Freivogel on Conflicts
 
 
 
 
Corporate Families

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A lawyer represents corporation A in a small matter. Corporation A is a wholly-owned subsidiary of Corporation AA. While that matter is pending, Corporation B comes to the lawyer and asks the lawyer to bring a multi-million dollar suit against Corporation AA. May the lawyer take the case? Are Corporations A and AA one for conflict of interest purposes? That will depend upon the tribunal or the facts or both. As shown below, some courts and writers have said that this is always a conflict of interest (the "bright line" rule). Others have said that the answer depends upon the facts (for lack of a better phrase, the "weighing" rule).

        ABA Op. 95-390 (1995). Any careful study of this issue should begin with a reading of this opinion. The majority concluded that a parent-subsidiary relationship should not automatically disqualify a lawyer from a representation such as that described in the opening paragraph. Two members of the Committee wrote eloquent dissents. They took the bright line position that this would always be a conflict for which a consent would be required. A third member joined in those dissents. Thus, the Committee was deeply split. Nevertheless, the opinion is highly instructive.

        Cmt. [34] to ABA Model Rule 1.7 was added by the House of Delegates in February 2002.  It adopts the weighing test and provides as follows:

[34] A lawyer who represents a corporation or other organization does not, by virtue of that representation, necessarily represent any constituent or affiliated organization, such as a parent or subsidiary. See Rule 1.13(a). Thus, the lawyer for an organization is not barred from accepting representation adverse to an affiliate in an unrelated matter, unless the circumstances are such that the affiliate should also be considered a client of the lawyer, there is an understanding between the lawyer and the organizational client that the lawyer will avoid representation adverse to the client's affiliates, or the lawyer's obligations to either the organizational client or the new client are likely to limit materially the lawyer's representation of the other client.

        A number of states have adopted, or are considering adoption of, the "Ethics 2000" changes.  So, you should check the rules for the state in question.

