Markham Concepts, Inc. v. Hasbro, Inc.
Filing
97
MEMORANDUM AND ORDER granting 75 Motion to Disqualify Counsel. Attorney Michael S. Lazaroff and Louis M. Solomon terminated- So Ordered by Chief Judge William E. Smith on 7/22/2016. (Barletta, Barbara)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
___________________________________
)
MARKHAM CONCEPTS, INC. and
)
LORRAINE MARKHAM,
)
)
Plaintiffs,
)
)
v.
)
C.A. No. 15-419 S
)
HASBRO, INC.; REUBEN KLAMER;
)
IDA MAE ATKINS; DAWN
)
LINKLETTER GRIFFIN; SHARON
)
LINKLETTER; LAURA LINKLETTER RICH, )
and DENNIS LINKLETTER,
)
)
Defendants.
)
___________________________________)
MEMORANDUM AND ORDER
WILLIAM E. SMITH, Chief Judge.
Before
the
Court
is
Defendant
Hasbro,
Inc.’s
Motion
to
Disqualify Greenberg Traurig, LLP, Louis M. Solomon, and Michael
S. Lazaroff (“Motion”).
(ECF No. 75.)
In March 2016, Solomon and
Lazaroff, two of Markham Concepts, Inc. and Lorraine Markham’s
(collectively “Markham”) attorneys, changed law firms, moving from
Cadwalader, Wickersham & Taft LLP (“Cadwalader”) to Greenberg
Traurig (“GT”).
Until Solomon and Lazaroff’s move, GT represented
Defendant Hasbro in a number of patent applications and was
actively seeking to expand its representation of the company.
Solomon and Lazaroff, however, sought to bring this matter to GT,
which would have created a direct conflict with GT’s representation
of
Hasbro.
When
Hasbro
declined
1
GT’s
request
to
waive
the
conflict, GT terminated its relationship with Hasbro and took on
the Markham matter.
Hasbro promptly moved to disqualify GT from
the Markham litigation on the grounds that GT was conflicted out
under the Rhode Island Rules of Professional Conduct.
For the
reasons that follow, Hasbro’s Motion is GRANTED.
I.
Background
The parties are familiar with the details of this case; the
Court will only recount those facts relevant to this Order.
On October 2, 2015, Markham – with the assistance of about a
half-dozen lawyers - commenced this action.
In its Complaint,
Markham asks the Court to adjudicate three major issues involving
Hasbro:
(1) whether Hasbro breached any contracts in the manner
in which it distributed royalties to Markham for the Game of Life;
(2) who controls the intellectual property for the Game of Life;
and (3) whether Hasbro has any right to commission derivative works
based on the Game of Life.
(See Second Am. Compl., ECF No. 43.)
If the Court rules in Markham’s favor, Markham requests that Hasbro
“be required to disgorge all monies, profits, and gains which it
obtained
or
[Markham].”
will
unjustly
obtain
.
.
.
at
the
expense
of
(Id. ¶ 73.)
Although this action has been pending for nine months, it is
still in the early stages of litigation.
Markham has amended its
complaint twice (ECF Nos. 14 and 43) and three fully briefed
preliminary motions on the pleadings are pending before the Court
2
(ECF Nos. 37, 49, and 62). Further, while some discovery has taken
place, the Court stayed the action pending resolution of this
Motion (ECF No. 94), which will require resetting the current
discovery deadlines.
The relationship between Markham and the attorneys subject to
this Motion is also relatively new.
Having had a bad experience
with its prior counsel, Markham retained Solomon, Lazaroff, and
Cadwalader in the summer of 2015 after a colleague of Solomon’s at
Cadwalader introduced them.
At least based on the record before
the Court, this is the only matter Solomon and Lazaroff have with
Markham.
Hasbro and GT’s relationship, on the other hand, is long
standing.
