Finalrod IP, LLC et al v. John Crane, Inc. et al
Filing
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ORDER GRANTING 44 Motion for Reconsideration Signed by Judge David A. Ezra. (lg1)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
MIDLAND DIVISION
FINALROD IP, LLC, R2R
AND D, LLC, d/b/a SUPEROD
§
§
§
Plaintiffs,
§
§
vs.
§
§
JOHN CRANE, INC., JOHN CRANE §
PRODUCTION SOLUTIONS, INC., §
§
Defendants.
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_______________________________ §
No. 7:15-CV-97-DAE
ORDER GRANTING MOTION FOR RECONSIDERATION
Before the Court is Finalrod IP, LLC (“Finalrod”) and R2R and D,
LLC, d/b/a Superod’s (collectively “Plaintiffs”) Rule 54(d) Motion for
Reconsideration of this Court’s Order on John Crane, Inc. and John Crane
Productions, Inc.’s (collectively “Defendants”) Motion to Disqualify the Matthews
Firm from Representing Plaintiffs. (Dkt. # 44.) Pursuant to Local Rule 7(h), the
Court finds this matter suitable for disposition without a hearing. After careful
consideration of the memoranda in support of and in opposition to the motion, the
Court, for the reasons that follow, GRANTS Plaintiffs’ motion.
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BACKGROUND
In 2008, Defendant John Crane Production Solutions, Inc. (“JCPS”)
entered into an Asset Purchase Agreement (“APA”) with The Fiber Composite
Company d/b/a Fiberod, Inc. and related companies Fiberod Industries, Fiberod
Inc., and FC Patent Ltd. (collectively “Fiberod”). (Dkt. # 19 at 2.) At that time,
Russell Rutledge (“Rutledge”) was the majority owner, Chairman, and Chief
Operating Officer (“COO”) of Fiberod. (Id.) Fiberod was in the business of
selling and installing suckerods 1 for the production of oil and gas. (Id.) According
to Defendants, JCPS acquired all of Fiberod’s tangible and intangible assets under
the APA. (Id.) These assets included Fiberod’s patents, trademarks, registrations,
applications, and other intellectual property. (Id.)
After the APA was finalized, Defendants used the firm of Matthews,
Lawson, McCutcheon & Joseph, PLLC (“the Matthews firm” or “the firm”) to
perform various legal services, including handling intellectual property (“IP”)
matters at the United States Patent and Trademark Office (“PTO”) and paying
maintenance fees. (Id.) According to Defendants, some of the IP matters handled
by the Matthews firm included work on U.S. Patent No. 6,193,431 (the “’431
patent”) and U.S. Patent No. 8,113,277 (the “‘277 patent”). (Id. at 3.)
1
Suckerods are “used with a sub-surface pump in instances where the pressure in
an oil reservoir is not sufficient to lift the oil to the surface.” (Dkt. # 20 at 1, n. 1.)
2
Subsequently, in 2011, Rutledge left employment with Defendants
and founded the plaintiff companies, R2R and Finalrod. (Id.) All parties agree
that Plaintiffs and Defendants are competing companies in the business of selling
suckerods for use in oil wells. (Id.; Dkt. # 20 at 1.) On June 29, 2015, Plaintiffs
filed suit against Defendants, alleging infringement of U.S. Patent No. 8,851,162
(the “‘162 patent”). (Dkt. # 1.) On September 15, 2015, Plaintiffs filed an
amended complaint, adding infringement of U.S. Patent No. 9,045,951 (the “‘951
patent”) to their claim. (Dkt. # 18.) On October 16, 2015, Defendants filed an
answer to Plaintiffs’ amended complaint, alleging affirmative defenses and
asserting counterclaims against Plaintiffs for the invalidity and infringement of
certain patents, including the infringement of the ’431 and the ‘277 patent. (Dkt.
# 30 at 11, 13.) On November 12, 2015, Defendants omitted their counterclaim for
the infringement of the ‘277 patent. 2 (Dkt. # 37.)
