Celgard, LLC v. LG Chem, LTD., No. 2014-1675, 2014 WL 7691765, 594 Fed. Appx. 669 (Fed. Cir. Dec. 10, 2014), is a most unusual lawyer disqualification case. It comes from the Federal Circuit, and it is hot topic for discussion among lawyers. Type “Celgard, LLC v. LG Chem” (with the quote marks) into Google and you get over 5,000 hits—pretty good for a patent law case. One web commentator advises, “This is a potentially very dangerous opinion for patent firms.” The disqualification issue, however, goes far beyond patent cases.
Although the Federal Circuit announced that “[t]his case was not selected for publication in West’s Federal Reporter,” that case is still precedent. Rule 32.1 of the Federal Rules of Appellate Procedure provides that a court of appeals may not prohibit a party from citing an unpublished opinion of a federal court for its persuasive value or for any other reason. In addition, under Rule 32.1(a), a court may not place any restriction on the citation of such opinions. For example, a court may not instruct parties that the citation of unpublished opinions is discouraged, nor may a court forbid parties to cite unpublished opinions even when a published opinion addresses the same issue. Hence, Celgard is precedent for the Federal Circuit and is as relevant for all courts as any federal circuit court opinion.
In Celgard, the Federal Circuit disqualified the international law firm of Jones Day because it was representing Celgard in a patent dispute while it continued to represent Apple (another Jones Day client) in other matters. However, Apple was not a party to the Celgard patent case. Jones Day represented Celgard seeking a preliminary injunction against LG Chem, maker of lithium batteries, for alleged patent infringement. It turns out that Apple uses LG Chem’s batteries in its products.
This appeal came from the Western District of North Carolina, so the Federal Circuit applied the North Carolina Rules of Professional Conduct. Its Rule 1.7(a) is based on the ABA Model Rules of Professional Conduct, which almost every state has adopted by a rule of court.
Rule 1.7(a), governs concurrent conflicts of interest, and prohibits representation when such representation will be “directly adverse” to another client. The court said, “Because Jones Day’s representation here is ‘directly adverse’ to the interests and legal obligations of Apple, and is not merely adverse in an ‘economic sense,’ the duty of loyalty protects Apple from further representation of Celgard.” The court concluded that Apple was “directly adverse” to Celgard in licensing negotiations related to that patent dispute and thus Rule 1.7(a) required disqualification.
What does it mean to be “directly” adverse and “not merely adverse in an ‘economic sense’”? Apple bought a product (lithium batteries) from LG Chem, but that alone should not create a conflict. As one comment noted, “Jones Day argued that it would not be possible for a law firm to anticipate the economic consequences to a non-party client who happened to be in an opponent’s supply chain.” It added, “the implications can be disturbing if read even a bit broadly,” because “[m]any litigations can have economic consequences for a non-party client, even foreseeable ones and here Apple was a client on unrelated matters. The case holds that as a client even on unrelated matters Apple had a right not to see Jones Day appear for another client in a matter in which Apple was not a party because of foreseeable economic harm to Apple.”
The Celgard precedent does not demand nor should it invite such a broad holding. Apple was concerned not merely that it could not buy batteries from LG Chem if Celgard was successful in this lawsuit. After all, Apple could presumably switch to Celgard as a supplier. However, the court noted that Apple faced “additional targeting by Celgard in an attempt to use the injunction issue as leverage in negotiating a business relationship” (emphasis added).
There should be no “direct adversity” under Rule 1.7(a) simply because a law firm’s success in one case will have economic consequences to another client who is in the supply chain. Consider, for example, a Law Firm that represents a local water utility. Law Firm also represents Client A, suing a consumer of the utility’s services. There is no conflict, even if the result of that lawsuit is that the consumer goes bankrupt, and thus it will use less water, thereby causing an economic harm to the local water utility.
If that scenario really creates “direct adversity” under Rule 1.7, every water utility would be a Typhoid Mary, infecting law firms with conflicts willy-nilly. No law firm would be able to represent any client who might buy a product from another client because of the economic ripple effects. Other Typhoid Marys would include any client (let us call it, “T-M” for “Typhoid Mary”) who may lose a customer (or sell less to the customer) if a lawsuit involving that customer would cause the customer to buy less from T-M.
Apple was concerned not merely that it could not buy batteries from LG Chem. After all, Apple could presumably switch to Celgard as a supplier. The court emphasized that Apple faced “additional targeting by Celgard in an attempt to use the injunction issue as leverage in negotiating a business relationship” (emphasis added). Using an injunction as leverage is what created the economic adversity.
The Celgard court made clear that there is no conflict for a law firm simply because another client of the law firm is part of the supply chain. “Jones Day’s representation here is ‘directly adverse’ to the interests and legal obligations of Apple, and is not merely adverse in an ‘economic sense,’ the duty of loyalty protects Apple from further representation of Celgard.” (Emphasis added). The Federal Circuit specifically said that there is no conflict “merely because the client is up or down the supply chain . . . .”
In Celgard, the client (Celgard) knew that its position in that litigation would affect Apple’s legal obligations. In fact, Celgard was negotiating with Apple over the very thing Jones Day was defending—i.e., Celgard was able to use its injunction that Jones Day was defending for business leverage against Apple. That scenario is inapplicable in the water utility example. In short, there is no economic adversity if the law firm is not seeking a remedy against a litigant that affects the obligations or legal rights of another client.
Several years earlier, in Freedom Wireless, Inc. v. Boston Communications Group, Inc., Nos. 2006–1020 et al., 2006 WL 8071423, *3 (Fed. Cir. Mar. 20, 2006), another Federal Circuit case, the Court also disqualified the law firm. In that case, the lawyers “asserted a position that an injunction obtained on behalf of one client, Freedom Wireless, should limit the activity of another client, Nextel. In this situation, a clear and direct conflict of interest has arisen.” (emphasis added.) Celgard applied its earlier learning in Freedom Wireless to a new and unusual set of facts.
What we learn from Celgard and Freedom Wireless, is that a law firm is in a conflict and risks that the court will disqualify it if it represents a client (Client Alpha) in one case and that Client Alpha attempts to use a proposed remedy (typically, an injunction) as leverage in a way that injures another client (Client Beta) if the same law firm also represents Client Alpha and Client Beta. That is what creates the economic adversity.
If one reads Celgard too broadly, it is indeed a potentially very dangerous opinion for patent firms. However, there is no need to do that: there is no conflict simply because a law firm represents a client and the result in that case would make it more difficult or more expensive for another client to purchase a good or a service.