It began in December of 2008, when GT started providing
the company “advice on general sales promotion and charitable
promotion laws.”
remained
in
The Retainer Agreement (“Agreement”), which
effect
throughout
GT
and
Hasbro’s
relationship,
included a conflicts clause, which states in relevant part:
the
Firm’s
representation
of
you
includes
the
understanding that you will not unreasonably withhold a
waiver of conflict of interest where the following
conditions are met: (i) we notify you in writing of
the potentially adverse representation, (ii) the matter
in which the Firm represents an adverse party is
substantially unrelated to the Firm’s work for you,
(iii) if appropriate, an “ethical wall” is created to
separate the other matter from the matters the Firm is
handling for you, and (iv) the Firm does not disclose
to such adverse persons and entities any confidential
information it obtains from you.
3
(Ex. G to Hasbro’s Mot., at 4, ECF No. 75-8.)
In August of 2011, GT broadened its representation of Hasbro
to include prosecution of patent applications.
This work — mostly
for Hasbro’s Play-Doh product line — constituted the majority of
GT’s recent work for Hasbro.
In 2013, GT billed Hasbro $17,698.50
for these patent prosecutions; in 2014, GT’s bills amounted to
$21,849.50; in 2015 the bills amounted to $14,325; and in 2016 the
bills amounted to $11,373.50.
On February 25, 2016, GT sought to expand its relationship
with Hasbro.
A GT shareholder and Hasbro’s General Counsel met to
discuss several practice areas where GT believed it could assist
the company.
During this meeting, GT also asked Hasbro whether it
ever waived conflicts.
Hasbro indicated that it depended on the
circumstances, and it would consider any request made by GT. After
the
meeting,
the
shareholder
followed-up
with
Hasbro
about
expanding their relationship.
The discussions between GT and Hasbro, however, came to an
abrupt halt on March 7, 2016.
On that day, GT disclosed its intent
to hire Solomon and Lazaroff from Cadwalader and to assume the
Markham action.
GT asked Hasbro to waive the conflict presented
by the Markham action.
Hasbro declined, citing the contentious
nature of the litigation and that the conflicting matters concerned
intellectual property issues that would be managed by the same inhouse attorney at Hasbro.
Four days later, on March 11, 2016, GT
4
notified Hasbro that it was ending its engagement with Hasbro and
withdrawing from the patent matters that remained open.
On March 16, 2016, Solomon and Lazaroff officially joined GT.
Around that time, Hasbro formally asked GT to decline the Markham
matter on conflict grounds.
When GT refused, Hasbro brought the
present Motion.
II.
Discussion
A.
Hasbro is a “current client” for the purposes of
this conflict analysis.
A critical threshold issue is whether Hasbro is GT’s current
or former client for the purposes of analyzing the Rhode Island
Rules of Professional Conduct (“RIRPC”).
client,
RIRPC
1.7’s
stricter
If Hasbro is a current
prohibition
against
adverse
representation would apply; if Hasbro is a former client, the
conflict would fall under the less stringent Rule 1.9.
According
to GT, Hasbro is its former client because GT terminated its
relationship with Hasbro five days before it welcomed Solomon,
Lazaroff, and the Markham matter into the firm.
Hasbro disagrees.
It argues that GT’s conduct falls squarely under the “hot potato”
doctrine, a judicially created rule which “bars an attorney and
law
firm
from
expediently
curing
severing
the
the
dual
representation
relationship
with
of
the
clients
by
preexisting
client.” W. Sugar Coop. v. Archer-Daniels-Midland Co., 98 F. Supp.
3d 1074, 1084 (C.D. Cal. 2015).
5
The Rhode Island Supreme Court has not expressly adopted the
hot potato doctrine, and courts interpreting the RIRPC have only
referenced it in passing.
See Ogden Energy Res. Corp. v. State of
R.I., No. CIV. A. 92-0600T, 1993 WL 406375, at *3 n.7 (D.R.I. June
23, 1993) (noting the existence of the “hot potato” doctrine, but
deciding the conflict issue on other grounds).
other jurisdictions recognize the rule.
But, a number of
See, e.g., Merck Eprova
AG v. ProThera, Inc., 670 F. Supp. 2d 201, 209 (S.D.N.Y. 2009)
(collecting cases); ValuePart, Inc. v. Clements, No. 06 C 2709,
2006
WL
2252541,
at
*2
(N.D.
Ill.
Aug.