On December 9, 2015, the Court granted Defendants’ motion to
disqualify the Matthews firm from representing Plaintiffs. (Dkt. # 40.) Based
upon submissions and the record at the time, the Court determined that the
Matthews firm’s prior work on the ’431 patent was substantially related to and
2
Defendants amended their counterclaim regarding the ’277 patent after parties
filed briefing in the underlying motion to disqualify. (See Dkt. # 37.) Although
the parties referred to both the ’431 patent and the ’277 patent in their briefing
regarding Defendants’ counterclaims, the Court only addressed the arguments
regarding the ’431 patent in light of Defendants’ amendment.
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involved the same subject matter as its present representation of Plaintiffs for
infringement of that patent. (Dkt. # 40 at 13.) The Court further held that the
Matthews firm’s work on the ’431 patent involved obtaining confidential
information which ultimately disqualified the firm from representing Plaintiffs on
matters in the pending case. (Id.)
On January 5, 2016, Plaintiffs filed the instant motion to reconsider
the Court’s order on the motion to disqualify. (Dkt. # 44.) On January 22, 2016,
Defendants filed a response in opposition. (Dkt. # 46.)
APPLICABLE LAW
I.
Motion for Reconsideration
Plaintiffs have moved for reconsideration under Rule 54(b) of the Federal
Rules of Civil Procedure. (Dkt. # 44.) However, “[a] motion asking the court to
reconsider a prior ruling is evaluated . . . as a motion . . . under Rule 59(e) . . .
[when] filed within twenty-eight days after the entry of judgment.” Demahy v.
Schwarz Pharma, Inc., 702 F.3d 177, 182 n.2 (5th Cir. 2012). Plaintiffs’ motion
for reconsideration was filed within this twenty-eight day period.
“A Rule 59(e) motion calls into question the correctness of a
judgment.” Templet v. Hydrochem, Inc., 367 F.3d 473, 478 (5th Cir. 2004).
“Under Rule 59(e), amending a judgment is appropriate (1) where there has been
an intervening change in the controlling law; (2) where the movant presents newly
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discovered evidence that was previously unavailable; or (3) to correct a manifest
error of law or fact.” Demahy, 702 F.3d at 182. Rule 59(e), however, is “not the
proper vehicle for rehashing evidence, legal theories, or arguments that could have
been offered or raised before entry of judgment,” Templet, 367 F.3d at 478, and it
“should not be used to . . . re-urge matters that have already been advanced by a
party.” Nationalist Movement v. Town of Jena, 321 F. App’x 359, 364 (5th Cir.
2009). Reconsideration of a previous order is “an extraordinary remedy that
should be used sparingly.” Id.
II.
Motion to Disqualify
“When considering motions to disqualify, courts should first look to
the ‘local rules promulgated by the local court itself.’” In re ProEducation Int’l,
Inc., 587 F.3d 296, 299 (5th Cir. 2009) (quoting F.D.I.C. v. U.S. Fire Ins., Co., 972
F.2d 605, 610 (5th Cir. 1992)). The Local Rules of the Western District of Texas,
in a section titled “Discipline of Attorneys,” states that “[m]embers of the bar of
this court and any attorney permitted to practice before this court must comply
with the standards of professional conduct set out in the Texas Disciplinary Rules
of Professional Conduct.” W.D. Tex. Local Rule AT-7(a).
The Fifth Circuit, however, has stated that the Texas Rules “are not
the sole authority governing a motion to disqualify.” ProEducation, 587 F.3d at
299 (internal quotation omitted); see In re Dresser Indust., Inc., 972 F.2d 540, 543
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(5th Cir. 1992) (“The district court clearly erred in holding that its local rules, and
thus the Texas Rules, which it adopted, are the ‘sole’ authority governing a motion
to disqualify.”). In Dresser, the Fifth Circuit explained “[m]otions to disqualify are
substantive motions affecting the rights of the parties and are determined by
applying the standards developed under federal law.” In re Dresser Indust., 972
F.2d at 543. In contrast, “[t]he district court’s authority to promulgate local rules is
derived from 28 U.S.C. § 2071, which allows the courts only to adopt rules for the
conduct of their business.” Id. “Thus, although the district court should determine
the rules for the conduct of attorneys for the purpose of identifying conduct subject
to sanctions, its local rules alone cannot regulate the parties’ rights to counsel of
their choice.” In re Dresser Indust., 972 F.2d at 543.
