Celgard, LLC v. LG Chem, Ltd., a disqualification case decided by the Federal Circuit, continues to make waves.  Insightful commentary from Ronald Rotunda is here; he notes that typing the case name into Google yields more than 5,000 hits.

Last December, when the opinion came out, there was concern (see here and here) that if read broadly, Celgard could signal a dangerous standard under which concurrently representing clients with adverse interests up and down a single supply chain might be sufficient to create a disqualifying conflict of interest.

The ruling should not be read broadly, however — in its opinion, the court expressly rejects such a reading.  But Celgard does yield lessons about possible conflicts in concurrently representing clients who are economic competitors.

Celgard, and LG Chem and Apple, oh my!

The case involves a patent dispute between Celgard and defendant LG Chem, which makes lithium batteries alleged to infringe on Celgard’s patent.  Jones Day sought an injunction on behalf of Celgard against LG Chem.  While not a party to the dispute, Apple uses LG Chem’s batteries in its products.

Rule 1.7 of the North Carolina Rules of Professional Conduct on concurrent conflicts of interest, patterned after Model Rule 1.7(a)(1), bars representation “directly adverse” to another client that the lawyer represents in an unrelated matter.   Jones Day’s representation of Celgard had foreseeable economic consequences for Apple, because Apple’s supply of lithium batteries was subject to potential disruption were Jones Day to win an injunction on behalf of Celgard.

The Federal Circuit upheld the district court’s determination that Jones Day’s representation was “directly adverse” to Apple, and that Apple had the right to intervene and to disqualify Jones Day.

Injunction used as leverage

The key to the Federal Circuit’s disqualification holding was that even before Jones Day became involved as counsel, Celgard had sent Apple a copy of its injunction motion, and “requested to work with Apple to find a mutually beneficial business arrangement to resolve the issues around infringement of Celgard’s intellectual property,” the court said.

Thus, Jones Day’s representation was not adverse to Apple merely in an economic sense; rather, said the court, its client, Celgard, additionally targeted Apple “in an attempt to use the injunction as leverage in negotiating a business relationship [with Apple].”  Thus, the court deemed Jones Day’s representation of Celgard to be adverse to Apple’s interests, including its “legal obligations.”

The court expressly disclaimed any intent to hold that Rule 1.7 covered conflicting representations “merely because the client is up or down the supply chain.”  Thus, contrary to some early expressions of concern, the case does not upset the usual rule, which, as Rotunda says, is that “there is no conflict simply because a law firm represents a client [in a case] and the result in the case would make it more difficult or more expensive for another client [represented by the lawyer in unrelated matters] to purchase a good or service.”

The usual rule is enunciated in comment [6] to Rule 1.7:  “[S]imultaneous representation in unrelated matters of clients whose interests are only economically adverse … does not ordinarily constitute a [direct adversity] conflict of interest.”

No broad reach — but caution still required

Recognizing that Celgard’s holding is a limited one, and that it depended on some unique facts, the ruling is a good opportunity to highlight two additional points about representing clients whose interests are economically adverse to each other:

  • First, while the circumstances might not raise a “direct adversity” conflict under Rule 1.7(a)(1), you may still have a “material limitation” conflict under Model Rule 1.7(a)(2) — which arises when “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client …”  If your ability to consider, recommend or carry out an appropriate course of action for Client A will be materially limited by your loyalty to Client B, as an economic competitor of Client A (or could be perceived to be), then you should consider whether you need consent — from both clients — in order to proceed.
  • Second, check whether you or your firm has agreed to the terms of “outside counsel guidelines,” which an increasing number of large clients require as a condition of the engagement.  Such guidelines may place limits on your ability to take on the representation of economic competitors of those clients.  Knowing what those guidelines provide before you accept the representation of another client is clearly the best way to steer clear of conflicts problems.