John Crane Production Solutions Inc. v. R2R & D, LLC et al
Filing
68
MEMORANDUM OPINION AND ORDER directing filing of supplemental briefing and evidence re 25 MOTION to Disqualify Matthews, Lawson & Johnson, PLLC from Representing Defendants filed by John Crane Production Solutions Inc. No later than June 12, 2012, plaintiff must submit a supplemental brief and evidentiary appendix. Within 21 days of the date these pleadings are filed, defendants may file an opposition supplemental brief and evidentiary appendix. Within 14 days of the date these pleadings are filed, plaintiff may file a supplemental reply brief (but not evidence appendix) in support of its motion to disqualify. (Ordered by Chief Judge Sidney A Fitzwater on 5/15/2012) (Chief Judge Sidney A Fitzwater)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
JOHN CRANE PRODUCTION
SOLUTIONS, INC.,
Plaintiff,
VS.
R2R AND D, LLC, et al.,
Defendants.
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§ Civil Action No. 3:11-CV-3237-D
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MEMORANDUM OPINION
AND ORDER
Plaintiff John Crane Production Solutions, Inc. (“JCPS”) moves to disqualify
Matthews, Lawson & Johnson, PLLC (the “Matthews Firm”), who are counsel for defendants
R2R & D, LLC (“R2R”), Finalrod, Inc. (“Finalrod”), and Russell P. Rutledge (“Rutledge”).
For the reasons that follow, the court directs the parties to submit additional evidence and
briefing.1
JCPS moves to dismiss the Matthews Firm primarily on the basis that it cannot
represent defendants in an action against JCPS because it previously represented JCPS in a
substantially related matter. “A party seeking to disqualify opposing counsel on the ground
of a former representation must establish two elements: 1) an actual attorney-client
1
Under § 205(a)(5) of the E-Government Act of 2002 and the definition of “written
opinion” adopted by the Judicial Conference of the United States, this is a “written opinion[]
issued by the court” because it “sets forth a reasoned explanation for [the] court’s decision.”
It has been written, however, primarily for the parties, to decide issues presented in this case,
and not for publication in an official reporter, and should be understood accordingly.
relationship between the moving party and the attorney he seeks to disqualify and 2) a
substantial relationship between the subject matter of the former and present
representations.” In re Am. Airlines, Inc., 972 F.2d 605, 614 (5th Cir. 1992) (quoting
Johnston v. Harris Cnty. Flood Control Dist., 869 F.2d 1565, 1569 (5th Cir. 1989)). As the
party seeking disqualification, JCPS bears the burden of proof. Id. (“[T]he party seeking
disqualification bears the burden of pro[of].”).2
To prove the required substantial relationship, JCPS relies on actions taken by the
Matthews Firm as counsel for Fiberod, Inc. (“Fiberod”) before JCPS entered into an asset
purchase agreement with Fiberod. The parties dispute whether the attorney-client privilege
between Fiberod and the Matthews Firm transferred to JCPS as a result of the asset purchase
agreement.
In Commodity Futures Trading Commission v. Weintraub, 471 U.S. 343 (1985), the
Supreme Court stated that “when control of a corporation passes to new management, the
authority to assert and waive the corporation’s attorney-client privilege passes as well.” Id.
at 349. “New managers installed as a result of a takeover, merger, loss of confidence by
shareholders, or simply normal succession” control the attorney-client privilege previously
controlled by old management. Id. Most courts interpreting Weintraub agree “that assignees
2
The Fifth Circuit is “sensitive to preventing conflicts of interest.” In re ProEduc.
Int’l, Inc., 587 F.3d 296, 299 (5th Cir. 2009). District courts are therefore “obliged to take
measures against unethical conduct occurring in connection with any proceeding before it.”
In re Am. Airlines, 972 F.2d at 611 (emphasis in original) (citing Woods v. Covington Cnty.