While a motion to disqualify is a substantive motion decided under
federal law, a reviewing court must also “consider the motion governed by the
ethical rules announced by the national profession in light of the public interest and
the litigants’ rights.” ProEducation, 587 F.3d at 299. The Fifth Circuit has
“applied the ethical canons contained in the [American Bar Association’s
(“ABA”)] Model Code.” In re Amer. Airlines, Inc., 972 F.2d 605, 610 (5th Cir.
1992). The Court therefore considers both the Texas Rules and the ABA’s Model
Rules.
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Texas Rule 1.09 states:
(a) Without prior consent, a lawyer who personally has formerly
represented a client in a matter shall not thereafter represent
another person in a matter adverse to the former client:
(1) in which such other person questions the validity of the
lawyer’s services or work product for the former client;
(2) if the representation in reasonable probability will involve a
violation of Rule 1.05 [dealing with confidential client
information]; or
(3) if it is the same or a substantially related matter.
Tex. Disciplinary R. Prof’l Conduct 1.09, reprinted in Tex. Gov’t Code Ann., tit. 2,
subtit. G, app. A., art. 10, §9 (West 2005). The relevant ABA Model Rule, Rule
1.9(b), has some “linguistic differences” from Texas Rule 1.09, but “the two codes
produce the same result application.” ProEducation, 587 F.3d at 301.
A court’s review of a motion to disqualify for prior representations is
governed by the “substantial relationship” test. Amer. Airlines, Inc., 972 F.2d at
614. A party who seeks “to disqualify opposing counsel on the ground of a former
representation must establish two elements: (1) an actual attorney-client
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.” Id. The party seeking disqualification bears the burden of
proving the present and prior representations are substantially related. Id.
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An attorney and a client can create an attorney-client relationship
either explicitly or implicitly, through conduct manifesting an intention to create
the attorney-client relationship. Nolan v. Foreman, 665 F.2d 738, 739 n. 3 (5th
Cir. 1982). It “is usually not a difficult matter for the client to establish” an
attorney-client relationship. Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex.
App.—Texarkana 1989, writ denied).
“Once it is established that the prior matters are substantially related
to the present case, the court will irrebuttably presume that relevant confidential
information was disclosed during the former period of representation.” Id.
(quotation omitted). Although the test is categorical, and requires disqualification
upon satisfaction of the substantial-relationship standard, it is not to be applied “in
a mechanical way that might ‘prevent[] an attorney from ever representing an
interest adverse to that of a former client.’” Id. “Rather, a substantial relationship
may be found only after the moving party delineates with specificity the subject
matters, issues and causes of action common to prior and current representations
and the court engages in a painstaking analysis of the facts and precise application
of precedent.” Id. (internal quotation omitted).
DISCUSSION
Plaintiffs move for the Court’s reconsideration on the basis that
(1) the Order contains a manifest error of law because the Court combined two
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distinct tests in determining whether there was a substantial relationship between
the Matthews firm’s prior and current representation; (2) the Court’s adoption of
Defendants’ misinterpretation of the evidence and conclusory statements is a
manifest error of fact, and (3) the Court should apply the correct test to the facts
which show the Matthews firm should not be disqualified from representing
Plaintiffs in this case. (Dkt. # 44.)
In response, Defendants argue that the Court correctly applied both
the substantial relationship test and Rule 1.09 of the Texas Rules of Disciplinary
Conduct. (Dkt. # 46-1 at 3.) Defendants further assert that Plaintiffs’ contentions
regarding reconsideration are an attempt to re-hash previous arguments that were
ultimately rejected by the Court. (Id. at 7.)