        The Cases. (Caution: those cases that adopted the weighing approach do not necessarily consider the same factors in the same way. One factor that is important to some courts is whether the same in-house lawyer may be involved in both matters. Another is whether the lawyer may have obtained information about the client in one matter that would give the lawyer an advantage in the other. Some courts that reject the bright line test hold that the test should be an alter ego test. Other courts appear to be applying an alter ego analysis but do not say so. In short, there is no substitute for reading these cases before relying upon them.); GSI Commerce Solutions, Inc. v. BabyCenter, L.L.C., 2010 U.S. App. LEXIS 17182 (2d Cir. Aug. 18, 2010) (weighing; disqualified; same law department and other shared facilities and personnel); Atlantic Specialty Ins. Co. v. Premera Blue Cross, 2016 WL 1615430 (W.D. Wash. April 22, 2016) ("brother-sister;" weighing; insurance claims handling; disqualified); Lennar Mare, LLC v. Steadfast Ins. Co., 2015 WL 1540638 (E.D. Cal. April 7, 2015) (weighing - disqualified); Standard Retirement Servs., Inc. v. Ky. Bancshares, Inc., 2014 U.S. Dist. LEXIS 136409 (E.D. Ky. Sept. 24, 2014) (weighing; no disqualification; emphasized information); Heartland Mem'l Hosp., LLC v. McGuireWoods, LLP, 2012 U.S. Dist. LEXIS 129203 (N.D. Ind. Sept. 11, 2012) (subsidiary cannot sue lawyer for parent); FDIC v. Commonwealth Land Title Ins. Co., 2012 U.S. Dist. LEXIS 127247 (N.D. Ohio Sept. 7, 2012) (no disqualification; used different lawyers); Title Ins. Co. v. St. Johns Bank & Trust Co., 2009 U.S. Dist. LEXIS 87151 (E.D. Mo. Sept. 22, 2009) (weighing; brother-sister context; firm disqualified); Cliff Sales Co. v. Amer. Steamship Co., 2007 U.S. Dist. LEXIS 74342 (N.D. Ohio Oct. 4, 2007) (court applied weighing test, found close relationship, but denied disqualification because two month conflict did not harm client); iSmart Int’l. Ltd. v. I-Docsecure, LLC, 2006 U.S. Dist. LEXIS 77323 (N.D. Cal. Oct. 12, 2006) (weighing; "close case," but no disqualification because no showing of use of confidences); Jones v. Rabanco, Ltd., 2006 U.S. Dist. LEXIS 53766 (W.D. Wash. Aug. 3, 2006) (weighing test; companies shared employees and worked out of same location; "one" for conflicts purposes); Snapping Shoals Electric Membership Corp. v. RLI Ins. Corp., 2006 U.S. Dist. LEXIS 45226 (N.D. Ga. July 5, 2006) ("reverse order" corporate family case; law firm disqualified in former client context); Robinson v. Bodoff, 382 F. Supp. 2d 229 (D. Mass. 2005) (discussed no test; uncritical acceptance of different entities); Eastman Kodak Co. v. Sony Corp., 2004 WL 2984297 (W.D.N.Y. Dec. 27, 2004) (weighing); Certain Underwriters at Lloyd's v. Argonaut Ins. Co., 264 F. Supp. 2d 914 (N.D. Cal. 2003) (weighing); Discotrade Ltd. v. Wyeth-Ayerst Int'l. Inc., 200 F. Supp. 2d 355 (S.D.N.Y. May 8, 2002) ("sister-sister;" weighing); JPMorgan Chase Bank v. Liberty Mutual Ins. Co., 189 F. Supp. 2d 20 (S.D.N.Y. 2002) (weighing); Colorpix Systems of America v. Broan Mfg. Co., 131 F. Supp. 2d 1499 (D. Conn.  2001) (weighing - court disqualified firm - impressed that same in-house lawyer involved for parent and subsidiary); Gen-Cor, LLC v. Buckeye Corrugated, Inc., 111 F. Supp. 2d 1049 (S.D. Ind. 2000) (bright line); Travelers Indem. Co. v. Gerling Global Reinsurance Corp., 2000 U.S. Dist. LEXIS 11639 (S.D.N.Y. 2000) (weighing - sister-sister corporations - note Stratagem below); Ramada Franchise Systems, Inc. v. Hotel of Gainsville Associates, 988 F. Supp. 1460 (N.D. Ga. 1997) (weighing); Reuben H. Donnelley Corp. v. Sprint Publishing and Advertising, Inc., 1996 U.S. Dist. LEXIS 2363 (N.D. Ill. 1996) (weighing; court noted same in-house lawyer not involved in both matters); Alcan International Ltd. v. S.A. Day Mfg. Co., Inc., 176 F.R.D. 75 (W.D.N.Y. 1996) (court allowed a firm to be adverse to a company even though the firm was representing employees of that company's sister company); Apex Oil Co. v. Wickland Oil Co., 1995 U.S. Dist. LEXIS 6398 (E.D. Cal. 1995) (weighing; alter ego); Vanderveer Group, Inc. v. Petruny, 1993 U.S. Dist. LEXIS 13614 (E.D. Pa. 1993) (weighing); Baxter Diagnostics, Inc. v. AVL Scientific Corp., 798 F. Supp. 612 (C.D. Cal. 1992) (seemed to apply a weighing test); Teradyne, Inc. v. Hewlett-Packard Co., 1991 U.S Dist. LEXIS 8363 (N.D. Cal. 1991) (weighing); Stratagem Dev. Corp. v. Heron Int’l. N.V., 756 F. Supp. 789 (S.D.N.Y. 1991) (bright line - parent-subsidiary); Gould, Inc. v. Mitsui Mining & Smelting Co., 738 F. Supp. 1121 (N.D. Ohio 1990) (weighing); Hartford Accident & Indem. Co. v. RJR Nabisco, Inc., 721 F. Supp. 534 (S.D.N.Y. 1989) (weighing); Pennwalt Corp. v. Plough, Inc., 85 F.R.D. 264 (D. Del. 1980) (bright line); URS Corp. v. Earth Tech., Inc., 2006 Cal. App. Unpub. LEXIS 11349 (Cal. App. Dec. 19, 2006) (weighing, but companies shared same law department, thus, disqualification); Morrison Knudsen Corp. v. Hancock, Rothert & Bunshoft, 81 Cal. Rptr. 2d 425 (Cal. App. 1999) (weighing; court noted possible prejudice because of confidential information obtained in one matter that might be used in the other); Brooklyn Navy Yard Cogeneration Partners L.P. v. Superior Court, 70 Cal Rptr. 2d 419 (Cal. App. 1997) (weighing; alter ego);  McKesson Information Solutions, Inc. v. Duane Morris LLP, No. 2006CV121110 (Super. Ct. Fulton Co. Ga. Nov. 8, 2006) (weighing); McCourt Co. v. FPC Properties, Inc, 434 N.E.2d 1234 (Mass. 1982) (bright line); Brooklyn Navy Yard Cogeneration Partners, L.P. v. PMNC, a Joint Venture, 679 N.Y.S.2d 312 (N.Y. App. Div. 1998) (weighing); McKenna v. Gammon Gold Inc., 2009 CanLII 79 (Super. Ct. Ont. Jan. 6, 2009) (weighing; applied traditional alter ego test); Savanna Energy Services Corp. v. CanElson Drilling Inc., 2010 ABQB 645 (Alb. Ct. Q.B. Oct. 8, 2010) (followed McKenna).

