Abstract

A non‑disclosure agreement in a financing transaction did not create a conflict of interest stemming from a fiduciary relationship or obligation for a law firm with respect to a party to that non-disclosure agreement that it did not represent.

Background

Centripetal Networks sued Palo Alto Networks for patent infringement. During the litigation, Centripetal Networks moved to disqualify counsel for Palo Alto Networks, Ropes & Gray LLP, in view of its prior involvement in a potential financing transaction between Centripetal Networks and third-party Silver Point Finance. The negotiations between Centripetal Networks with Silver Point Finance dealt with specialized financing to provide Centripetal Networks with general purpose funds and funds to pay an insurance premium on a policy covering a judgment from a prior patent litigation.

Prior Negotiations between Centripetal Networks and Silver Point Finance

The two parties, Centripetal Networks and Silver Point Finance, agreed they had a “common-interest with respect to the transaction” and executed a mutual non-disclosure agreement (NDA) to facilitate the disclosure of any confidential information used solely for the evaluation of the potential transaction. The same day the NDA was signed, Silver Point Finance retained Ropes & Gray to represent it in negotiating the potential transaction. Centripetal Networks, Silver Point Finance, and several attorneys from Ropes & Gray participated in a teleconference to discuss the potential transaction. According to Centripetal Networks, the parties discussed its “patents, prospective litigation, and other highly confidential, privileged, and work product information.” According to Palo Alto Networks, the Ropes & Gray attorneys recalled only seeking “confirmation that their understanding of the public record was correct given that their team had only been allotted one day to review the material and their understanding was based largely on oral summaries from associates.” None of the Ropes & Gray attorneys recalled “future litigation being discussed.”

After the teleconference, Centripetal Networks set up a “data room” to store confidential information and provided access to the Ropes & Gray attorneys. Two Ropes & Gray attorneys tested their access to the data room, but never accessed documents in the data room because Silver Point Finance instructed them to stop working on the transaction. Ropes & Gray never resumed working on the transaction.

Pending lawsuit between Centripetal Networks and Palo Alto Networks

After Centripetal Networks sued Palo Alto Networks for patent infringement, the same Ropes & Gray attorneys that represented Silver Point Financial in the earlier transaction appeared on behalf of Palo Alto Networks. Centripetal Networks requested that Ropes & Gray withdraw, but Ropes & Gray refused.

Centripetal Networks then filed a motion to disqualify counsel alleging that Ropes & Gray’s representation of Palo Alto Networks created a conflict of interest.

The Centripetal Networks-Palo Alto Order

The district court for the Eastern District of Virginia considered the issue of conflict of interest under the Virginia Rules of Professional Conduct 1.7, 1.9(a), and 1.9(c). In part, Rule 1.7 states that a lawyer shall not represent a client if the representation involves a concurrent conflict of interest where a client will be materially limited by the lawyer’s responsibility to a former client or third person. Rule 1.9 pertains to conflicts from “representing a client in a matter that is substantially related to a matter in which the attorney represented a different client.”

In its motion to disqualify Ropes & Gray, Centripetal Networks alleged it was either “a former client” based on an “implied attorney-client relationship” theory under Rules 1.7 and 1.9 or “a third person” to whom the Ropes & Gray attorneys would owe responsibilities under Rule 1.7. Under Virginia law, an attorney-client relationship may be implied from the actions of the parties. In this case, however, the wording of the NDA made it clear that no attorney-client relationship existed between Centripetal Networks and Ropes & Gray. The NDA specifically referenced Ropes & Gray as Silver Point Finance’s attorneys “and not the transaction’s attorneys, the joint venture’s attorneys, or any other term or syntax denoting collective representation.” The NDA further stated “that no licensing rights or intellectual property rights would be shared between [Centripetal Networks and Silver Point Finance];” thus, to the extent a common interest existed, it was in reaching a financing agreement, and not in the defense of any patents. The court also relied on the purpose of the financing transaction, which was to provide “liquidity and security” to Centripetal Networks in view of the uncertainty of its judgment from the prior litigation undergoing an appeal. Ropes & Gray’s representation for Silver Point Finance in a business transaction, therefore, did not create an attorney-client relationship with Centripetal Networks and did not render it a “former client.”

With respect to being a “third person,” Centripetal Networks argued Ropes & Gray was obligated to not use any confidential information gained from the financial transaction for purposes outside of the transaction. When evaluating the evidence submitted, however, the court found Centripetal Networks’s declarations contain conclusory allegations that were unsupported by relevant details, while Ropes & Gray’s declarations provided detailed and specific information related to the transaction. Thus, the court found Centripetal Networks did not prove it is a “third person” to which Ropes & Gray owed an obligation that would materially affect its ability to represent Palo Alto Networks in the patent infringement action.

Having found no violations of Rules 1.7 and 1.9, there were no conflicts of interest to impute onto Ropes & Gray and the court denied Centripetal Networks’s motion to disqualify.

Strategy and Conclusion

The wording of an NDA in a transactional financial negotiation is relevant to determining implied attorney-client relationships as well as obligations of outside counsel to parties to the agreement. The same is true for confidential information shared during negotiations. If companies or counsel do not want to create such obligations and relationships, they should consider the language and conduct of the attorneys.

Further Information

The Centripetal Networks order can be found here.