At the outset, the Court notes Plaintiffs’ concession that its “Counsel’s
briefing was not as clear as it could have been in distinguishing the two distinct
grounds of disqualification identified in Defendant’s Motion.” (Dkt. # 44 at 3.)
The Court also notes Plaintiffs’ late attempt to support its argument against
disqualification with additional briefing and arguments—not contained in
Plaintiffs’ response to Defendants’ motion to disqualify—that the Matthews firm’s
prior representation did not involve acquiring any confidential information. (Id. at
8.) Indeed, the Court notes Plaintiffs’ overall lack of adequate briefing in its
response to Defendants’ motion. Nevertheless, to be thorough, and because
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(1) disqualification is a severe action that should not be applied “mechanically”
and, (2) a court should consider “all of the facts particular to the case,” the Court
will once again consider the merits of the parties’ arguments in regard to its initial
disqualification of the Matthews firm. See In re ProEducation Intern., Inc., 587
F.3d 296, 300 (5th Cir. 2009).
A.
Substantial Relationship Test
In their motion to disqualify, Defendants contend that the Court
should disqualify the Matthews firm from representing Plaintiffs in the instant
action because the firm previously assisted Defendants in obtaining and
maintaining the ’431 patent. (Dkt. # 19 at 1.) Defendants assert that they have
both an attorney-client relationship with the Matthews firm and that there is a
substantial relationship between the subject matter of the Matthews firm’s former
and present representations in regard to the ’431 patent.
1.
Attorney-Client Relationship
Defendants contend that there is no serious dispute that the Matthews
firm represented JCPS, thereby creating an attorney-client relationship. (Dkt. # 19
at 5.) Defendants assert that the Matthews firm represented JCPS in connection
with the ’431 patent Defendants assert in their counterclaim, and that JCPS passed
its pre-existing attorney-client relationship with the Matthews firm on to
Defendants when it acquired Fiberod. (Id. at 5–6.)
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Plaintiffs, in their response, agree that the Matthews firm represented
Defendants on a limited basis for IP matters from May 2008 until January 2009 for
matters unrelated to the patents at issue in this case. (Dkt. # 20 at 4.) They also
agree that the Matthews firm represented Defendants’ predecessor company on IP
matters. (Id.) Plaintiffs argue, however, that the Matthews firm did not represent
Defendants on matters related to prosecution of the ’431 patent, but only
represented Rutledge individually for that matter. (Id.)
Because there is no dispute by Plaintiffs that the Matthews firm
represented JCPS in at least a limited capacity related to IP matters after
Defendants’ acquisition of Fiberod, Defendants have established that an attorneyclient relationship existed between JCPS and the Matthews firm. Defendants have
also presented evidence that an attorney-client privilege was passed to JCPS from
the Matthews firm work on Fiberod’s assets prior to the APA because “[t]he
practical consequences of [JCPS’s purchase of Fiberod] were that control of
Fiberod passed to JCPS” and that business was continued under JCPS’s new
management. See John Crane Prod. Solutions, Inc. v. R2R and D, LLC, No. 3:11CV-3237-D, 2012 WL 3453696 at *4 (N.D. Tex. Aug. 14, 2012). As a result, “the
attorney-client privilege followed” because “JCPS acquired nearly all of Fiberod’s
assets, including the assets necessary to continue running Fiberod’s business.” Id.
(citing Soverain Software LLC v. Gap, Inc., 340 F. Supp. 2d 760, 763 (E.D. Tex.
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2004); see Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 349
(1985) (“[W]hen control of a corporation passes to new management, the authority
to assert and waive the corporation’s attorney-client privilege passes as well.”).
Accordingly, the first prong of the substantial relationship test is met.
2.