2,
2006);
Int’l
Longshoremen’s Ass’n, Local Union 1332 v. Int’l Longshoremen’s
Ass’n, 909 F. Supp. 287, 293 (E.D. Pa. 1995); Picker Int’l, Inc.
v. Varian Assocs., Inc., 670 F. Supp. 1363, 1365-66 (N.D. Ohio
1987),
aff’d,
869
F.2d
578
(Fed.
Cir.
1989).
importantly, the doctrine comports with the RIRPC.
And,
more
As this Court
has long recognized, “Rule 1.7 is grounded primarily upon the
attorney’s duty of loyalty to his or her client.”
Gray v. R.I.
Dep’t of Child., Youth & Fam., 937 F. Supp. 153, 160 (D.R.I. 1996);
see also RIRPC 1.7 cmt. 1 (“Loyalty and independent judgment are
essential in the lawyer’s relationship to a client.”).
The
Comments to Rule 1.7 instruct how to discharge this duty when a
conflict
of
interest
develops
between
clients:
“[T]he
representation must be declined, unless the lawyer obtains the
informed consent of each client . . . .”
6
RIRPC 1.7 cmt. 3.
As
explained
below,
this
language
does
not
create
the
per
se
disqualification rule suggested by Hasbro, but nor does the Comment
support GT’s position - that a lawyer may drop a current client to
avoid a conflict with a prospective client.
It espouses just the
opposite — that lawyers should, as a general rule, remain loyal to
their current clients and decline to take on the new, conflicting
representation.
All of this authority, taken together, suggests
that the hot potato doctrine is consistent with, and furthers the
purpose of, the RIRPC.
Therefore, the Court will apply it here.
GT’s treatment of Hasbro falls squarely within the scope of
the doctrine.
Prior to the Markham conflict, GT had not only
represented Hasbro for eight years, but was actively seeking to
expand its relationship with the company.
Then, as far as the
Court can tell, GT decided to abruptly drop Hasbro as a client
only after Hasbro refused to waive the Markham conflict.
If GT
could convert Hasbro to its former client by quickly dropping it
in the face of an imminent conflict, then any firm could avoid
Rule 1.7 “by simply converting a present client into a former one.”
Picker Int’l, Inc., 670 F. Supp. at 1366.
Such a rule would render
meaningless the duty of loyalty a lawyer owes to his or her
clients.
Accordingly, for the purposes of this Motion, Hasbro is
GT’s current client. 1
1
This is not to say that a lawyer may never drop a client.
If, for whatever reason, GT thought it best not to continue
7
B.
Application of the hot potato doctrine does not per
se require GT’s disqualification from this action.
Hasbro argues that the hot potato doctrine bars GT from
representing Markham per se.
of
out-of-district
cases
In support, Hasbro quotes a number
that
hold,
generally,
“[c]oncurrent
representation triggers a per se rule of disqualification — even
on wholly unrelated matters.”
Wingnut Films, Ltd. v. Katja Motion
Pictures Corp., No. CV05-1516 RSWL (SHX), 2007 WL 4800405, at *1
(C.D. Cal. Jan. 17, 2007); see also Stratagem Dev. Corp. v. Heron
Int’l N.V., 756 F. Supp. 789, 792 (S.D.N.Y. 1991); Hilton v.
Barnett Banks, Inc., No. 94-1036-CIV-T24(A), 1994 WL 776971, at *3
(M.D. Fla. Dec. 30, 1994).
Hasbro then tries to extend this per
se rule to the RIRPC by pointing to cases in which this Court
disqualified counsel due to a conflict.
The cases on which Hasbro
relies, however, do not support Hasbro’s assertion.
First, in most of the cases, courts have applied Rule 1.9’s
“substantially related” requirement to a former client. See Ogden,
1993 WL 406375, at *1, *4 (applying Rule 1.9 and disqualifying
lawyer
and
firm
because
the
conflicting
matter
“concern[ed]
matters substantially related to [their] former representation of
the [old client], and because [the new client’s] interests are
representing Hasbro, it could have sought to wind down its
representation and declined to take on new matters.
The issue
here is that GT apparently dropped Hasbro solely to assume a
conflicting representation.
As detailed in this Order, this
breached GT’s duty of loyalty to Hasbro in violation of Rule 1.7.
8
materially adverse to those of the [old client]”) (emphasis in
original); Pfarr v. Island Servs. Co., 124 F.R.D. 24, 29 (D.R.I.