        "No Harm, No Foul." HLP Props., LLC v. Con. Ed. Co. of N.Y., Inc., 2014 U.S. Dist. LEXIS 147416 (S.D.N.Y. Oct. 16, 2014). Law Firm found itself representing Parent Co. on corporate matters and against Subsidiary Co. on a long-running environmental matter (this case). Sub Co. moved to disqualify Law Firm in this case. In this opinion the court denied the motion. First, the court found that Parent and Sub were one for conflicts purposes, noting, among other factors, that they shared a law department. In effect, the court applied a balancing/“no harm, no foul” test. First, the court noted how prejudiced Sub’s client would be if it lost Law Firm in this case. Second, the court noted that different offices and different lawyers were involved at Law Firm and that there was no sharing of Parent’s information. Though ruling for Law Firm, the court said that Law Firm’s failure to obtain waivers from Sub and Parent when it began representing Parent was “troubling.”
       
A Twist on Alter Ego.  In re Consolidated Fen-Phen Cases
, 2003 U.S. Dist. LEXIS 20231 (E.D.N.Y. Nov. 12, 2003).  Personal injury plaintiffs “tried to pierce the corporate veil” by showing that the companies in question had earlier been held to be a single entity for conflict-of-interest purposes, Discotrade Ltd. v. Wyeth Ayerst Int’l. Inc., 200 F. Supp. 2d 355 (S.D.N.Y. 2002).  The court disagreed, quoting from Discotrade that a conflict of interest analysis is “not nearly as rigorous as an ‘alter ego’ or ‘piercing the corporate veil’ analysis.”

        NetRatings, Inc. v. The NPD Group, Inc., 2003 U.S. Dist. LEXIS 23543 (D. Del. Dec. 11, 2003).  NPD moved to disqualify NetRatings’ General Counsel, Alan Shapiro, because Shapiro had previously been General Counsel at JMM.  The court characterizes JMM as a “subsidiary” of NPD; however, JMM is a public company with “many shareholders” other than NPD.  NPD is not a public company.  Tod Johnson was Chairman of both NPD and JMM.  In support of the motion to disqualify, Johnson submitted an affidavit that said that when Shapiro was General Counsel of JMM, Shapiro discussed strategy with him about a related case between JMM and NetRatings.  The court denied the motion, on the basis that Shapiro was never counsel for NPD.  The court also took a stab at Johnson, saying that it would have been wrongful for him to use JMM's resources on behalf of NPD, to the detriment of JMM's other shareholders.  Thus, he should have had no expectation that Shapiro was acting on behalf of NPD.

        What about Mere "Controlling Interest"?  Weil, Gotshal & Manges v. Fashion Boutique of Short Hills, Inc., 780 N.Y.S.2d 593 (N.Y. App. 2004).  Law Firm was suing one company while representing another company, which had a "controlling interest" in the first company.  Parties and court seemed to believe that was impermissible.

       "Affiliates" or "Successors."  Waid v. Eighth Judicial District Court, 119 P.3d 1219 (Nev. 2005).