Substantially Related Matter
Having found that Defendants have met the first prong of the
substantial relationship test, the Court now turns to the second prong. Defendants
contend that the Matthews firm’s work on the ’431 patent involved in its
counterclaim is directly at issue in this case, thereby meeting the substantial
relationship test. (Dkt. # 19 at 9.) In response, Plaintiffs contend that the
Matthews firm did not represent Defendants in the prosecution of the ’431 patent,
but that the firm represented only Rutledge, individually, as the inventor of the
patent and prior to Defendants’ acquisition of Fiberod. (Dkt. # 20 at 6.) Plaintiffs
contend that, in any case, the firm’s former representation is not substantially
related to the matters in dispute in this case. (Dkt. # 44.)
The APA governing JCPS’s purchase of Fiberod’s assets specifically
states that “the Sellers . . . own all the right, title and interest to each item of
Company IP.” (Dkt. # 19-1 at 21.) The “Sellers” are the collective companies
comprising Fiberod—not Rutledge as an individual. Therefore, contrary to
Plaintiffs’ contention, the APA does not state that Rutledge personally owned the
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’431 patent; in fact, the ’431 patent is expressly included in the list of Company
IP. 3 (Dkt. # 25-1 at 1.) As a result, the Court finds that the ’431 patent was fully
assigned and transferred to JCPS, and thereby Defendants, through the APA.
Furthermore, there is no dispute in this case that the Matthews firm
initially represented Rutledge in obtaining and prosecuting the ’431 patent. And,
as addressed above, there is no serious dispute that the ’431 patent was assigned to
JCPS in accordance with the APA. Nevertheless, this assignment, by itself, is not
sufficient to demonstrate that the Matthews firm’s two representations are
substantially related for purposes of disqualification.
In considering the evidence and arguments presented in this case, the
Court does not find that a substantial relationship exists between the Matthews
firm’s two representations. The prosecution and assignment of the ’431 patent by
the Matthews firm is not substantially related to the matters in this case where the
firm is defending Plaintiffs in a lawsuit against infringement of the ’431 patent.
See Commil USA, LLC v. Cisco Sys., Inc., __ U.S.__, 135 S. Ct. 1920, 1929
(2015) (holding that, in patent law, “[v]alidity and infringement are distinct issues,
bearing different burdens, different presumptions, and different evidence”). As
such, Defendants have not carried their burden of “specifically delineat[ing] the
matters, issues, and causes of action common to these two representations.” Nat’l
3
The fact that Rutledge may have transferred the patent to JCPS does not change
the fact that at the time of the APA, the ’431 patent was the property of JCPS.
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Oilwell Varco, L.P. v. Omron Oilfield & Marine, Inc., 60 F. Supp. 3d 751, 770
(W.D. Tex. 2014). While it is true that both representations involved the ’431
patent, that is the end of their similarity for disqualification purposes. Cf. id. (“The
Court concludes the two representations are substantially similar. Both cases
involve the same defendant opposing patent infringement claims related to the
same control system with similar theories of liability and defenses.”).
Disqualification, in this case, requires more than that two cases involve the same
patent. See Model Rules of Prof’l Conduct R. 1.9 cmt. 2 (2013) (“The scope of a
“matter” for purposes of this Rule depends on the facts of a particular situation or
transaction. The lawyer’s involvement in a matter can also be a question of
degree. . . . A lawyer who recurrently handled a type of problem for a former client
is not precluded from later representing another client in a factually distinct
problem of that type even though the subsequent representation involves a position
adverse to the prior client.”).
B.
Confidential Information Test
“[A] former client c[an] also disqualify counsel by showing that his
former attorney possessed relevant confidential information in the manner
contemplated by Rule 1.09(a)(2).” Am. Airlines, 972 F.2d at 615. Defendants
assert that the Matthews firm work on the ’431 patent involved not only patent
prosecution and due diligence, but also involved confidential information relating
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to the invention record with regard to that patent. (Dkt. # 25 at 2.) Therefore,
Defendants contend that the Matthews firm necessarily gained and maintained
confidences regarding the inventions involved in the patent and should be
disqualified from representing Plaintiffs in this case on that basis. (Dkt. # 19 at
10.)