1989)
(disqualifying
a
firm
where
a
new
attorney’s
prior
representation of an adverse client was substantially related to
a conflicting matter); Putnam Res. Ltd. P’ship v. Sammartino, Inc.,
124 F.R.D. 530, 532 (D.R.I. 1988) (same).
But, as noted above,
Rule 1.9 does not apply here. The Court has determined that Hasbro
should be treated as a current client and Rule 1.7 applies.
Further, in Hasbro’s cases, the courts’ decisions turn in
large part on the risk that confidential information from the prior
representation could be used in the conflicting representation.
See Falvey v. A.P.C. Sales Corp., 185 F.R.D. 120, 126 (D.R.I. 1999)
(considering a conflict that arose when an attorney switched law
firms and disqualifying the lawyer under Rule 1.9 and 1.10 because
“it [was] clear from [the] record that [the attorney] obtained
material and confidential information on the [conflicting matter]
while employed at [his old firm]”); Pfarr, 124 F.R.D. at 29
(disqualification decision turned on the access to confidential
information that could be material to conflicting representation);
Putnam, 124 F.R.D. at 531-32 (“a substantial relation is found
where ‘. . . a lawyer could have obtained confidential information
in the first representation that would have been relevant in the
second.’” (quoting Kevlik v. Goldstein, 724 F.2d 844 (1st Cir.
1984)).
To
be
sure,
this
type
9
of
risk
provides
strong
justification
for
a
disqualification
motion,
but
the
parties
concede that it is not a risk in this action.
And the remaining decisions cited by Hasbro actually cut
against adopting a per se disqualification rule.
In Allendale
Mutual Insurance Co. v. Excess Insurance Co., No. 94-0614B, 1995
U.S. Dist. LEXIS 19882, at *22 (D.R.I. June 1, 1995), R. & R.
adopted in relevant part, 1995 U.S. Dist. LEXIS 20373 (D.R.I. July
5,
1995),
expressly
a
case
stated
on
which
Hasbro
heavily
a
violation
of
that
automatically result in disqualification.
relies,
Rule
1.7
the
Court
does
not
As even Hasbro concedes
in a footnote, a court’s analysis must weigh other factors, such
as the prejudice the non-moving party’s client would face should
the court disqualify the client’s attorney.
The Court echoed this
conclusion in McLane, Graf, Raulerson & Middleton, Professional
Association v. Rechberger, No. CIV.A. 99-286-T, 1999 WL 33649127,
at *3 (D.R.I. Sept. 10, 1999).
There, Judge Torres considered
whether to disqualify an expert witness due to a concurrent
conflict with the opposing party.
Citing to the rules governing
attorney-client conflicts, the Court stated that “[b]ecause such
a conflict presents a great risk that the duty of loyalty will be
breached,
its
mere
existence
is
sufficient
to
disqualify
an
attorney unless the client waives his right to be represented by
conflict-free
counsel.”
Id.
(emphasis
added).
Contrary
to
Hasbro’s assertion, McLane does not suggest that a current conflict
10
requires disqualification in every circumstance.
Indeed, in the
very next paragraph, the Court notes that, at least with expert
witnesses, courts should analyze the specific facts of a case
before deciding a motion to disqualify.
Id.
Allendale and McLane accord with the spirit of the RIRPC and
other case law in this District.
The Preamble to the Rules states
that a violation does not automatically warrant disqualification
of a lawyer from pending litigation:
In addition, violation of a Rule does not necessarily
warrant any other nondisciplinary remedy, such as
disqualification of a lawyer in pending litigation. The
Rules are designed to provide guidance to lawyers and to
provide a structure for regulating conduct through
disciplinary agencies. They are not designed to be a
basis for civil liability. Furthermore, the purpose of
the Rules can be subverted when they are invoked by
opposing parties as procedural weapons. The fact that
a Rule is a just basis for a lawyer’s self-assessment,
or for sanctioning a lawyer under the administration of
a disciplinary authority, does not imply that an
antagonist in a collateral proceeding or transaction has
standing to seek enforcement of the Rule.
RIRPC
Scope
(emphasis
added).