        University/Hospital Relationship.  Hirsch v. Columbia University,  293 F. Supp. 2d 372 (S.D.N.Y. 2003).

       Engagement Letter Important.  Avocent Redmond Corp. v. Rose Electronics, 491 F. Supp. 2d 1000 (W.D. Wash. 2007).  Law Firm represented the defendants in this case.  Law Firm formerly represented a subsidiary of Plaintiff.  For that reason Plaintiff moved to disqualify Law Firm.  In this opinion the court granted the motion.  The court resolved the corporate family issue by looking at the engagement letter between Law Firm and Plaintiff’s subsidiary, which said that Law Firm represented  “[client/subsidiary], a wholly owned subsidiary of [Plaintiff], and its affiliates.”

        Court Relied in Part on Corporate Family Authorities to Disqualify Law Firm.  Eleventh St. Loftominium Ass’n v. Wabash Loftominium, L.L.C., 876 N.E.2d 65 (Ill. App. 2007).

        Unintended Consequences of “Our Only Client” Language in Retention AgreementGeneral Nutrition Corp. v. Gardere Wynne Sewell, LLP, 2008 U.S. Dist. LEXIS 66703 (W.D. Pa. Aug. 12, 2008).

        Skycasters LLC v. J.W. Didado Electric, Inc., 2008 Ohio App. LEXIS 4062 (Ohio App. Sept. 24, 2008).  Law Firm represented the defendant in this breach of contract case.  Law Firm had earlier represented a company not a party to this case in obtaining a zoning change to the plaintiff's property.  The non-party company had even earlier been under common ownership with the plaintiff, but was no longer at the time of the zoning change.  The plaintiff moved to disqualify Law Firm.  The trial court denied the motion, and, in this opinion, the appellate court affirmed.

        e2Interactive, Inc. v. Blackhawk Network, Inc., 2010 U.S. Dist. LEXIS 48333 (W.D. Wis. May 17, 2010).  Law Firm, one of the firms for plaintiffs in this patent infringement case represented corporate affiliates ("Affiliates") of the defendant in unrelated litigation in Georgia.  In undertaking the Georgia litigation in 2007 Law Firm provided a retainer agreement that included an advance conflict waiver and and agreement that the Georgia client would not deem its affiliates as clients of law firm ("Corporate Family Provision").  In-house counsel for Affiliates struck both provisions.  In 2009 Law Firm proposed a fee change in the Georgia litigation and forwarded to Affiliates another retainer agreement containing both of the foregoing provisions.  For some reason in-house counsel for Affiliates struck the advance waiver but not the Corporate Family Provision.  In any event, the defendant in this case moved to disqualify Law Firm in this case.  In this case the magistrate judge denied the motion.  The magistrate judge held, in effect, that the failure to strike the Corporate Family Provision from the 2009 retainer meant that Law Firm could be adverse to Affiliates' affiliates (i.e., the defendant in this case).

        Cascades Branding Innov., LLC v. Walgreen Co., 2012 U.S. Dist LEXIS 61750 (N.D. Ill. May 3, 2012).  Law Firm represented Co. No. 1, owned by Owner, in litigation.  Later Owner, after selling Co. 1, owned another company (Co. 2), which is the plaintiff in this suit.  Law Firm appeared as counsel for a defendant in this suit.  The plaintiff moved to disqualify Law Firm in this suit.  First, the court held that a lawyer can represent one company and then oppose another company where they were owned by the same owner but at different times.  But, the court granted disqualification on another ground, which was a Rule 1.18 matter.  A member of Co. 2's current corporate family had communications with Law Firm about a representation that related to this case, but was not precisely this case.  Law Firm did not take that case, but wound up representing a defendant in this case.  The court said that the relationship analysis for Rule 1.18 should be "viewed through the prism of Rule 1.9."  The analysis about what was disclosed to Law Firm in these communications was very fact-intensive.

