] has the burden of proof to establish the
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communication was not confidential or that the privilege does not for other reasons apply.”

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Costco, 47 Cal. 4th at 733.

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In Clark, the plaintiff, Verisign’s former chief administrative officer, was terminated,

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and he retained counsel to pursue a claim against Verisign. During the litigation his counsel

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advised Verisign’s counsel that he intended to assert an additional claim that Verisign believed

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was based on privileged information that the plaintiff improperly took from Verisign when it

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terminated his employment. 196 Cal. App. 4th at 42-43. Verisign immediately demanded that

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the plaintiff return all Verisign documents, including any privileged documents, and that he

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cease using that information or documents. As the litigation proceeded, it became clear that
plaintiff and his counsel had not complied and had used privileged information during the

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For the Northern District of California

United States District Court

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litigation. Id. at 43-44. Verisign then moved to disqualify.

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Applying the principles outlined in Costco and Rico, the Clark court found that a

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declaration from counsel “stating the identities of the parties to each of the sets of the

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communications ... and the general nature of the purpose of the communication (all of which

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involved obtaining legal advice on a variety of subjects)” was sufficient to establish a prima

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facie claim of privilege. 196 Cal. App. 4th at 49, 51-52; cf. Hartpence, 2013 WL 2278122, at

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*2 (noting that relators were former executives of defendant and had extensive contacts with

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defendant’s lawyers, so that “counsel should have known that many of the documents ... were

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privileged”).

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It is undisputed that the Principals were employees of Art.com at the time the

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communications were made. Although only one of the emails at issue appears to have been

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clearly marked as “Privileged; Confidential,” that fact is not dispositive. “The absence of

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prominent notations of confidentiality does not make them any less privileged.” Rico, 42 Cal.

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4th at 818; see also Clark, 196 Cal. App. 4th at 51-52 (concluding privilege applied even when

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all documents did not contain privilege designation). It also is not seriously disputed that

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members of Art.com’s legal department were parties to those communications. BraunHagey

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argues that, based on its review of the documents, and in the Principals’ opinion, the

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communications were business related. However, Art.com’s in-house counsel, Kevin Lucas,
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attests that he and other members of Art.com’s legal department were parties to the

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communications, he describes the general nature of these communications, and he attests that

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they were made for the purpose of obtaining or receiving legal advice. (Id. ¶¶4, 8-13, 16.) The

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Court concludes that Art.com has made a prima facie claim of privilege. Accordingly, the

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emails are presumed to have been made in confidence, and Gotham City bears the burden to

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show the privilege does not apply.

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Gotham City argues that Art.com waived the privilege by submitting the Proffer as part

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of its arbitration demand. However, Art.com attests that it has not provided the documents

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attached to the Proffer. It is Gotham City’s burden to show a waiver, and the Court finds it fails
to meet its burden. Similarly, to the extent BraunHagey argues that the documents are not in

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For the Northern District of California

United States District Court

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fact privileged and, thus, it was entitled to review them, it was not BraunHagey’s role to make

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that determination. As the Ninth Circuit stated in the Gomez case, “[t]he path to [an] ethical

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resolution is simple: when in doubt ask the court.” 255 F.3d at 1135.

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Because Gotham City has failed to show the privilege does not apply, the Court must

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consider whether BraunHagey complied with its ethical obligations under Rico. The Court

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concludes it did not. First, it is not seriously disputed that BraunHagey reviewed and analyzed

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the emails and, thus, it reviewed the documents more than was reasonably necessary to make a

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determination that there was a privilege issue. Cf. Hartpence, 2013 WL 2278122, at *3 (citing

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Clark, 196 Cal. App. 4th at 54-55 and finding that relator’s counsel had used privileged

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materials to craft claims and incorporated verbatim content from privileged material into

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pleadings). Although BraunHagey contends it took remedial action once Art.com notified it of

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the issue, BraunHagey received the documents in October 2013. Under Rico, it would have

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been BraunHagey’s duty to notify Art.com of this issue when it came into possession of the

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privileged materials and to cease any further review pending resolution of the issue.

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The Court acknowledges that the disqualification issue is complicated by the

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relationship between the Principals and Gotham City, the legal entity that is the plaintiff in this

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case. BraunHagey argues that, as its clients, the Principals were permitted to disclose

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confidential information so that they could obtain legal advice on how to pursue their claims
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against Art.com. BraunHagey relies on Neal v. Healthnet, Inc., 100 Cal. App. 4th 831 (2002),

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Fox Searchlight v. Paladino, 89 Cal. App. 4th 294 (2001), and Bell v. 20th Century Ins. Co., 212

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Cal. App. 3d 194 (1989), each of which support the proposition that a party cannot improperly

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disclose confidential information to prosecute its lawsuit. Neal, 100 Cal. App. 4th at 843-44;

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Fox Searchlight, 89 Cal. App. 4th at 302-304; Bell, 212 Cal. App. 3d at 198. If the dispute

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before the Court was a wrongful termination claim by the Principals, the Court might well

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follow find these cases to be on point. However, the case at bar was filed by by a different - and

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presumably separate - legal entity, Gotham City, for claims that are, in Gotham City’s own

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words, “unrelated” to the employment disputes between Art.com and the Principals. In
addition, in the Fox Searchlight case, the court noted that even though a client may be permitted

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United States District Court

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to disclose confidences to his or her attorney, the client and the attorney would not necessarily

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be permitted to disclose privileged information in public records or proceedings. Fox

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Searchlight, 89 Cal. App. 4th at 311-14.

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Although Gotham City’s reliance on these cases has not persuaded the Court that the

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motion should be denied, the Court has considered them in connection with the breadth of the

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remedy to be imposed. Art.com has asked that the Court disqualify BraunHagey from

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representing Gotham City and the Principals in this case and in any other dispute arising out of

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the sale of Poster Revolution to Art.com and to any employment disputes, disputes that are not

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before this Court. In light of the principles set forth in Neal, Fox Searchlight, and Bell, the

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Court finds that Art.com’s requested relief is too broad.

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Accordingly, it is HEREBY ORDERED that the law firm of BraunHagey & Borden

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LLP (“Braun Hagey”) is hereby disqualified from serving as counsel for Gotham City Online

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(“Gotham City”) in the above captioned matter.

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BraunHagey, Gotham City, and the Principals are ordered to return all copies in their

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possession, custody, or control of the documents listed in the Declaration of Kevin Lucas and

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any other Art.com documents in their possession, custody or control that are protected by the

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attorney-client or work product privilege within five court days of the date of this Order.

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Braun Hagey, Gotham City, and the Principals are ordered to inform Art.com within five

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court days of the date of this Order of the identify of any persons to whom they disclosed any of

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the attorney-client privileged documents or information contained therein.

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BraunHagey and the Principals shall not discuss the contents of the attorney-client

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privileged documents with new counsel in this action and shall not provide their work product

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in this action to Gotham City or new counsel.

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Gotham City shall retain alternate counsel who shall immediately file a notice of

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appearance and a declaration that new counsel has received no information about or contained

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in the attorney-client privileged documents.

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For the Northern District of California

United States District Court

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The action is stayed pending the retention and appearance of new counsel for Gotham
City.
IT IS SO ORDERED.
Dated: March 13, 2014
JEFFREY S. WHITE
UNITED STATES DISTRICT JUDGE

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