Further,
considering
the
application of Rule 1.7, albeit to a government attorney, this
Court has noted, “every disqualification motion . . . requires
analysis tailored to the specific ethical dilemma presented by the
circumstances.
requires
a
The proper disposition of a motion to disqualify
careful
representations.”
examination
of
the
allegedly
conflicting
Gray, 937 F. Supp. at 158 (internal citation
and quotation marks omitted).
And, though applying admiralty law,
11
the First Circuit has suggested that courts should consider all of
the facts before disqualifying an attorney for appearing adverse
to a client in litigation:
Although we do not condone a lawyer suing his own client,
we find no basis in the unique circumstances of this
case for finding that the district court abused its
discretion in denying the disqualification motion.
Borges v. Our Lady of the Sea Corp., 935 F.2d 436, 440 (1st Cir.
1991) (emphasis added).
GT, therefore, is not automatically
disqualified from this action because it dropped Hasbro as a client
to avoid a conflict; rather the Court must carefully examine the
facts underlying the conflict situation.
C.
The
The facts of this case weigh
disqualifying GT from this action.
fate
of
GT,
Solomon,
and
Lazaroff’s
in
favor
of
representation
depends on the “the specific ethical dilemma presented by the
circumstances”
and
“a
careful
conflicting representations.”
examination
of
the
allegedly
Gray, 937 F. Supp. at 158 (internal
citation and quotation marks omitted). Here that examination makes
pellucid that the circumstances surrounding this conflict are
particularly egregious.
This is not a case where the partnerships of two firms voted
to merge, or where one existing firm client decided to sue another
firm client.
In those situations, conflicts are inevitable, often
beyond the control of the individual attorneys who represent the
clients, and warrant a more sympathetic analysis.
12
Here, by
contrast, GT identified the conflict prior to Solomon and Lazaroff
joining the firm. All attorneys involved had the ability to remain
loyal to their respective clients.
GT started down this path when
it asked Hasbro to waive the conflict with Markham before it hired
Solomon and Lazaroff.
But when Hasbro refused to give GT the
answer it wanted, the RIRPC clearly instructed GT on its choice:
it could have either declined to take on the Markham matter, or
declined to hire Solomon and Lazaroff (at least until the matter
was completed).
See RIRPC 1.7 cmt. 3.
And, if the Markham matter was so important to Solomon and
Lazaroff (or Solomon and Lazaroff so important to Markham, as they
claim in their brief) the Rules provided them a variety of options.
They could have remained with their prior firm until the action
concluded, or found another firm to join that did not present a
conflict with Markham.
Alternatively, if moving to GT was their
only
and
option,
Solomon
Lazaroff
could
have
arrangements for Markham to remain at Cadwalader.
made
other
They could have
elevated the role of one of the other attorneys who have entered
appearances on Markham’s behalf, or they could have introduced her
to other competent counsel who could handle the case without the
specter of a conflict of interest hanging over the representation.
In any event, what is abundantly clear is that this conflict
results primarily, if not solely, because of the action and choices
of Markham’s lawyers and GT.
Solomon and Lazaroff decided to risk
13
the consequences of a known conflict of interest in order to join
GT; GT consciously disregarded its duty of loyalty to Hasbro in
favor of Markham.
This conduct does not comply with Rule 1.7 and
requires the Court to disqualify GT, Solomon, and Lazaroff from
this action.
Of course, a firm’s clients do not hold all the cards in
situations like this.
As one treatise puts it, “[a] definition of
‘disloyalty’ broad enough to encompass the mere act of dropping a
client would convert the client-lawyer relationship into one of
continuing servitude.”
21.15 (4th ed. 2016).
Hazard et. al., The Law of Lawyering §
Other facts could have provided sufficient
“good cause” to justify GT breaching its duty of loyalty to Hasbro.
GT, however, does not point to any that carry the day.
GT’s strongest – albeit unsuccessful - argument is that the
prejudices weigh against disqualification.
It begins by claiming
that Hasbro has not articulated any harm it will suffer from losing
GT as its lawyer.
For starters, this is not true.
GT had ongoing
patent applications for which Hasbro must now seek alternative
counsel.
This will certainly come with some cost to Hasbro.