As evidence, Defendants provided the Matthews firm’s invoices to
JCPS, indicating that the firm performed various legal work subsequent to the APA
for JCPS, including reviewing files for the preparation and assignment of the ’431
patent. (Dkt. # 19-2 at 242–43.) Defendants have also submitted a copy of the
lengthy and detailed patent application submitted by the Matthews firm for the
’431 patent. (Dkt. # 19-4.) The Utility Patent Specification contains detailed
information relating to the background and design of the suckerod. (Id.) It also
contains information related to the methodology and modeling concerns of the
suckerod as well as detailed comparisons of its designs. (Id.) Overall, this
evidence may suggest that the Matthews firm played an integral part in the
application process for the ’431 patent, thereby obtaining confidential and
proprietary information concerning that patent.
In opposition, Plaintiffs, in their motion to reconsider—only now—
have responded to Defendants’ evidence regarding the Matthews firm’s
acquirement of confidential information regarding the ’431 patent. (Dkt. # 44 at 7–
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9.) Plaintiffs contend that Defendants’ invoices “merely show that the Matthews
Firm drafted the assignment of the ’431 patent for Defendants,” but that “[t]he
assignment is not part of the file history or prosecution of the ’431 patent, and
certainly does not require confidential information.” (Id. at 8.) Plaintiffs further
assert that “[a]ssigning a patent is more akin to clerical or administrative work than
legal work” and that “all information filed in the course of prosecuting a patent
becomes public as of the date published pursuant to 35 U.S.C. § 122, or as the
issuance date of the patent—February 27, 2001 for the ’431 patent.” (Id.)
Additionally, Plaintiffs assert that the Utility Patent Specification does not contain
any confidential information because the information is available to the public
through the PTO’s Patent Application Information Retrieval system and available
online. (Id. at 9.)
Despite the Court’s agreement with Defendants contention that
“motions for reconsideration ‘cannot be used to raise arguments that could, and
should, have been made before the judgment issued,’” (Dkt. # 46-1 at 2 (quoting
Marseilles Homeowners Condo. Ass’n v. Fidelity Nat’l Ins. Co., 452 F.3d 1053,
1058 (5th Cir. 2008)), the Court nevertheless determines, on reconsideration, that
Defendants did not provide sufficient evidence to meet their burden of
demonstrating that confidential information was obtained in the Matthews firm’s
prior and current representation regarding the ’431 patent. The evidence
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Defendants produced in support of their motion to disqualify does not demonstrate
that any confidential information was obtained in regard to the ’431 patent,
especially in light of the public’s ability to access the very documents which
Defendants contend contain confidential information. While Defendants attempt
to argue that the infringement issues regarding the ’431 patent “will necessarily
involve confidential information gathered in the course of prosecuting the ’431
patent,” they have failed to carry their burden to show that the Matthews firm’s
representation of Plaintiffs would in reasonable probability entail disclosure of any
confidential information. See Tex. Disciplinary R. Prof’l Conduct 1.09(a)(2).
Defendants have not delineated and explained the confidential information that the
Matthews firm possesses and how it will affect the representation of Plaintiffs in
the infringement claims regarding the ’431 patent.
Despite Plaintiffs’ deficiencies in first responding to Defendants’
motion to disqualify, the Court now finds Plaintiffs’ arguments persuasive in
regard to Defendants’ inability to show that the Matthews firm obtained
confidential information in its former representation of the ’431 patent.
Accordingly, this Court grants Plaintiffs’ motion for reconsideration and Plaintiffs’
counsel will not be disqualified from representing them in this matter.
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CONCLUSION
Based on the foregoing, the Court GRANTS Plaintiffs’ Rule 54(d)
Motion for Reconsideration of this Court’s Order on Defendants’ Motion to
Disqualify the Matthews Firm from Representing Plaintiffs. (Dkt. # 44.)
Accordingly, the Matthews firm is no longer disqualified and may represent
Plaintiffs for all matters in this case. The Court therefore CANCELS the hearing
set in this case for March 21, 2016.
IT IS SO ORDERED.
DATED: San Antonio, Texas, March 3, 2016.
_____________________________________
David Alan Ezra
Senior United States Distict Judge
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