        Robt. Bosch Healthcare Sys., Inc. v. Cardiocom, LLC, 2014 U.S. Dist. LEXIS 81296 (N.D. Cal. June 13, 2014). Plaintiff is part of a family of companies holding medical-related patents (“Bosch Cos.”). For some years up until March 2014 Law Firm did patent prosecution work for several Bosch Cos. In 2012 one of the Bosch Cos. sued Cardiocom for patent infringement. Law Firm appeared for Cardiocom. The Bosch Co. did not object. In 2013 a Bosch Co. filed this action against Cardiocom for patent infringement, and Law Firm appeared for Cardiocom. The Bosch Co. filed a motion to disqualify Law Firm in this case in April 2014. In this opinion the district judge denied the motion. First, the court held that the Bosch Co. waited too long to file the motion in this case and noted that the Bosch Co. never moved in the earlier case. The Bosch Co. made a lame “our-right-hand-did-not-know-what-our-left-hand-was-doing” argument, which the court rejected. Second, the court held that the relationship between the Bosch Cos. Law Firm represented in patent prosecution work, with the Bosch Co. in this case, was too attenuated to treat them as one for conflicts purposes.

        Trip Mate, Inc. v. Stonebridge Cas. Ins. Co., 2012 U.S. Dist. LEXIS 136340 (W.D. Mo. Sept. 24, 2012).  Law Firm does work for members of a "family" of insurance companies.  The court does not describe the precise nature of the "family."  In this case Law Firm has appeared for a client against members of the "family" that Law Firm does not currently represent.  In this opinion the court denied a motion to disqualify Law Firm.

        Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC, 2016 WL 6106652 (N.Y. App. Div. Oct. 20, 2016). Plaintiff, an “international construction conglomerate,” sued defendants for breaches of a $100 million plus construction contract. Law Firm, which represents Defendants in this case, represented “two of Plaintiff’s affiliates in matters in Maryland and Florida.” Plaintiff moved to disqualify Law Firm. The trial court denied the motion. In this opinion the Appellate Division affirmed. The court said that the Maryland and Florida matters were not related to this case, that none of Law Firm’s lawyers on this case has Plaintiff’s confidential information, and that Plaintiff failed to show that Law Firm’s screen was “inadequate.”
       
        Freedom Financial Group, Inc. v. Woolley
, 2010 Neb. LEXIS 134 (Neb. Nov. 12, 2010).  Affiliates of a client do not normally have a cause of action for malpractice for work for the client.

        State and Local Ethics Opinions. (See the parenthetical note at The Cases, above. Much the same can be said for the following opinions.)  Ala. Op. 1992-20 (1992) (weighing); Cal. State Bar Op. 1989-113 (1990) (weighing; alter ego test); Ill. Op. 95-15 (1996) (weighing); Md. State Bar Op. 87-19 (weighing); Mass. Bar Op. 3 (1992) (weighing, but leaning toward bright line [see McCourt, above]); N.Y. City Op. 2007-03 (Sept. 2007) & 2003-03 (Oct. 2003) (weighing); N.Y. County Bar Op. 684 (1991) (weighing; stresses possibility of misuse of confidences).  Pa. Op. 2001-03 (2001) would allow a law firm that represents one subsidiary to be adverse to a another subsidiary of the same parent.  N.Y. City Op. 2008-2 (Sept. 2008) discusses the extent to which an in-house lawyer may represent other members of a corporate family.
        
        Rule 4-1.13 of the Florida Rules of Professional Conduct. The Florida Supreme Court amended the Comment to its version of Model Rule 1.13 to adopt the alter ego test. See Comment [12].  See also Comment [13] to D.C. Rule1.7.

        Restatement.  See § 121, cmt. d.

        Treatises.  Hazard, Hodes, & Jarvis § 17.9; Rotunda & Dzienkowski § 1.13-7.

       Law Reviews.  John Steele, Corporate Affiliate Conflicts: a Reasonable Expectation Test, 29 W. State U. L. Rev. 283 (2002) ; Wolfram, Corporate Family Conflicts, 2 J. Inst. Study Legal Ethics 296 (1999); Rotunda, Sister Act: Conflicts of Interest with Sister Corporations, in, Legal Ethics: The Core Issues, 1 J.  Inst. Study Legal Ethics 215 (1996); Steele, Corporate Affiliate Conflicts: A Reasonable Expectations Test, 29 Western St. U.L. Rev. 283 (2002); Kehr, Who’s the Client, 23 L.A. Law 33 (June 2000).

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