Yet,
more importantly, GT’s argument overlooks the intangible harm that
comes with ethical violations. As this Court has previously noted,
“[w]hile
the
particularly
‘sporadic’
spurning
troubling,
client
of
a
any
besmirches
longtime
perceived
the
14
and
intimate
disloyalty
reputation
of
client
to
the
even
is
a
legal
profession” and has “the potential to erode public confidence in
attorneys.”
Allendale, 1995 U.S. Dist. LEXIS 19882, at *17
(quoting Alexander Proudfoot, PLC v. Fed. Ins. Co., Case No. 93 C
6287, 1994 U.S. Dist. LEXIS 3937, at *10-11 (N.D. Ill. Mar. 30,
1994)).
GT urges the Court look not to Hasbro’s concerns, but to
consider the burden that disqualification would place on Markham.
GT overstates the weight of this burden.
First, while Solomon and
Lazaroff are designated as Markham’s lead attorneys, four other
capable attorneys have entered appearances on Markham’s behalf.
These attorneys are ostensibly familiar with Markham’s claims and
litigation strategy, and can efficiently step in for Solomon and
Lazaroff.
Further, this action has reached an inflection point.
At Markham’s request, the Court stayed these proceedings until it
resolves this Motion.
Then the Court must consider a series of
fully briefed motions to dismiss and transfer.
Although fact
discovery was set to end on June 29, 2016, the stay and pending
motions obviously require revising this schedule, giving Markham’s
new lead counsel an opportunity to get up to speed on the case.
Finally, as noted above, Solomon and Lazaroff knew about this
conflict prior to joining GT.
They should have advised Markham of
the conflict and prepared Markham for the potential consequences,
including the possibility of disqualification.
While the Court is
sympathetic to Markham’s plight, any prejudice experienced by
15
Markham resulted from it and/or its lawyers’ decisions, and does
not outweigh the duty of loyalty GT owed to Hasbro, or the burden
to Hasbro of disregarding it.
GT also argues that Hasbro is responsible for this conflict
because it unreasonably refused to waive it. The Court can imagine
some instances where a client’s refusal to waive a conflict, for
example, where the stated conditions in a retainer agreement are
met, could be unreasonable and warrant denial of a disqualification
motion.
This, however, is not such an instance.
Markham alleges
Hasbro engaged in serious misconduct, including the unlawful use
of the intellectually property rights for the Game of Life.
Markham is correct, its damages could be significant.
If
So, even
assuming the conditions in the retainer agreement with GT are met,
it is reasonable that Hasbro would not want its own lawyers
prosecuting such allegations and seeking significant damages from
it.
Finally, GT argues that its decision to drop Hasbro is
justified because its relationship with Hasbro was sporadic and
the two matters were unrelated. 2
relationship was not sporadic.
First off, GT and Hasbro’s
GT had continuously represented
Hasbro since 2008 and expressly sought to expand its relationship
2
GT also claims that this action is different from the
patents it prosecuted for Hasbro because the prior work was nonlitigious. The Court does not analyze this point separately, but
instead considers it as part of GT’s “unrelated” argument.
16
only weeks before dropping the company as a client.
Moreover,
under Rule 1.7, the applicable rule in this case, GT cannot
disregard its ethical duty of loyalty to a current client just
because a conflict involves unrelated matters. There are instances
where attorneys may have sufficient cause to override the duty of
loyalty that binds a lawyer to his or her clients.
this is not one of them.
But, again,
As far as the Court can tell, the Markham
conflict constitutes the only reason GT abruptly decided to end
its longstanding relationship with Hasbro.
billings
to
Hasbro
may
not
have
So while GT’s net
been
substantial,
the
representation was regular and sufficient to warrant a try at
growing the relationship.
The test is not one where the more
valuable matter wins the loyalty contest.
Hasbro’s exercise of
its discretion in declining to waive this conflict is insufficient
justification to warrant overlooking GT’s duty of loyalty to Hasbro
and GT’s clear violation of RIRPC Rule 1.7.
17
IV.
Conclusion
For the foregoing reasons, Hasbro’s Motion to Disqualify is
GRANTED.
IT IS SO ORDERED.
William E. Smith
Chief Judge
Date: July 22, 2016
18
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