Bank, 537 F.2d 804, 810 (5th Cir. 1976)).
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or transferees of most, if not all, of a corporation’s assets will have the authority to assert or
waive the attorney-client privilege,” but “[a] transfer of assets, without more, is not sufficient
to effect a transfer of the privileges; control of the entity possessing the privileges must also
pass for the privileges to pass.” Am. Int’l Specialty Lines Ins. Co. v. NWI-I, Inc., 240 F.R.D.
401, 406 (N.D. Ill. 2007) (citations omitted) (collecting cases). Some courts have concluded
a bright-line rule cannot capture “the myriad ways control of a corporation or a portion of
corporation can change hands,” so when determining whether the attorney-client privilege
transfers courts should examine whether “the practical consequences of the transaction result
in the transfer of control of the business and the continuation of the business under new
management,” and if they do, “the attorney-client privilege will follow as well.” Soverain
Software LLC v. Gap, Inc., 340 F.Supp.2d 760, 763 (E.D. Tex. 2004); see also Parus
Holdings, Inc. v. Banner & Witcoff, Ltd., 585 F.Supp.2d 995, 1002 (N.D. Ill. 2008) (holding
that the rule from Soverain is “the better reasoned rule, and the one that appears to be
followed by the majority of recent cases”); NWI-I, 240 F.R.D. at 407 (“[B]ecause the
practical consequences of the Asset Purchase Agreement resulted in the transfer of control
of Old FTL’s business and the continuation of that business under new management, the
authority to assert or waive the attorney-client privilege transferred to New FTL.”).
In determining whether the “practical consequences” of a given transaction result in
the “transfer of control,” courts consider such factors as the extent of the assets acquired,
including whether stock was sold, whether the purchasing entity continues to sell the same
product or service, whether the old customers and employees are retained, and whether the
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same patents and trademarks are used.3 See, e.g., Soverain Software, 340 F.Supp.2d at 76364; M-I, LLC v. Stelly, 2010 WL 2196281, at *4-5 (S.D. Tex. May 26, 2010). Although both
parties characterize the transfer of assets from Fiberod to JCPS differently—JCPS as the
continuation of business under new management and defendants as a mere asset
purchase4—neither party provides sufficient evidence5 to enable the court to assess the
“practical consequences of the transaction” and therefore determine whether JCPS has
established that the attorney-client privilege between Fiberod and the Matthews Firm passed
to JCPS.
Accordingly, no later than June 12, 2012, JCPS (the party with the burden of proof)
must submit a supplemental brief and evidentiary appendix.6 Within 21 days of the date
these pleadings are filed, defendants may file an opposition supplemental brief and
evidentiary appendix. Within 14 days of the date these pleadings are filed, JCPS may file
3
This list is not exhaustive, and any evidence demonstrating the practical
consequences of the transaction could be probative of whether the attorney-client privilege
passed to the purchasing entity.
4
Defendants argue that Texas law has eliminated the continuation theory of liability,
thus foreclosing the court from finding that the attorney-client relationship between Fiberod
and the Matthews Firm passed to JCPS as part of the asset purchase agreement. Because
motions to disqualify are governed by federal law, see, e.g., FDIC v. U.S. Fire Ins. Co., 50
F.3d 1304, 1312 (5th Cir. 1995) (“Motions to disqualify are substantive motions[,]
[t]herefore, they are decided under federal law.”), this argument lacks force.
5
Although the parties describe the practical consequences of the relevant transaction
in their briefs, they neither cite to nor include documentary or testimonial evidence attached
to their briefs to support their assertions.
6
By agreement, or for cause, the court will approve reasonable extensions to the
deadlines imposed for submitting supplemental briefing and evidence.
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a supplemental reply brief (but not evidence appendix) in support of its motion to disqualify.
SO ORDERED.
May 15, 2012.
_________________________________
SIDNEY A. FITZWATER
CHIEF JUDGE
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